The good, the bad, and the ugly - and how to avoid being a casualty

The Australian Securities and Investments Commission's shadow-shopping of retirement advice put the spotlight on advisers who did their job well, and some who fell well short.

By InvestSMART · 6 Jun 2012

By InvestSMART ·
6 Jun 2012

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The Australian Securities and Investments Commission's shadow-shopping of retirement advice put the spotlight on advisers who did their job well, and some who fell well short.

The good

- One adviser explained that the client's current financial arrangements would not meet their retirement needs. He recommended strategies that would get them closer, but explained a shortfall would still remain. While the client felt less confident about their future, the adviser worked with them to set realistic goals and implement strategies to make the most of what they had.

- The adviser explored all the options available to the client within their defined benefit scheme, as well as two further options about what to do with a redundancy payment.

The bad

- One client sought advice to work out whether their finances were on track, when they could afford to retire and what their retirement income would be. While the adviser considered these topics and provided recommendations, they did not address the client's existing debt. Nor did the adviser clarify that debt was outside the scope of the advice.

- A client saw a financial adviser employed by a big bank. The client had insurance and estate-planning needs, as well as substantial looming expenses. However, these were not considered by the adviser, who focused on the lump sum required to provide the client's desired income, and on switching their super to one of the bank's funds.

The ugly

- One adviser attempted to exclude the client's cash flow, expenses, defined benefit fund and insurance within super from the scope of the advice. ASIC felt that these aspects could not legitimately be disregarded, given that the adviser was purporting to provide broad "retirement planning" advice.

- A participant sought financial advice specifically to reduce the risk in their super portfolio. However, the adviser put the majority of the client's funds into shares and property. While the investment mix was disclosed, the asset allocation was not sufficiently highlighted or explained to the client, who believed their risks had been appropriately adjusted.

- One statement of advice clearly stated that the benefit of implementing the adviser's recommendations would be "zero". Even this may have been an overestimation, as the strategy was likely to result in a loss of social-security entitlements. Further, while the statement explained how paying lower fees can lead to a higher retirement balance, it also showed the advice would leave the client tens of thousands of dollars worse off.

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Frequently Asked Questions about this Article…

What did ASIC's shadow-shopping review reveal about the quality of retirement advice?

ASIC's shadow-shopping of retirement advice found a mix of outcomes: some advisers provided clear, useful retirement planning and explored options, while others fell short by ignoring key issues such as debt, cash flow, insurance and estate planning, or by giving inappropriate investment mixes that contradicted client objectives.

What did the 'good' financial advisers do well in the ASIC review of retirement advice?

In the review, good advisers explained if a client's current arrangements wouldn't meet retirement needs, set realistic goals, recommended strategies to improve outcomes, and explored all available options within a client's defined benefit scheme and possible redundancy-payment choices.

What are common adviser failings everyday investors should watch for in retirement advice?

ASIC highlighted several common failings: not addressing a client's existing debt or clarifying it was outside scope, failing to consider insurance and estate-planning needs or large upcoming expenses, excluding cash flow and expenses from retirement planning, and providing poorly explained or inappropriate asset allocations.

Why is it important that an adviser addresses existing debt and the scope of advice?

ASIC flagged cases where advisers did not address a client's existing debt or did not make clear that debt was outside the scope of advice; investors should expect advisers to either consider material issues like debt when giving retirement planning or to explicitly state if they are excluded so clients understand limitations.

How should advisers handle defined benefit superannuation options and redundancy payments?

The review praised advisers who explored all options available within a client's defined benefit scheme and who considered multiple options for handling a redundancy payment, showing that a thorough assessment of these matters is an important part of retirement advice.

What are the warning signs an adviser may be steering you toward their employer's super fund?

ASIC found advisers employed by a big bank who focused on switching a client's super to the bank's fund while neglecting insurance, estate planning and looming expenses; a red flag is when the adviser emphasizes product switches or the lump sum required for income over addressing your broader needs.

How did some advisers mishandle clients who asked to reduce investment risk in their super?

One case showed a client sought advice to reduce risk, but the adviser placed most funds into shares and property. Although the mix was disclosed, the asset allocation was not sufficiently highlighted or explained, leaving the client believing their risk had been reduced when it had not.

What should I look for in a Statement of Advice and what are red flags to avoid?

A good Statement of Advice should clearly show the projected benefits, fees and any impacts on social-security entitlements. ASIC highlighted a harmful example where the SOA stated the benefit would be 'zero' and the strategy could reduce social-security entitlements and leave the client tens of thousands of dollars worse off—clear warning signs to question the advice.