In a conversation with ifa, Jim Hennington, chief executive officer of Apricot Actuaries, explored whether advisers could learn something from superannuation funds as the latter prepare to expand their role in advice off the back of the Quality of Advice Review (QAR).
Examining the QAR, specifically the recommendation that pushes for the expansion of the advisory role super funds play, Mr Hennington drew a comparison between the distinct benefits that both advisers and super funds bring to retirees seeking to optimise their retirement income.
“The advantage that financial advisers have over super funds is in understanding their client more deeply. This includes the client’s complete household situation and preferences. Super funds don’t have this data, even though it’s critical to any meaningful conversation about retirement income,” he told ifa.
“What advisers may lack, however,” Mr Hennington countered, “is the tools and techniques to determine the probability that a given retirement plan will work out (or not) for each client, particularly for ‘mum and dad’ Australians.”
According to Mr Hennington, while wealthy retirees can easily afford their living costs for life, everyday Australians who want a lifestyle that costs more than the Age Pension often encounter extremely complex actuarial analysis.
“The advantage super funds have over advisers is scale and (hopefully) fresh expert thinking to incorporate the research and government policy over recent years. Funds are used to working with actuaries and consultants and are likely to deploy advice frameworks that are ‘stochastic’ in nature,” he said.
“The disadvantage super funds have is they’re used to only looking at things through a lens of their own product. In reality, you need information on the household to get retirement right.”
“The winners are likely to be those who can utilise the best of both worlds,” he explained.
“Those who properly understand financial planning but can also incorporate techniques for risk and confidence levels. It’s important to be able to do this at scale and at ‘household’ level, not just product level.”
As such, Mr Hennington has predicted a growing recognition within the industry regarding the importance of actuarial tools capable of evaluating, comparing, and stress-testing products for diverse retirees across various risk scenarios.
“The rates of income paid from ‘lifetime’ retirement products are based on life expectancy statistics as well as margins for risk and cost. Advisers will need excellent new research tools and techniques to assess and compare what’s best for each client,” he concluded.
Amid discussions last year on what the Retirement Income Covenant would mean for retirement advice, actuarial firm Accurium expressed a similar sentiment to Mr Hennington, and urged advisers to adopt a “more sophisticated” approach to retirement modelling.
Namely, Accurium said that while most advisers already know how to manage risk, maximise income, and balance flexibility for a retiree’s individual circumstances and objectives, they also needed to think about how to evidence those considerations to showcase the value of their advice.
“Super fund trustees are engaging professionals such as actuarial consultants to undertake sophisticated and comprehensive retirement modelling to comply with the covenant and develop retirement strategies for cohorts of members. However, there is no reason why financial advisers cannot access similarly sophisticated tools to evidence the benefits of their personalised retirement strategies,” the actuarial certificate provider wrote in an online article last year.
In his response to the QAR last month, Financial Services Minister Stephen Jones stressed that super funds are “well-suited to safely meeting the needs of their members”.
“They are already governed by strong obligations to act in the best financial interests of members and act for the sole purpose of providing retirement benefits to members.”
The government is, however, due to run a consultation to address questions regarding the scope of advice that can be provided by a fund, the education standards needed for an employee or representative of that fund, as well as how funds are held to an appropriate duty.
Just wondering how can the publication call itself ‘independent’ if it doesn’t allow other than just popular opinions to be published in the comments section.
Ok so just fyi, the ‘sophisticated and comprehensive retirement modelling to comply with the covenant and develop retirement strategies for cohorts of members’ may sound fancy, but all they are is a bunch of assumptions about the economic and personal circumstances which are always (inevitably) wrong. They have nothing to do with value a financial planner brings to the table. His/her role is firstly re-focus long term, goals focused client’s attention to variables they can control together and guide them to work their plan, through ups n downs of the economy and noise of financial journalism.
It’s almost funny how the financial industry (read circus) participants, with very little understanding of the topic, make comments like this, gently pushing their own agenda.
We see you…. Yes you.
100%
Thanks anonymous. But how do you go about assessing your clients capacity for risk? I.e. the amount of investment risk they can take on without it threatening their ability to pay their living costs, year on year, for the rest of their life? That’s an essential task to ‘refocus long term goals’. It requires assumptions, yes. And yes, if you try to make a single prediction, it will be wrong. Therefore the projections needs to be rigorously stress tested through all market sequences.
[i]“The disadvantage super funds have is they’re used to only looking at things through a lens of their own product.[b] In reality, you need information on the household to get retirement right.”[/i][/b]
100% spot on and you reckon that Intra Fund “Free Advice” paid for by other members not getting advice, should be funding the comprehensive retirement plans for those asking for Super Funds for entire household advice.
What an absolute joke that is.
While I agree that both super funds and advisers have a great start, neither are well enough placed to engage with each person in providing an all-encompassing response. This requires a current understanding of each person’s different time outlook, perspectives and key issues and how they intend to respond to them including ‘household’ plans. This is personal longevity planning.
Their financial and estate planning decisions are then framed by these insights and a genuinely informed commitment can be made by each person to their ‘rest of life’ strategy – including ‘retirement’ and their current personal and household outlook. Reviews become issues-based not merely ‘annual’.
Personal longevity planning is now available in a fully online, stand-alone service which is easily integrated with the concepts (and systems) Jim mentions.
In response to the headline, no, they do not.