Thursday, August 06, 2015

Superannuation: governance and competition failing us?

"We worked very hard in the FSI to not base our decisions on personal experience. But let me tell you one..."

So started a dyspeptic and damning summary of the super system as seen through the eyes of Financial Systems Inquiry Chairman, former CBA CEO, inaugural Chairman of the Future Fund Board of Guardians and now Credit Suisse consultant, David Murray.

Murray proceeded to tell delegates at the FSC Annual Conference this afternoon about his daughter's experience on entering the super system as a casual employees.

In a nutshell it was this: she joined the fund without knowing about it, she was paying insurance premiums she was unaware of it. And she found herself, ultimately, "booted out" of the fund because her savings had been eroded to zero by insurance premiums.

Stepping back from the personal to the macro view, Murray was clear that, in examing the super system, the FSI "found no evidence of a competitive system". Fighting words.


How would we know a competitive system if we'd found it, asked Murray, rhetorically?

We'd see choice, freedom of entry and exit and a lack of information symmetry.

In a damning assessment of super, Murray suggested our super system is far more admired offshore than it deserves.


Governance, and remedies for not meeting governance standards, should be lifted. His general tenor was that super is not competitive, and we need to lift our game.

Murray, of course was also the inaugural Chairman of the Future Fund Board of Guardians. And guard they do, based on Murray's quick relating of the level of governance and the penalties Guardians may face if they don't come up to scratch.

Board members at the Future Fund must make a declaration of interests, including all financial affiliations dating back some three years from the date of the declaration. If you fail to make a declaration that every other Board member has seen, and witnessed, and you're found be in breach, you're open to criminal, not civil proceedings.

It's a high risk game - as it should be when you're responsible for decisions involving other people's money.

"You have to ask, who stands to benefit from opposing independent directors on super fund boards?"

Why is Murray so vehement? Murray's personal view is that the arguments around governance have devolved into what he calls "very silly suggestions".

If the super system is to be of any value to us, says Murray, we need a transparent evolution.

Conflict of interest

Judith Fox of the Governance Institute cited a lack of perception of conflict as key - not jus the reality of a lack of conflict of interest

A Board skills matrix, assessing current and future requirements can enable super Boards to set out proactively to find the skills needed to best serve members best interests. In contrast, perhaps, to a limited pool of candidates who happen to have some alignment to a related union or employer.

Further she said, it makes sense than super find boards should reflect the standards expected of their investee companies.

What of the member?

Independence doesn't equal governance, says Fox. So what about the rights of members? Currently, with no significantly say in the governance of their funds, are they left out of the governance conversation? Not okay, says Fox.

She's right of course. But surely the question then becomes how on earth to get them to understand the issues and have a well-informed and effective voice?

Say "HI" to your new financial planner? #roboadvisor

The afternoon advice concurrent session at Day 2 of the FSC Annual Conference canvassed trust, digital delivery and the ability to scale advice.

Will so-called "robo advice" replace human financial planners?

Not a chance.

One panellist's research shows that when someone wants to start a planing relationship eight out of 10 want to eyeball the planner first.

Why? To establish trust, see the office and surroundings, the pictures on the wall and the quality of the individual.

But let's be really clear: after that they're really happy NOT to see their planner.

After a face-to-face meeting five out of 10 people are then more than happy to be served in alternative ways - online, digital and phone based channels.

Back to "robo advice", what is it anyway? Anything from investment advice and personal portfolio creation to software that helps make overall financial planning decisions.

Does using Google qualify? More people over 40 are using Google searches to access planning advice than are using financial planners.

Or, as the lawyer on the panel asked, is that "ro-oh-no" advice?

Importantly, robo advice in any form probably can't be done properly under the existing legislative regime. It can be done, but it won't be a quick fix.

The question and answer section in these sessions is always where it gets really interesting.

Q: Is robo advice conflict free?
Not necessarily. If a human can be conflicted so too can be the person who writes the algorithm

Q: Isn't people's trust in planners misplaced - history tells us people make poor decisions about whether they can trust someone - so isn't robo advice a much better option?

Simply put we still live in a world where financial services are sold, not bought. Can a program sufficiently encompass all the exchanges in a financial planning interaction?

Q: What kinds of robo advice work offshore?
Portfolio management, for one, which works well to rebalance and more. But it's important to note that this is off the back of an industry that did this well already. In the UK there's a provider than uses social media to track likes of various brands and stocks - and recommend investment portfolios accordingly. Dangerous, maybe, but it does access the trend to trust others' recommendations via social media. The wisdom of crowds - perhaps. Or think of this: technology that allows you to walk through a supermarket, scan a brand barcode and invest on the spot.

In summary, when only three in a hundred people (according to a Harvard study cited) left to their own devices will actually act on a plan, it seems human planners are pretty safe for now. Behaviour finance and decades of experience shows most of us won't act in our own self-interest without a human holding our feet to the fire.

Apple are an investing case study - they launched online stores but because significantly more successful actually selling stuff once they launched a physical store.

Why? Humans trust humans.

Long may it remain. I'm not sure I want to live in a world where a machine can read my emotions, access my deepest hopes and fears and then tell me how to organise my finances as a result.

Quality financial advice? Let the numbers speak for themselves

Will raising education standards really improve the quality of advice in this country?

Yes, no, maybe?

Probably. But let the numbers speak for themselves - read on for why, and how.

Other measures to support professionalism are needed also.

BT's GM Advice Mark Spiers, AMP Director of Channel Services Michael Paff and Infocus MD Rod Bristow landed on a number of other measures that are just as important. One of those other measures includes pre-employment checks across organisations.

In the first concurrent session of Day 2 at the Financial Services Annual Conference some of Australia's most influential executives listened to panellists and debated their contribution.

The topic was "to what degree will raising education standards ensure quality advice and how else can the advice industry drive the journey t professionalism?"

The audience included the heads of some of the country's largest and most professional dealer groups. At least two key advice CEOs were not afraid to put some clear views to the panel.

Q: If the community don't trust the planning profession - but do trust their adviser - what more can we do improve the public standing of the profession - including removing the wrong people? Given raising education standards may take a generation to improve (industry-wide) what else should or could we do now?

Improve the quality of recruits, make standards clearer for the existing advisers in transition - over perhaps three to five years. By 2022 BT modelling suggests the existing force will be up to scratch: all with: tertiary education; biannual certification; meeting financial ethical literacy and meeting annual CPD point requirements - as well as operating in an environment in which their advice is quality checked on an ongoing basis.

Some may be good right now at outing "bad apples" but we all need to be better at it, was the bottom line from panellists.

Q: If professionalism isn't possible without a qualification what of the self-regulatory professional bodies needed to deliver and enforce high standards? Ultimately who is responsible?

An independent, apolitical industry self-regulator body with a disciplinary arm - perhaps along FINRA (US) lines.

Q: Are trails being paid on hybrids? 
No clear answer from the panel but if so, technology at the front line should deliver monitoring that stamps out a practice that's just not okay.

Q: How much self-regulation control should we give up in order to get to better standards?
In part it depends on the outcome of the PJC process. Perhaps a coalition of the willing, providing funding and an independent board could reprint consumers and stkaehodlers in order to get this right - perhaps in as little as a year.

Q: To what extent can the reputation of the advice profession improve without real change - which may take a long time?
Broaden the footprint of advice from the 20% who currently seek, and use, advice to the rest of the community. Get the positive messages out: about what advisers, advice and the organisations behind them contribute to the community, overall social good and the very real and positive impact on people's lives. BT Adviser View, with some 750 advisers and 2,000 pieces of client feedback, allows anyone seeking advice to judge for themselves.

The ultimate answer really comes down to numbers. Whether internally measured Net Promoter Scores, external independent ratings such as Adviser Ratings or the 4.89/5 average adviser quality rating on BT Adviser View, perhaps we can just let consumers be the final judge.

TripAdviser for financial planning consumers?

Yes. In any number of formats, whether by the institutions themselves or (ideally) outsiders like Adviser Ratings.

Perhaps we can just let those who matter most be the judge.

Wednesday, August 05, 2015

Retirement incomes: are we lazy because we're already good?

Attending the Financial Services Council Annual Conference for the next two days, it strikes me we're way undercooked on the retirement income discussion nationally. 

It was pretty predictable we'd end up here, soon. 

"Here", of course, is with people taking more money out of super than is going in. AKA decumulation. But relative to the size and importance of the issue have we really done it justice, with enough lead time, as an industry?

Vanguard's Rodney Comegys, when pushed on the panel, said "Yes" perhaps Australia it's exactly because Australia is good at retirement income saving as a nation, that we're not particularly engaged as individuals. Either as potential retirees or industry participants thinking about the future. 

Somewhat surprisingly, in answer to "should we move to 15%?" Dr. Michael Keating says no.

In fact 12% could even be too much cites Keating. As one of the founders of the super system he's worth listening to. Accumulation is working well, he says. It's the decumulation piece that's now the priority. Perhaps not surprising given we've only just reached a tipping point.

Are we, as nation, able to innovate retirement income product well enough yet? Always room to improve was the diplomatic answer from Vanguard. A 'layer' of different options is needed. Once upon a time you retired with a single fund. You chose the asset mix based on your own views about investing or that advised by an advisor. Now it's not that simple, so alternatives that provide for a range of contingencies might be smarter - funds of different types, combined, perhaps, with deferred annuities, longevity insurance, mandatory payout funds - and of course a well defined spending policy that doesn't have to radically adjust to differing investment returns but where there is some flexibility to dial up and oddness based on changing circumstances. 

Oh and one more thing? Good advice. Very possibly from a super fund.

When should planning for all this start? Our 30s and 40s. 

A side note: while I agree, I'm also probably about 1% of the population. Where that leaves everyone else, particularly the less well off, is frightening.

How much is enough? About 70-80% of your pre-retirement income. But plan for the very good and very bad events that might alter that number.

Finally, what about a death tax on unconsumed super? Fighting my extreme ire I managed to write it down. But seriously - do we really need another way to encourage people NOT to save?