How complex is too complex? FSC weighs in on NCAs and collective charging

While it has so far been relatively bullish on the government opening the door to a broader range of collectively charged advice through the Delivering Better Financial Outcomes (DBFO) reforms, the Financial Services Council (FSC) has signalled it still sees cause for caution when it comes to retirement advice.

In its submission to the consultation on the latest tranche of the DBFO, the FSC said that despite the wider range of advice options on the table for super funds under the reforms, trustees would still be unable to “charge across the membership for types of advice that are unavoidably complex and ongoing in nature”.

“This will depend on the inherent complexity of the topic and, importantly, the complexity of the member’s personal circumstances,” the submission said.

As FSC members noted in the submission, retirement income is on the higher end in terms of introducing complexity than some of the other “allowable topics”, including in the draft bill’s explanatory materials.

Specifically, the “advice needs of the member require greater expertise and therefore the resource effort is beyond what is reasonable under the collective charging arrangement”.

“Other members have raised that there may be situations where a person has simple circumstances and the efficiency gained by the provision of digital advice tools would justify the use of collective charging, though this would be subject to a trustee’s legal risk appetite,” it added.

“But we note, in order to provide advice on an allowable topic, where the consideration of circumstances and the provision of the advice extends to material levels of debt and other assets held by the member outside superannuation, this is more likely to be too complex.”

Additionally, the industry group argued that, as is the case currently, when a member’s circumstances are “too complex” for the trustee to consider under collective charging, it should refer the member to a “relevant provider for comprehensive advice under a fee for service arrangement”.

‘Lower threshold’ before advice becomes too complex

Noting that the “unavoidably complex retirement advice” is likely to routinely crop up for super fund members, this is an area that doesn’t align with the overall reform package’s goals of increasing access to “simple and cost-effective advice to members about retirement”.

“Detailed advice on more complex topics such as retirement income solutions and transition to retirement strategies, where the level of enquiry into a member’s personal circumstances can extend beyond what is reasonable for a trustee, are hard to deliver in practice where charging for the higher costs involved in providing complex advice would not be in members’ interests as a whole,” the FSC said.

“As noted above, there may be situations where a person has simple circumstances and the efficiency gained by the provision of digital advice tools would justify the use of collective charging for advice on retirement income.

“But given retirement advice will often require consideration of a member’s broader circumstances, including income and assets held outside superannuation, a spouse’s/dependent’s needs and financial circumstances, and sometimes superannuation consolidation, there is a lower threshold before the advice becomes more complex and costly as a result of the level of enquiry required.”

Given the framework that has been proposed in the consultation extends into much broader areas – with the FSC pointing specifically to contributions, investment options, retirement product selection and adequacy of retirement income and Centrelink eligibility – this is going to routinely clear the bar for complex.

“Where the retirement advice topic is relatively discrete, such as advice to a member about the appropriate level of drawdowns from their existing account-based pension, and the member’s circumstances are not complex, it may be appropriate for a trustee to collectively charge for the advice,” it said.

“Similarly, where a member requests advice on a lump-sum withdrawal, the superannuation trustee may be well placed to provide advice that is collectively charged.”

Where do NCAs fit in?

The notable absence of any detail on the new class of adviser (NCA) has made it particularly difficult for any of the consultation responses to properly interrogate how the collective charging regime will interact with a provider that are far less qualified than a professional adviser.

“Collectively charged advice provided by a superannuation trustee is designed as simple, single issue and low-cost advice about the member’s interest in the fund. To date, personal advice of this nature has been provided by relevant providers,” the FSC said.

“As the minister has confirmed, a separate framework for the NCA will be consulted on in due course, potentially also under a new set of regulations. The proposed policy design of the NCA (finalised in December), including the option to collectively charge for the advice as well as through fee for service arrangements, means the NCA is also well-suited to support superannuation trustees with intra-fund advice provision.

“Given the potential for overlap, it is challenging to comment definitively on the collective charging model without understanding the parameters of the NCA.”

However, it did explain that FSC members envisage NCAs as operating from a “lower cost base” than professional advisers, which is unsurprising given the lower education and competency requirements they are expected to face.

“Alongside the cost efficiencies delivered by digital advice tools and calculators to enable advice, we would expect the cost of standing up human advisers (whether a relevant provider or NCA) will be an important factor for trustees as they consider an appropriate advice delivery model. We would encourage Treasury to consider this as it develops the remaining reforms,” the submission said.