Extra $130b super savings tipped

THE Gillard government's reforms to financial advice will increase the retirement savings of workers by $130 billion over 15 years, according to research commissioned by the not-for-profit industry superannuation fund sector.

By InvestSMART · 6 Feb 2012

By InvestSMART ·
6 Feb 2012

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Industry Super Network, the peak body for the union-backed sector, has used the report to attack claims from the for-profit sector that removing commissions for financial planners will destroy up to 35,000 jobs.

The report, prepared by Rice-Warner Actuaries, updates a similar report on the government's Future of Financial Advice (FOFA) policy, prepared by the same firm in March 2010. While the earlier report predicted the number of financial advisers would plunge by 23 per cent in the 14 years following the abolition of fees, the new report predicts that the number will be "broadly stable".

The difference reflects the removal from the FOFA rules of bans on asset-backed fees and on commissions for insurance, which generate about 40 per cent of adviser revenue, Rice-Warner said in the report.

"It's not that we've changed our minds, it's that there's been those two big changes," Rice-Warner's director, Richard Weatherhead, said.

Rice-Warner predicts that by 2026 FOFA will have raised retirement savings by $130 billion, in today's dollars.

"It's basically driven by the fact that if you've got a product with commissions coming out at the moment and that commission reduces, there's more in it," Mr Weatherhead said.

By 2026 FOFA will slash adviser remuneration by $1.6 billion a year, Rice-Warner estimates.

In parliamentary hearings last month, representatives of the for-profit sector estimated the reform package would slash between 25,000 and 30,000 jobs from the finance industry.

Claims that up to 35,000 jobs could be lost were described as "silly" by the executive director of Treasury's markets group, Jim Murphy, who told the hearing they were based in part on outdated assumptions contained in Rice-Warner's previous report. Rice-Warner now predicts the number of full-service advisers will drop by 3000 over 15 years, but this will be partly offset by an increase in advisers offering piece-by-piece advice of about 2200.

Mr Weatherhead said Rice-Warner had not modelled the knock-on effect on backroom jobs of cutting adviser numbers.

"Given that as you can see you've only got a 5 per cent reduction over 15 years, it's only going to be a small number anyway," he said.

But he admitted Rice-Warner's modelling depended on advisers being legally able to offer advice on a piece-by-piece or "scaled" basis, rather than having to provide full-scale advice to every customer.

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Frequently Asked Questions about this Article…

What is FOFA and how will the Gillard government’s FOFA reforms affect retirement savings?

FOFA (the Future of Financial Advice reforms) is a package of rules intended to change how financial advice and commissions work. Research by Rice‑Warner, commissioned by the Industry Super Network, estimates FOFA will boost workers’ retirement savings by about $130 billion (in today’s dollars) over 15 years, by reducing conflicted commissions and changing adviser remuneration.

Who produced the $130 billion forecast and how was the research commissioned?

The $130 billion estimate comes from a Rice‑Warner Actuaries report prepared for the Industry Super Network, the peak body for the union‑backed industry superannuation sector. The report updates a similar Rice‑Warner analysis from March 2010 and reflects revised FOFA settings.

Will FOFA cause large job losses in financial advice?

Claims from parts of the for‑profit sector that FOFA could eliminate 25,000–35,000 jobs are disputed. Rice‑Warner now predicts the number of full‑service advisers will fall by about 3,000 over 15 years, partly offset by roughly 2,200 advisers offering piece‑by‑piece (scaled) advice, so adviser numbers are expected to be broadly stable overall.

How will adviser pay and commissions change under FOFA?

Rice‑Warner estimates FOFA will cut adviser remuneration by around $1.6 billion a year by 2026. The report also notes that asset‑backed fees and insurance commissions currently make up about 40% of adviser revenue, and changes to those rules were a big factor in the new projections.

What is 'scaled' or 'piece‑by‑piece' advice and why does it matter for investors?

Scaled (piece‑by‑piece) advice means advisers charge for specific, limited services rather than providing full‑scale, comprehensive advice to every client. The Rice‑Warner modelling assumes advisers can legally offer scaled advice, which helps cushion adviser job losses and gives consumers more flexible, potentially cheaper ways to get advice.

Why does the new Rice‑Warner report differ from its 2010 forecast of adviser numbers?

The earlier 2010 report predicted a 23% drop in advisers after commission bans, but the updated report reflects two major changes: FOFA no longer bans asset‑backed fees or insurance commissions, and the ability to offer scaled advice. Those changes reduce the projected adviser decline and change revenue impacts.

How did government and industry figures react to the job‑loss estimates?

Representatives of the for‑profit sector warned of 25,000–30,000 job losses (with some claims up to 35,000), while the Industry Super Network used the Rice‑Warner report to challenge those figures. Treasury’s markets group executive director Jim Murphy described the 35,000 claim as "silly," saying it relied on outdated assumptions from the earlier Rice‑Warner work.

What are the main limitations or assumptions in the Rice‑Warner projections investors should know?

Rice‑Warner’s forecasts assume advisers can legally offer scaled advice and do not model knock‑on effects on back‑office or support jobs. The report also presents figures in today’s dollars and covers impacts over a 15‑year horizon to 2026, so results depend on those assumptions and future regulatory and market developments.