In the battle to retain super fund members into retirement, advice is the key weapon. And First State Super's acquisition of financial planning firm StatePlus for about $1 billion is a clarion call to this new super fund battlefield. By buying a well-respected financial planning provider, First State Super signalled that advice is of paramount importance for leading super funds. If leadership means ‘taking a stand and acting on something you believe in’, this move shows advice is critical to serving members and keeping them into retirement phase.
Higher satisfaction levels
Other funds have increasingly stated the importance of advice in their plans. Advised investors, on the whole, benefit from savings, investment and insurance advice through better outcomes, and generally report higher levels of satisfaction.
These efforts seem to be paying off as, anecdotally at least, funds that make strong financial planning efforts appear to have much better member retention rates into retirement and more success particularly with higher- balance members.
But many funds have only a basic financial planning offer, provided more as an add-on service, not a core component. And the numbers from Comparator show just how modest the overall impact is: industry-wide, only 2% of members reportedly receive financial advice from their super fund each year.
Industry, and other profit-for-member funds, were once labelled the ‘sleeping giant’ of the advice business and it’s long been suspected that industry and retail funds would converge through more similar advice offers. Surely, the giant is waking up.
Strategic imperative and strategic decisions
If there’s a clear strategic imperative for fund executives to build advice capabilities, it’s not quite as clear how to do it. Executives face a number of strategic questions and opportunities:
a. Distribute through independent financial planners? In the post FOFA fee-for-service world, the competitive pricing and performance of profit-for-member funds should place them in a strong position to compete with retail funds in distribution through independent financial planners. This is dependent on them being able to master the arcane requirements of third-party distribution, build a brand, and match the service proposition of retail funds.
b. Introduce external planners to serve members? A number of funds, such as AustralianSuper and Sunsuper, have headed down this path by developing panels of independent financial advisers to extend the services available to members. The challenge of course is to not lose the member in the process.
c. Build internal planning capability? Many funds such as Unisuper have ramped up internal capability by hiring a team of planners, with all the licensing, management and business process challenges that involves. Smaller funds may struggle to get the economies of scale and efficiency needed to offer a first-class effort, but larger funds may be able to do it with a significant investment.
d. Reach the mass of members? This requires adopting a much broader focus than traditional advice approaches. The economics of financial planning delivery means that only high balance members can be served through traditional telephone or face-to-face processes. The costs per statement of advice are too high to provide advice to the mass membership. Retail firms often talk about the costs of advice being $2000-$3000 per client. Even straightforward intra-fund telephone advice can cost hundreds of dollars to deliver. Those economics aren’t supported by the typical balances of industry fund members.
The role of digital advice in reaching a larger audience
Leaders look at trends and what is happening in other industries for a competitive edge, and digital advice has the potential to be the ‘game-changer’. Using the toolkit of digital disruption changes the economics of advice delivery and opens up access to advice for all members at low costs.
Digital advice enables personalised experiences, both financial and behavioural. Digital approaches can engage the client in an ongoing journey, which makes the experience personalised, on demand (24X7), ‘in my living room’ or anywhere else. Digital advice need not be transactional based only on one-time statements of advice. It can guide. It can educate. It can provide motivation and personalised communications as needed.
And it can coexist with traditional human forms of advice. Effective triage is an essential part of strong digital advice offers. At times, people need the validation provided by another human being; at times, advice requirements are just beyond today's digital solutions.
The US industry has been leading the way. While often referred to as robo advice, that catchy title doesn’t capture the variety of digitally based solutions currently available. Often overlooked in articles about US robo advice is Financial Engines, the ‘granddaddy’ of online retirement advice services companies. This pioneer, founded by Nobel Laureate Bill Sharpe, has for 20 years offered online retirement forecasts, advice and managed accounts to members of US defined contribution (401(k)) plans. Financial Engines currently provides advice to millions of members, with assets under advice exceeding $A1,300 billion, and investments in managed discretionary accounts of more than $A160 billion. It is the largest independent investment adviser in the US.
Others in the US are focusing on hybrid solutions. A major trend is using technology to make human advisers more efficient and allowing the interaction between consumer and adviser to be more interactive and integrated, so the customer can decide when to obtain advice online and when to call a human adviser.
In conclusion, advice will become a key battlefield for funds serving their members into retirement. As most funds don’t have a billion to spare to buy existing capability and need better ways to reach the mass membership with ongoing advice, digital advice is the most promising solution.
Jeremy Duffield is Co-Founder of SuperEd. See www.supered.com.au. He was the Managing Director and Founder of Vanguard Investments Australia, and he retired as Chairman in 2010.