Banding together on retirement advice

The Retirement Income Review had a lot of insights, but perhaps most importantly for advisers, it acknowledged the importance of accessible advice in helping retirees navigate the end of their working lives. A lack of financial literacy and a highly complex system mean that the average Australian can find themselves lost, in need of better information and affordable advice tailored to their needs.

Despite the swathe of resources, products and information available, clients still find retirement daunting, confusing and expensive. And while it is acknowledged that Australians need advice to prepare for retirement, the industry has flagged that it is not well-placed to deliver it effectively. Advisers find the system, processes and tools lacking, while the regulatory hurdles are rising – making it difficult and costly to give full and comprehensive retirement advice.

It is this context that has pushed a group of stakeholders across the wealth industry to undertake a project to build a retirement advice- centred community and best practice system. Allianz Retire+ has teamed up with platform provider HUB24 and financial advice business consultant Encore Advisory Group, among others, to work towards the development of more relevant, better quality advice and products for retirees. The project will provide guidance, tools, content and up to date information for clients, advisers and licensees.

“At the moment, we’ve got an ecosystem that’s been wired and built to support accumulation advice and it doesn’t support retirement advice very well. That’s not an adviser’s fault, it’s essentially the ecosystem, that’s a big part of that,” Caitriona Wortley, head of distribution at Allianz Retire+, says.

“So, we want to remove that friction and then improve how advisers can engage with their clients.”

The Retirement Income Review also points to a superannuation system that has been geared towards accumulating savings in its first couple of decades, that now needs to shift towards focusing on decumulation. New solutions are already coming off the back of the report, that are set to go to market in the coming years.

Tom Reddacliff, CEO of Encore Advisory Group, an advice practice consultancy, has forecast that in the next one to two years, there will be a larger range of retirement solutions available to consumers – and the need will rise for advisers to help navigate the raft of products.

In that sense, the Retirement Income Review is “very much a catalyst”, as he describes it. “I think it increases the need for advice, because at a client level, you’re looking for someone to make sense of all that for you,” Mr Reddacliff explains.

“But at a business level as well, you’re trying to deliver that advice to your client more efficiently.”

But how do advisers deliver that advice efficiently and profitably? And can stakeholders across the industry help advisers to ensure their businesses are viable? The solution requires each link in the ecosystem to come together, Ms Wortley says.

The group’s discussions are still in early days, but the plan is to collaborate on solutions with practices, licensees, product providers and other stakeholders.

Allianz Retire+ has signalled there are more engagements with licensees and other software and technology providers that are set to unfold under the project.

“The collaboration needs cohesion across the entire advice ecosystem, it’s critical in terms of driving change and removing friction for retirement advice and the implementation of retirement advice, for advisers and ultimately their clients, with a goal of reducing complexity as well,” Ms Wortley says.

Greg Hansen, senior business strategy manager with HUB24, says products and platform services are only part of the solution.

He adds that retirement advice is crucially different to accumulation advice, across a number of areas such as objectives and risk.

“What I think we’ve realised is that we need to help advisers, give context to that product or help advisers help clients understand the decisions that they make in retirement, the trade- offs that they can make the different alternatives they have,” Mr Hansen notes.

“Product is only the very end of that conversation, what we need is to create a system or a structure that allows advisers to make those decisions meaningful to their clients, to help them use the best path forward.”

But for practices sweating under the influx of regulatory challenges, Mr Reddacliff predicts that a silver lining will come, with the ageing population and current environment to make retirement advice a growth area.

“Despite what’s been going on in the industry and probably some issues affecting confidence, the demand for advice is still very  strong,” Mr Reddacliff says.

“And if you look at the demographics, you look at things like the retirement review, and you look at recent announcements, this area can only grow.”

Tools, modelling and client experience

Consulting advice firms has let Mr Reddacliff observe the  engine room of practices. Cost and complexity are already constraints, with many businesses struggling to provide advice for under $3,500 to $4,000. But trying to deliver advice tailored to clients’ retirements can further steep the costs and difficulties.

The higher costs also pose sustainability issues for businesses, the largest worry for practices at this moment, Mr Reddacliff says.

“What we’ve found is the very client that you’re trying to deliver affordable advice to, let’s say someone with around $500,000,” he says.

“The minute you  start to get retirement products that involve Centrelink advice, assets test, so forth, we’ve found the cost base can go north of $5,000. Because you’re juggling different systems, calculators, Xplan, so what actually happens is that whole problem of cost and complexity actually rises for that client. And that’s the very last thing all the stakeholders want.

“So we think, big opportunity, but it’s a big problem to solve.”

The tools available to advisers also can inhibit their abilities in the retirement space.

“We know specific retirement  solutions are desperately needed in retirement and innovation needs to continue. But solutions are  just one piece of the puzzle. Arguably, the more challenging issue to solve is how advisers can model and implement these solutions into their businesses,” Ms Wortley said.

“That includes having a dedicated retirement philosophy and retirement investing framework, as well as sophisticated retirement modelling tools available to support advisers.”

As a starting point, Ms Wortley calls out the application of an accumulation mindset in retirement as being problematic.

“The lens that you need to apply to looking at investment in retirement is completely different – it’s different risks and completely different objectives. But the reality is that today, the same accumulation style lens is still being applied,” she says.

“The vast majority of advisers use Xplan as a modelling system, and it’s a deterministic modelling face, which will effectively give a retiree a flip of the coin chance on meeting their objectives. Now, for retirement, the critical  lens  that you need to apply is the increasing of confidence levels of meeting your outcomes. That equates to making sure the risk lens applied in retirement is running out of money, not volatility.”

This example of modelling scenarios can seem a small underlying problem, but if the majority of advisers don’t have the right framework factoring for retirement specific risks in place, it makes for an industry- wide issue.

Other problems Encore have found include the processes underlying advice, such as double backs on the fact find and SOA components.

But as Mr Reddacliff notes, there are regulatory risks for advisers who do not adapt their approaches to consider alternative retirement solutions and factoring for different factors, such as the age pension.

“If you take an accumulation phase approach to retirement advice, then I would argue there are best  interest duty risks that are going to arise,” he notes.

“Because what the regulator says to everybody is in an SOA is that you should have explored three alternative strategies and often, three alternative product solutions with that as well. So I think in the retirement phase, that’s going to take people a bit of getting your head around.”

Reassurance and emotional support are also key for retirees – another way that advisers will be important for their clients.

“We need as an industry, as a country, to provide more confidence to our retirees. I think if you look across the financial services industry, financial advice is the best place to be,” Ms Wortley says.

“We have the Retirement Income Covenant impending from a trustee perspective, but I think advisers are still critical in helping retirees to achieve confidence.”

There are five core service areas the group has identified as its focus for the project. The first and primary focus is the advice experience – how does the adviser talk to the client and what sort of information do they need? The others include the regulatory structures that underpin the advice, the process for producing the advice, and the portfolio construction and products.

Mr Hansen and Mr Reddacliff state all factors hang off the first principle, the client experience – but business sustainability comes as a close second.

“The point is that  is we can attack one of the areas, we’re going to take the advice experience, or we’re going to take portfolio  construction or we’re going to take advice production, but it doesn’t work for an advice business, unless you’ve got an integrated system that covers all of those things,” Mr Hansen says.

“That’s the way to make it sustainable for the practice is to have all of those things working together.”

Mark Zaglas, managing director of Encore Advisory Group, calls the balance between client experience and maintaining a successful business model “two sides of the same coin”.

“If we don’t impact and disrupt the way advisers create their advice to reduce the costs, make it more seemly and more affordable to  clients, and then also retool and reshape the way that advisors engage with clients, and how to actually have the conversation that is fundamentally different to the way that you would have with someone in the accumulation phase, then I don’t think you can have one side without the other,” Mr Zaglas comments.

“Or you’re certainly not going to get to cut through. That is a huge capability element. The other one goes to the fundamentals of running a business and having affordable advice.”

He adds that advisers want to be able to help more Australians, but they need the “financial permission” to deliver that – it has to be profitable. Advisers have to have the business capability, but they also need to master the technical aspects of advice, as well as the human element, for their relationships and engendering trust and confidence in their clients.

The outlook

Looking towards the future, Ms Wortley predicts that retirement advice will become a specialty, with more education and training backed behind the space.

Similarly, Encore expects many practices will pivot towards niches, similar to their US counterparts.

Advisers will need to shift their approach in coming years.

“The reality is, from an outcomes perspective, how we invested in retirement in the past, it’s not going to work anymore,” Ms Wortley says.

“The other factor is the macro environment, where yields are at, where cash rates are at, absolutely, is low from the retiree’s perspective. So, the reality is, investing approaches might have actually worked in the past, 10 years ago, in GFC times when  investees were yielding 8 per cent. It was pretty easy to deliver retirement outcomes from a return perspective.

“Now it looks pretty bleak, unless you start thinking differently about how you’re investing for your portfolio.”

Retirement advice is also expected to remain costly, because it is a tailored experience, adjusted to individual clients’ goals and circumstances.

Mr Reddacliff predicts there will be a greater spread of scalable advice.

“We’re on a path to about 15,000 advisers in the marketplace, particularly with the FASEA exam this year,” he says.

“You’ve got more demand, less advisers. We’re therefore increasingly seeing more scalable corporatised practices emerging, but over a greater spread of licensees. So that’s the sort of broader landscape, and retirement advice is fitting within that broader trend.

“But I would argue that its demand aspects are higher than the average.”

Retirement advice is projected to be in higher demand than other areas of advice, but it has higher complexity and costs – which can cause practices angst. But it’s a potential opening.

“It’s the old story, when you see something where there’s a big opportunity and there’s problems to solve, it’s not a bad place to start, to zero in the focus on,” Mr Reddacliff concludes.