Financial advice reforms to add $130bn to super: report

Gillard government's reforms will boost retirement savings of Australian workers over 15 years.

By InvestSMART · 6 Feb 2012

By InvestSMART ·
6 Feb 2012

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Gillard government's reforms will boost retirement savings of Australian workers over 15 years.

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

Industry Super Network, the union-backed sector's peak body, 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 at a time when white-collar employment is already under severe pressure.

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 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 director Richard Weatherhead said.

Rice-Warner predicts that by 2026 FOFA will have boosted 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 25,000 to 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by the executive director of Treasury's markets group, Jim Murphy, who told the hearing they were based in part on outdated assumptions contained in Rice-Warner's previous report.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 of about 2200 advisers offering piece-by-piece advice.

Mr Weatherhead said Rice-Warner had not modelled the knock-on effect on backroom jobs of cutting adviser numbers. ''Given that ? 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 are the FOFA financial advice reforms and how will they affect retirement savings?

FOFA (Future of Financial Advice) is the Gillard government’s package of financial-advice reforms. A Rice‑Warner Actuaries report commissioned by Industry Super Network estimates FOFA will boost Australian workers’ retirement savings by about $130 billion in today’s dollars over 15 years (to 2026), largely by reducing commissions and fees that currently drain funds.

Will removing commissions and fees under FOFA cost financial adviser jobs?

There are differing estimates: some in the for‑profit sector warned of 25,000–35,000 job losses, but Rice‑Warner’s updated modelling predicts a much smaller impact — about 3,000 fewer full‑service advisers over 15 years, partly offset by roughly 2,200 advisers offering piece‑by‑piece (scaled) advice. Treasury’s markets group also suggested the larger job‑loss claims were based on outdated assumptions.

How will adviser remuneration change under the FOFA reforms?

Rice‑Warner estimates FOFA will reduce adviser remuneration by about $1.6 billion a year by 2026. The report notes that changes to commissions and asset‑backed fees — which currently make up about 40% of adviser revenue in some areas — are a key driver of that reduction.

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

Piece‑by‑piece (or scaled) advice means advisers can charge for and deliver advice on specific issues rather than providing full‑scale advice to every client. Rice‑Warner’s modelling assumes advisers will be legally able to offer scaled advice, and it predicts an increase in advisers offering this type of service, which can make professional advice more flexible and potentially more affordable for everyday investors.

Who commissioned the Rice‑Warner report and which organisations commented on it?

The industry superannuation sector’s peak body, Industry Super Network (a union‑backed group), commissioned the report by Rice‑Warner Actuaries. Treasury’s markets group (represented by Jim Murphy) also commented in parliamentary hearings, questioning some larger job‑loss estimates from the for‑profit sector.

How does the new Rice‑Warner report differ from its 2010 analysis of FOFA?

Rice‑Warner’s 2010 report predicted adviser numbers would fall sharply after bans on certain fees; the updated report finds adviser numbers will be 'broadly stable.' The difference mainly reflects policy changes since 2010 — specifically the removal from FOFA rules of bans on asset‑backed fees and insurance commissions, which materially affect adviser revenue assumptions.

What limitations or caveats did the Rice‑Warner report acknowledge?

The report acknowledged it did not model knock‑on effects on back‑office or support jobs from changes in adviser numbers, and its outcomes rely on advisers being legally permitted to offer piece‑by‑piece (scaled) advice. Rice‑Warner also noted that policy changes since the earlier report drove differences in its projections.

What do the FOFA changes mean for everyday super members and investors?

According to the Rice‑Warner analysis, FOFA’s reductions in commissions and some fees mean more money could stay in members’ super accounts, contributing to an estimated $130 billion uplift in retirement savings by 2026. For everyday investors this could mean lower hidden costs in products and greater value retained in their long‑term savings.