Reforms to advice could unlock billions for Australians

Based on Vanguard research, Australia has been found to be lagging behind several of its counterparts at the Organisation for Economic Co-operation and Development, being one of only a handful where more money is being held in savings accounts than in investment markets.

According to Vanguard, if Australian households were to invest as little as 10 per cent of their excess savings into investments, it would unlock a $185 billion injection into capital markets. As it stands, Australians are holding 23 per cent of their household financial assets in cash and deposits, which yields an average annual return of just 2 per cent.

“Many people are missing out on investment returns by holding too much cash and could significantly improve their long-term financial outcomes by being invested in capital markets,” managing director of Vanguard Investments Australia Daniel Shrimski said.

As it stands, the majority of Australians’ only interaction with investment is through their super funds, which while generally reliable and well run, does not generate the same returns retail investment can.

Vanguard suggested a number of reforms, including introducing auto-enrolment into certain savings plans (much like Australia’s current superannuation system), tax incentivisation and creating default, easy-to-access products for customers.

Another key area of reform suggested by Vanguard is enhancing the spectrum of financial advice accessible to the everyday Australian.

“Investors need access to a full range of support, guidance and advice to suit their individual circumstances,” it said.

“Regulatory frameworks that facilitate digital services can help meet the needs of a growing section of society.”

Pointing to the advice gap within Australia, Vanguard said the majority of Australians never seek financial advice in their life, or only access generalised, broad advice.

According to the fund manager, many Australians “lack confidence when it comes to investing, attributing their lack of participation to not knowing how to invest or what investments to choose”, with financial advisers clearly well-equipped to build individual confidence.

Unfortunately, the same Vanguard research identified that Australia has a generally distrustful disposition to the financial services industry. The industry, overall, was reported to have only 52 per cent trust from Australians, with financial advisers’ trust rating sitting even lower at 45 per cent.

Other challenges, which are obstacles globally, such as the high cost of advice, the lack of alignment advice has with the needs of average investors, and the lack of awareness of advice products on offer, were also identified in the report.

Vanguard recommended several reforms that can help overcome these challenges, including embedded advice within product design and simple, limited and automated advice directly integrated into platforms.

Simple digital nudges to customers to seek advice or make themselves aware of advice options is also highlighted by Vanguard as an investment tool, drawing attention to its successful implementation in the US: “Approximately 60 per cent of 401(k) plan participants took action after receiving a nudge from Vanguard, and 14,000 IRA clients acted after Vanguard nudged them, boosting their retirement savings by US$50 million.”

Personalised, easily accessible advice that is catered to different cohorts of investors is also key area of reform, with Vanguard identifying the UK’s new Targeted Support regime as an effective example. Under the new scheme, it said, “we envisage being able to proactively engage and target clients who hold excess cash in their portfolio” and encourage them into the retail investment market.

“Vanguard’s research provides key insights on the steps needed to motivate more Australians to invest outside of their super, including through new tax incentives and by helping more people to make the best investment decisions,” Shrimski said.

"We are keen to work with Australian policymakers to help further refine the existing regulatory system in a way that supports retail investor outcomes at all levels.”