Fasten Your Seatbelts

Our largely apathetic nation accounts for a large majority of the recommendations to come out of the long-awaited Cooper Review into superannuation, published at the end of June.

At the core of Cooper’s proposals are an increased focus on transparency, reduced costs, greater efficiency – and above all, a focus on the end consumer.

Cooper’s argument is that of efficiency through scale and he has made no secret of his desire to see widespread mergers among superannuation funds.

He believes (and our data shows he’s right), that most Australians are indifferent when it comes to their super, and are unwilling or unable to make an active choice about where to invest.

Key recommendations include:

* MySuper and choice architecture – Criticised by factions of the industry as being ‘paternalistic’, Cooper wants the ‘choice architecture model’  adopted as the structure for the nation’s super industry, and MySuper made the default fund for members who don’t want to make an active choice.

* Abolishment of commissions on superannuation and insurance – While on the super side this was no surprise to the industry – indeed the Government made this a core component of its Future of Financial Advice reforms, published ahead of the release of the Cooper Review’s final report.  What was surprising, however, was the decision to extend the ban to insurance products. Under the Government’s Future of Financial Advice reforms, commissions paid by fund managers to advisers will be banned on July 1, 2012. It has yet to make a decision on whether the bank should extend to life insurance products.

* Tightened regulatory standards for SMSFs – Among the proposals are: legislation requiring advisers to hold an AFSL to provide advice on SMSFs; the removal of the accountant exemption in relation to SMSFs and the banning of ‘exotic’ assets in SMSFs. Lifting the bar for trustees is both admirable and desirable, however the decision to require advisers to hold an AFSL when providing advice on establishing SMSFs could add further costs to the system – flying in the face of everything the review aims to achieve.

* SuperStream – A package of changes aimed at reducing member costs and inefficiencies by moving paper-based systems online. This includes the use of uniform data protocols to enable speedy transfers between employers and member accounts. Undoubtedly this is a necessary development for the industry and should help move super into the 21st Century.

Transparency and efficiency are also the key themes of the Government’s reforms, however as always, there will be unintended consequences.

Advisers exist for a number of reasons, one of the most pertinent being to save people from making bad choices.

Let’s consider for a moment what happened during the global financial crisis.

Investors largely exhibited two behaviours: there were those that ‘froze’, choosing to exit the market, and store all their assets in cash, and there were those that saw the market freefall as an opportunity to buy quality assets at a discount (the ‘ambitious’).

CoreData’s research on the high net worth investor segment clearly shows that those who remained in the market, and even used the crisis as a chance to buy new assets, have benefited significantly from the recovery, while those who froze have achieved much lower returns, and are in many ways no better off than they were 12 months ago.

There is a lesson in this which has major implications for the opt-in requirement for consumers seeking advice, the caveat being that those who responded aggressively to the downturn (the ambitious) were significantly more likely to be self-directed.

Had the opt-in requirement existed in the height of the GFC, many advisers’ clients – having experienced significant portfolio losses, as most people did – would have chosen to cut their losses and run.

They would have dumped their adviser and run for cover, and would now be considerably worse off for the decision.

An adviser once pointed out that he was in the business of ‘stupidity prevention’; saving people from making poor decisions.  

If that’s the case, then if the opt-in goes ahead, the role of the adviser just got even harder.