“SET & FORGET” SUPERANNUATION- YOU PAY THE MONEY BUT OTHERS MAKE THE CHOICE
Stone the crows! Superannuation is not salvation but financial planners don’t know the way to investment heaven.
Australia’s retirement savings are the wonder of the world, with $1.87 trillion stashed away for our collective old age. We rate behind the Danes and equal the Dutch on a 40 attribute scale.
Good, but not good enough. For a start, the existing 9.25 per cent compulsory contribution will generate a retirement stream “significantly below half of the median equalised income of the overall population, a commonly-used measure of relative poverty.”
Even worse, default funds, where workers deposit and forget the contributions that come out of their pay are not always good deals. As Adam Creighton points out, fund members pay for managers who try to earn more than the market, almost impossible over time. Nor do industry fund members control who manages their money. Thus, David Murray’s report recommends have an independent chair and majority of independent directors, not least because “members lack the power to remove directors who breach their duties.”
Assistant Treasurer Josh Frydenberg says independent directors is an imperative. This is why people are setting up their own schemes, looking for control and better returns. There are now one million self-managed superannuation funds controlling a third of the industry’s assets.
This is harder than it looks, especially if you hire an advisor who isn’t any good.
Unethical advisors, who put their own interests ahead of clients understandably attract the attention, as in Adele Ferguson and colleagues’ Gold Walkley winning report on Commonwealth Bank financial planners who sold products without explaining the risks, rather than advised investors.
But another problem is advisors who do not have a clue. As Australian Securities and Investments Commission chair Greg Medcraft warns, “Many people have lost their life savings and suffered great hardship and this is very hard to deal with and I empathise with these people. I am a major believer in free markets, but the reality is that markets recover but people may never recover.”
And it is very easy to be a clueless financial advisor, demonstrated by a 2012 ASIC survey of the information financial advisors provided to people about to retire. While 58 per cent was “adequate”, ASIC considered 39 per cent poor, with just 3 per cent classed as good.
No wonder Greg Medcraft wants advisors to be degree qualified and to have them pass a national exam that measures advisors competencies in various levels of practise, “not unlike” the system the Civil Aviation Safety Authority uses to test pilots. “The industry needs to get its house in order and the introduction of a compulsory national examination will help it do that,” Medcroft says.
The Murray Inquiry also calls for “a relevant tertiary degree and “competence in specialised areas,” although means to assess competencies are not set out. While everybody recognises the need for competent, educated advisers, the various interest groups in the industry have not agreed on a unified approach.
‘Twas ever thus. In 2009, the Rippol Inquiry found minimum training standards for advisers were too low, particularly given the complexity of many financial products and called for increased competency standards and educational qualifications. But while various industry associations required demonstrable qualifications, which were higher than ASIC’s minimum entry, an integrated approach to education and knowledge was beyond the industry and universities.
As the Crows put it back then, “While everybody agrees financial planning is a demanding discipline, in need of higher standards, nobody is ready to spell them out, leaving financial planners caught between the competencies ASIC requires and the higher qualifications universities offer, but which aren’t mandatory. It leaves financial planning in an educational no-man’s land, where it has been for years, caught between the traditional competency-based training and the professional status degree-qualified accountants enjoy.”
Six years later, and after another wave of financial planning scandals, this is where the industry remains. Everybody agrees that more education is essential for planners but no one other than Greg Medcraft has a specific plan.
And watch what will happen if he tries to set out compulsory qualifications. The industry is divided over whether planners need either degrees or to pass a competencies test, or both. And universities are still ambivalent about their role in setting practise standards. Mark Brimble, head of financial planning studies at Griffith University, says degrees are only part of the suite of solutions that is required, which also includes professional standards, complaints and compensation schemes and national exams “verifying currency of knowledge.”
But I’m guessing everybody will unite against the regulator if ASIC tries to take control of standards.
As Michael Aitken, head of the Capital Markets Cooperative Research Centre puts it,
I doubt whether the ability to pass an exam is going to have any impact on integrity-challenged individuals other than clearly telling them where the line they are not to cross actually is. I rather think such individuals are likely to ace such tests and provide investors with a false sense of security.
When it comes to super, you stick with funds managers you don’t know or trust advisors who may not have much in the way of formal qualifications and practical knowledge. You pays your money, and they make your choice.
ENDNOTES Association of Superannuation Funds of Australia, Superannuation statistics, December 2014 @ http://goo.gl/DmiJwl recovered on January 18  Australian Centre for Financial Studies, Mercer Melbourne global pension index, October 2014 @ http://goo.gl/9b0liZ recovered on January 18  John Burnett et al, Melbourne Institute working paper 5/14: measuring adequacy of retirement savings, March 2014 @ http://goo.gl/SLsM3s recovered on January 18  Adam Creighton, “Put an end to the rip-off this year: get a cheaper super fund, The Australian December 26  Financial System Inquiry, Final Report, November 2014, 136 @ http://goo.gl/cTnMxF recovered on January 18  Sally Patten, “Union funds may lose insider run,” Australian Financial Review, January 19  Brendan Swift, “Self-managed super funds blossom as members search for control,” Australian Financial Review December 9  Adele Ferguson and Deb Masters, “Banking Bad,” Four Corners, ABC TV May 5 @ http://goo.gl/cTnMxF recovered on January 18  Greg Medcraft, “Exam for financial advisers critical,” Australian Financial Review, January 12  ASIC, “Report on retirement advice shadow shopping research,” March 27 2012 @ http://goo.gl/oJBzuB recovered on January 18  Greg Medcraft, “Exam for financial advisers ‘critical’,” Australian Financial Review, January 12  Financial System inquiry, op cit 222  Parliamentary joint committee on corporations and financial services, Inquiry into financial products and services, 87, 128, November 2009 @ http://goo.gl/3zXq0s recovered on January 18  Stephen Matchett, “Financial planning by degrees,” The Australian, September 30 2009  Glenn Freeman, “PJC report may cause a ‘shuffling of the deckchairs’ among planning associations,” Professional Planner, January 14 @ http://goo.gl/KZNZWL recovered on January 15  Joyce Moullakis, “Test not the answer for poor advice,” Australian Financial Review, January 15, Ruth Liew, “Financial advisers spilt on exams,” Australian Financial Review, January 15  Mark Brimble, “Why we still don’t expect financial planners to sit an exam,” The Conversation, January 15  Julie May, “ASIC criticised over national exam,” Financial Observer, January 20 @ http://goo.gl/4VMyf7 recovered on January 20