The Australian Wealth Management Industry Evolving to meet the needs of all Australians - PowerPoint PPT Presentation

1 / 35
About This Presentation

The Australian Wealth Management Industry Evolving to meet the needs of all Australians


... The Value of Advice: The Financial Adviser, Value Creation and Remuneration ... Fact sheet from - Independent Financial Advice ... – PowerPoint PPT presentation

Number of Views:90
Avg rating:3.0/5.0
Slides: 36
Provided by: Emma163


Transcript and Presenter's Notes

Title: The Australian Wealth Management Industry Evolving to meet the needs of all Australians

The Australian Wealth Management Industry
Evolving to meet the needs of all Australians
(No Transcript)
  • The Aim
  • To understand whether the current Australian
    Wealth Management Industry was meeting the needs
    of all Australians
  • The Holy Grail
  • Access for all Australians to a sufficient and
  • sustainable retirement income for life
  • Current state

Open, well contested, and well regulated for
customers. Mandated super means stability,
investment into corporate Australia and public
capital put to best use.
  • Interview and collect the perspectives of
    influential actuaries and industry experts
    covering each of these areas
  • Interview industry representatives from IFSA and
  • Research some of the industries myths and
  • Research some of the innovations and solutions
    from around the globe

  • Areas where customers have needs
  • Advice / education / engagement
  • Product features and costs
  • Investment Management
  • Retirement Income

Advice - Debates we are familiar with
Value of advice vs cost of adviceFinancial
advice is an intangible product. It can be quite
expensive. People can find it difficult to
understand what value they are getting from an
adviser.Richard Cornwell (Value of Advice
Financial planner vs investment
consultantFinancial planners are NOT asset
consultantsactuary Comprehensive / holistic
financial advice vs single issue Financial
planning should be like building a high-rise
building. You need strong foundations (risk
insurance), then office space on top (savings,
super, other assets).advisory
executive Product is advisor centric Product
manager is the one who chooses the picture for
the front of the PDSadvisory executive
  • Regulatory restrictionsCost of delivering
    advice is high know your client rules, 10 page
    questionnaires, statement of advice etc.actuary
  • Price maker vs price takerRemuneration for
    financial advisers has not necessarily been
    aligned with their value proposition but has been
    primarily driven by the product designMartin
    Mulcare (The Personal CFO 2008)

  • We have the right to choose own approach to
    investment for retirement
  • Ready access to a vast range of product
  • World leader in platforms
  • UK is growing, US only just coming online
  • Allows individualisation of product
  • But can you have too much of a good thing?

Did you know?
The average Australian manager is 5 times smaller
as their US counterpart, has 6 times as many
investment options, each with FUM 30 times smaller
2/3 of investment options have less than 10m,
1/3 less than 1m
The average investment option size of the 5
biggest retail managers is 47m (1/3 of the
global average)
The median Australian investment option is 4.1m
including wholesale!
More Australian equity options than shares listed
on the ASX (2439 vs 2086)!
Australia has 13 of all the worlds investment
options, but under 2 of the FUM!
90 of the investment options contain only 20 of
the total FUM
Source ICI, IMA, ASX, Morningstar (excludes
industry and public sector funds), All figures A
/ Dec 2008 (where available)
Some international comparisons
Source ICI, IMA, Morningstar (excludes industry
and public sector funds), All figures A / Dec
2008 (where available)
Average Australians
  • Only one in five adult Australians use financial
  • For choice of superannuation funds - Only 10
    have exercised choice of provider
  • Of the remainder in the default fund, 80 are in
    the default investment option

Source FSWG Simple Advice consultation paper,
Choice, Virgin Money - Roy Morgan Research
Are we meeting the needs of the average
An Average Australian
Access / Education / Engagement
  • Lacks financial education
  • Only 16 have strong knowledge about their super
  • Half dont know if they have accumulation or
    defined benefit fund
  • 30 dont know their approximate balance
  • 24 dont even know if they have a growth,
    balanced or conservative option
  • Lacks engagement with their super
  • Choice versus default funds
  • 6.4m lost accounts

Sources Mercer Superannuation Sentiment Index
Feb 2009, AFR, The Australian
An Average Australian
Access / Education / Engagement
  • Education gap ? engagement gap ? confidence gap
  • Exacerbated by
  • perceived accessibility and affordability of
  • complexity of product
  • Can result in
  • underinvestment
  • underperformance
  • underinsurance

I'm not optimistic we will be able to
successfully turn individuals into informed
decision makersSenator Nick Sherry
Where we are
Access / Education / Engagement
  • Access affordability intra-fund advice
  • Objective is to increase access to low-cost,
    simple advice about a persons investment in an
    existing superannuation fund
  • Education financial literacy program Paul
  • Engagement end-benefit projections in super
    statements focus on adequacy/retirement income,
    not investment option?
  • Super is compulsory, so why is education/advice

End-benefit projections would quickly engage
consumers with the issue and they could then use
the calculator if they wanted to try out a few
what-ifsThe Age
Source The Age The sum of all years John
Kavanagh 11/2/09
Global comparisons
Access / Education / Engagement
  • UKs Retail Distribution Review
  • Independence and quality of advice specific
    requirements to remove conflicts, raise standards
    and demonstrate value
  • Money Guidance education program
  • Guidance that is sales-free, available to all,
    and free to all
  • Telephone, face to face, and web-based service,
    focused on giving people information
  • Swedish System - Orange envelope
  • End benefit projections provided annually by

EDUCATION Money Guidance
SALES (non-advice)
ADVICE (Independent)
Are we meeting the product needs of the average
Dealing with the system
Product complexity and cost
  • Cannot manage their super effectively
  • 40 of those trying to rollover/consolidate their
    super give up
  • too time consuming, too much paperwork, lack of
  • Will lose their share of billions from use of
    cheques/manual processing
  • Average contribution delay of 81 days
  • 13 billion over next decade in costs and lost

It is an embarrassment and somewhat of an irony
that a 1 trillion industry, which is one of the
most globalised industries around, still uses fax
machines and chequebooks Alex Dunnin /
Sources Virgin Money - Roy Morgan Research ,
Ernst Young - The Super Iceberg, Rice Warner
Actuaries, AFR, The Australian
Global comparisons
Product complexity and cost
  • Swedish PPM System 5.5 million members
  • Public administration with private investment
    management to
  • Minimise cost
  • Promote investment choice

Global comparisons?
Product complexity and cost
  • Getting lower but more to go
  • 125 bps average cost of super, (but varies from
    around 70bps for corporate schemes, to over 2
    for personal)
  • US
  • 86bps Average equity option
  • 74bps Average balanced 401(k) option
  • Retail index funds
  • US 10bps Fidelity Spartan / 36bps California
    Investment (FUM 100m)
  • UK 30bps Fidelity Moneybuilder
  • Australia - 75bps Vanguard Personal Super (50bps
    for over 50K)

Sources ICI, IMA, Rice Warner / IFSA,
Morningstar, OECD Fees in Individual Account
Pension Systems
Are we meeting the investment needs of the
average Australian?
An Average Australian
Meeting investment needs
  • Over last 20 years, almost all investment risk
    has been shifted back to investors
  • Market linked risk exacerbated by asset
    allocation issues, specifically Balanced options
    becoming less balanced

Households are now the shock absorber of the
The point about old balanced is that it wasnt
very balanced. It was substantially weighted
towards equities.IMA
Sources Mercer Superannuation Sentiment Index
Feb 2009, IMA UK Asset Management Annual Survey
An Average Australian
Meeting investment needs
  • Asset allocation is often left to the financial
    planner, or worse, the investor?
  • 1/4 of investors dont understand how the
    sharemarket affects their super
  • 1/2 were surprised that their recent statement
    was lower than expected
  • Allocation decisions too focused on outperforming
    rivals or irrelevant benchmarks, rather than
    their original objective - which may have been a
    target return over CPI or cash.

Choice forced people to make decisions for
which they are not well-equipped
The risk to a manager is the risk of deviation
from peersactuary
Source Mercer Superannuation Sentiment Index Feb
An Average Australian
Meeting investment needs
  • This process has unwittingly left many
    Australians with risky exposures, unbalanced with
    their objectives

What part of targeted inflation plus 3 results
in negative 20?actuary
If most customers are more worried about
losing money than making it, there should be
more focus on preserving capital than
outperforming rivalsPenny Pryor / AFR
We have let Australians' downindustry executive
Source AFR Smart Investor
Solution ideas
Meeting investment needs
  • The basics
  • Standard ways are needed to measure and
    communicate risk and reward so that every
    Australian can understand
  • Standard definitions for growth, balanced etc
  • However, proposed superannuation league tables
    will exacerbate bad behaviours, not encourage
    good ones
  • The cutting edge
  • We have already heard some solutions at this
    conference Day 1 - New Approach to Investing,
    Rebalancing Revisited
  • Some argue that industry funds have focused more
    on using asset allocation to meet customers

Global comparisons
Meeting investment needs
  • UK New Balanced, Liability Driven Investments
    and fiduciary service
  • A more holistic approach, using the liabilities
    as the benchmark, not an index
  • Uses asset liability modelling to drive asset
    allocation choices and manager selection
  • US Market linked guarantees
  • Investors have asymmetric risk profile, so need
    investment strategy to match
  • Costs can be kept down by using passive
    investment strategy
  • Lower base fee
  • More effective hedging, therefore cheaper

Source IMA, CNN Money, Milliman
Are we meeting the retirement needs of the
average Australian?
An Average Australian
Meeting retirement needs
  • Customers underprice risks because they dont
    understand the value of protection against
    longevity and market risk
  • if a bank cant price risk, how can we expect a
    consumer to?
  • A lost generation of Australians' lacking
    education, engagement and now confidence
  • Have borne the brunt of the great risk
    transfer, and have certainly not achieved their
    objectives or met their needs

All of the focus is on the accumulation phase
actuary There is no default system for
retirement actuary
There is a lack of integration between the 3
pillars actuary The industry is lazy, let
someone else innovate, then copy actuary
Solution ideas
Meeting retirement needs
  • Compulsion required for some form of retirement
    income solution?
  • Need to consider both market risk and longevity
  • Age pension a fundamental minimum
  • 75 of Australians will still receive some form
    of age pension
  • Age pension top-up government to be
    nationalised annuity provider
  • Annuities
  • Term certain to deferred age pension / lifetime
    for security
  • Compulsion would reduce cost (removes selection,
    increases competition)
  • May require CPI linked debt / longevity linked
  • Reverse mortgages market depth, design and
    means test issues
  • Lifetime income guarantees 91 of Australians
    near retirement like the idea, but only 51
    prepared to pay for it

Source IAA Retirement Income Taskforce, Milliman
Survey 2009
Global comparison
Meeting retirement needs
  • The goal secure retirement income for life
  • No country appears to have the solution
  • US system has some similar features to Australia
  • Choice / free market for retirement savings
  • Individual market linked investments
  • Social security safety net (but payments increase
    if commencement deferred)
  • 96 of variable annuities offer the option of a
    guaranteed income (guaranteed drawdown for fixed
    term, or for life)
  • 69 take-up by customers of guarantee
  • One in five 401(k)s now offer an option of an
    income guarantee

Source Milliman Survey 2009
Vision Australia as a Gold Standard Access
for all Australians to a sufficient and
sustainable retirement income for life
Our Gold Standard Vision
  • Access to education and necessary advice for all
  • Simple products designed for the mass consumer
  • Adequacy for all
  • Modern streamlined administration to remove
    barriers to engagement
  • Low cost/value for money for all
  • Understand the needs/objectives, and take
    responsibility to ensure investment strategy
    actually meets them
  • Manage investment risk, with more choice for
    mitigating it
  • A range of options should be available to achieve
    an adequate retirement income solution, with
    tools for managing market and longevity risk

Thank you
Our Gold Standard Vision
  • Industry, government and regulators will need to
    continue to work together to share a broader
    vision if we are to meet the needs of all

Please note that the views expressed in this
presentation are the presenters own and do not
necessarily represent the views of the profession
or the presenters employer.
References / Sources
  • Richard Cornwell 2006 The Value of Advice The
    Financial Adviser, Value Creation and
  • Martin Mulcare 2008 The Personal CFO An
    Alternative Model for Financial Advice
  • Investment Management Association (IMA) 2007 -
    Asset Management in the UK 2007, The IMAs sixth
    annual survey
  • Investment Company Institute (ICI) 2008
    Investment company fact book
  • Morningstar 2008 December quarter market share
  • PricewaterhouseCoopers 2008 Investment
    Management CEO Survey 2008
  • Tony Kaye 27/6/08, The Australian - The value of
    good financial Advice
  • Roy Morgan Research Virgin Money media release
    February 2006 Super funds have switchers in
  • Mercer Superannuation Sentiment Index February
  • John Kavanagh 11/2/09, The Age - The sum of all
  • Ernst Young Research 2008 - The Super Iceberg
  • Rice Warner / IFSA research 2008 Superannuation
    Fees Report
  • Tapia, W. and J. Yermo 2008 - OECD Fees in
    Individual Account Pension Systems
  • Penny Pryor 22/03/09, The AFR Smart Investor, Why
    supers still super
  • Premium Pension Authority 2006 The clearing
    house model in Sweden
  • Walter Updegrave 23/11/2006, CNN Money The
    retirement plan Uncle Sam has right
  • IAA Retirement Income Taskforce, Milliman Survey
    2009 Meeting the needs of retirees
  • Financial Services Working Group Consultation
    paper May 08 - Simple advice on choices within an
    existing superannuation account
  • CHOICE submission July 2008 -Simple advice on
    choices within an existing superannuation account
Write a Comment
User Comments (0)