Minister for Financial Services & Superannuation
14 September 2010 - 1 July 2013
Address to the Financial Planning Association Luncheon
13 April 2011
Good afternoon and thanks for having me here.
If midwifery is the mother of all professions, surely financial planning is one of the human family's oldest uncles.
Without your work over generations we'd have no civic life, no family farms, no ship-building towns, no trucks taking goods across the desert.
Financial planners have been part of our life on earth for maybe no more than three thousand years.
Once there were cities, and marketplaces, and ships in the harbour bringing in frankincense and olive oil and monkeys and imperious Roman bureaucrats, you became pretty much irreplaceable.
Sure, perhaps purveyors of the skill didn't carry quite the same business cards as you each do today (having to carry around a sheath of stone tablets or a tanned leather flannels would have something to do with this for a start..) and perhaps the pitfalls of getting those planning calls wrong had greater consequences than they do today (remember is wasn't just the Christians who were forced to harden up and try it on against the lions) – but if serious financial planning, and the purveyors of it, wasn't in Ancient Rome, Athens or Mesopotamia, then neither were loin cloths and coliseums.
You kept Julius Caesar going with bigger and bigger loans at higher and higher rates of interest. You got the Sistine Chapel built and Michelangelo on his back improving the ceiling.
You funded the privateers that, under Drake and Raleigh and Frobisher, settled the New World. And under van Diemen and Flinders navigated and settled our own Down Under.
It's quieter now in your game than it used to be. But it's worthwhile noting how long you've been at it, and the two or three tricks you've picked up over the millennia that we still see at work today.
I say again - financial planners have been a key part of family and societal life for thousands of years.
It's easy to overlook that yours is a noble ancient profession in this frenzied modern world.
So I think it deserves great respect – and I am glad to be here today.
I'd also like to thank the FPA for your ongoing contribution to the work of the Advisory Panel on Standards and Ethics for Financial Advisers.
The FPA is truly a representative professional association.
It's one that has evolved with the industry every step of the way, from the early days of life agents... to financial advisers... to the professional financial planners which make up your membership today.
Your profession will have held a well grounded, attuned and informed view on a huge range of economic reforms that Australia has seen over the past 30 years.
From deregulating the financial sector, to floating the dollar, to compulsory superannuation, mandating the independence of the Reserve Bank, introducing a consumption based tax, the need for corporate tax reform, the need for tax cuts, the arguments for tax hikes, the pros and cons of negative gearing right through to the pros and cons of a national healthcare reform.
You are a crowd that has an ‘Australian economy situational awareness' like few others really. You are unique in your view at the coalface of micro economic reform for the last quarter of a century.
Very much like Australia's accountants, who I spoke to only last week, you are steadfast in your efforts to help Australian citizens, families, businesses and other organisations get the big decisions right when it comes to their financial welfare and prosperity.
You are not just privy to confidential information; you are privy to people's trust.
So I applaud the FPA's work to develop financial planning as a universally respected profession, and to foster the trust and confidence of the community.
And I note that, on Thursday last week, FPA members voted overwhelmingly in favour of the proposed new three-year strategic plan which aims to elevate financial planning as a universally respected profession. With a renewed focus on professionalism, accountability, and integrity I believe this represents an important step forward for the industry.
Today I do want to speak with you about your profession and a number of considerable reforms the Gillard Government is going ahead with that will indeed change the way your businesses operate.
The FOFA rubber is really about to hit the road and I know many if not most of you have strong views here – particularly on issues like opt in and volume rebates.
But I want to say from the outset that there is a huge dividend that the financial planning industry can reap from embracing these professional reforms and seeing demand for your services grow as a direct result.
From the Government's standpoint FOFA has always had consumers forefront of mind.
I believe the financial planning sector does have some trust issues with the Australian community, with consumers, and this is reflected in the existing number of Australians proactively seeking financial planning advice – less than a quarter of the general population, and less than a third of those over 50 years old.
The opportunity and promise of FOFA through improved professional standards, greater transparency for clients and more trust and confidence from consumers in financial planning – adds up to a potential windfall for financial planners as a profession.
To take up the FOFA reform baton with open minded gusto will in my view see a commensurate increase in demand for your services, and as an increase in the turnover and profitability of your businesses.
Sure FOFA is primarily for consumers. But it's also a growth strategy for your profession.
Size of financial advice industry
The financial advice industry in our country has been growing rapidly.
In 2009, according to ASIC, retail funds under management stood at about $515 billion, and the annual average growth rate for retail funds under management over the five years to 2009 was a very healthy 18.2 percent.
Compulsory superannuation has no doubt made an important contribution to this growth, and we can expect this trend to continue as the Superannuation Guarantee increases from nine to 12 percent.
As I'm sure you know, the increase will be phased in over a seven-year period, commencing on 1 July 2013.
It's essential that Australians get to observe this incremental increase in two years time because an inescapable reality is that a Super Guarantee of 9 percent is not enough.
Important of superannuation reform
It is generally accepted that the average worker will need 60 to 65 percent of pre-retirement income to live comfortably. The OECD recommends 70 percent.
At present only 35 percent of the population are likely to get their desired standard of living in retirement. In terms of adequacy, our retirement savings system ranks only 7th on global comparison.
And some say that with mortality improvements, the average 65 year old man will now live to the age of 90. With the chance of a partner reaching 100 astonishingly high.
So an increasing number of retirees are going to outlive even substantial sums sets aside for retirement.
To take a particularly relevant age bracket, 55 to 64 year old men receive on average about $507 per week, yet for women the same age it's only $300 a week.
You can see where I'm going here – whatever your gender.
Today, the average retirement lump sum of someone aged between 60 and 65 is $245,000 for men and $170,000 for women.
By 2035, those numbers will lift to $485,000 for men and $345,000 for women, and you'll note that this means women's super actually doubles.
But a significant part of this forecast growth in retirement balances is attributed to Gillard Government's legislative commitment to a 12 percent Superannuation Guarantee and Superstream's efficiencies.
This is why the Minerals Rent Resource Tax is so important to our nation's future. And it's why we need your industry to talk to your Liberal and National friends and acquaintances about why the MRRT warrants their support too.
Private sector research determines that a couple in life-after-work need about $54,000 per year to live comfortably.
I am not satisfied this income level is a sufficient reward for 40 years work. For an individual it is around $23,000 a year including the aged pension entitlement.
The average current retirement balance from Australian Super, I'm advised, is about $43,000. If retirees try to live at the aforementioned research standard their superannuation will be exhausted in just 3 or 4 years.
If a couple stick to a modest lifestyle they have an 80 percent chance of it lasting their lifetime as an allocated pension. For those who have bigger balances or those with more time in the workforce contributing 9 percent who may ultimately achieve balances of $150,000 or $300,000 the outlook is still not dramatically better.
Retiring at 65 the retiree with $150,000 can only expect to be able to live comfortably until they are 71 and the one with $300,000 until they are 80 years old. That is still well short of a retirees' life expectancy.
So 12 percent compulsory superannuation is integral to the future wellbeing of our nation. And I do mean it to my last breath when I say I need financial planners to consume all the arguments for the reforms and serve them up to your everyday clients every day you can.
Value of Advice
Although the benefits of financial advice may be difficult to fully quantify, it's clear that those Australians who access advice are better off than those who do not.
Research conducted by Rice-Warner Actuaries, and commissioned by the FPA, showed that good financial advice provides significant benefits at several levels.
As well as the financial benefits, advice also provides an incalculable emotional value.
As the Rice-Warner survey stated:
"For many people, there is huge benefit in having control over their finances, a plan for their future and financial protection against death or disability. These intangible benefits are priceless."
The report concludes that:
"...it is fair to state that almost everyone using advice will be better off, and by extrapolation, so will Australia as a society."
And I think that's something we all want.
Changes to the Tax Agents regime
Over the past few months, I've had constructive meetings with representatives of the financial planning, accounting and tax bodies in relation to how best to regulate financial planners providing tax advice.
The Tax Practitioners Board and ASIC have also been at these meetings. We've been able to come up with an approach that is both practical and will provide suitable protection for consumers.
The approach that was agreed by all participants was to have registration through ASIC with the Tax Practitioners Board. This will cut down on unnecessary red tape for financial planners.
We've also agreed that the extent to which financial planners should be able to provide tax advice should correspond to their competency in that area.
Under future regulatory arrangements, the holders of an AFSL will be able to identify tax issues and provide general factual tax information.
If a financial planner obtains an addition competency and registration, they will be able to provide tax advice within the context of providing financial advice.
The group agreed that a diploma level course would be appropriate in this context.
We will work out the details of the competencies over the coming months, and of course will consult with the industry as part of that process.
Undertaking tasks in addition to tax advice in the context of financial advice – like lodging returns or representing taxpayers with the Commissioner of Taxation – will require registration as a tax agent.
There will be a transitional period of three years so that financial planners who want to provide tax advice have sufficient time to obtain the new competencies.
This is consistent with the overall move towards greater clarity and transparency in relation to financial planners' qualifications.
And this will strengthen the profession's reputation with consumers and its capacity to provide the services that inform people's decisions about their long-term investments.
Shift in focus since FSR
I'm sure most of the people in this room remember the days of the Financial Services Reform Act 2001, or FSR as it came to be known.
Introduced with great fanfare and a flurry of red tape by Joe Hockey, the then Minister for Financial Services and Regulation, FSR provided a regulatory regime that focused on licensing requirements.
FSR also focused on disclosure as a way to reduce the information asymmetries so often seen when financial services are provided to unsophisticated investors.
Of course, the problem with disclosure is it's not enough in itself.
You may think that providing consumers with yet more financial information they couldn't use or understand would have sent them flocking to financial planners for advice — or at least a translation.
But that didn't happen.
Despite the upheavals it created in the industry, FSR failed to make a meaningful difference to the number of Australians receiving advice.
According to a 2007 Galaxy survey commissioned by the FPA - and I mentioned some of these numbers briefly earlier - about 22 percent of Australians use financial advisers. And what is probably even more acutely worrying is that fewer than 30 percent of Australians over the age of 50 access financial advice.
Given the significant changes confronting our economy, and the fact that an increasing number of Australians can expect to live for many years after they retire, it's simply unacceptable that barely one in five Australians accesses financial advice.
Future of Financial Advice
The Government's current reforms, aptly named the Future of Financial Advice, will put the financial planning industry on a sound path.
The Future of Financial Advice will not only facilitate consumer access to advice but importantly, improve the quality of that advice.
The reforms will see consumers receiving financial advice that is in their best interests, rather than being directed to products due to incentives or commissions offered to the financial adviser.
And unlike FSR, the Future of Financial Advice will create a new market for financial advice, by expanding the provision of low-cost, simple or limited advice.
The current reforms represent a shift away from some of the principles that underpinned FSR.
We no longer accept that disclosing conflicts of interest is an appropriate way to address the fact that advice can be distorted by incentives.
We also believe we need to enshrine in legislation that it is simply unacceptable for advisers to place their own interests ahead of their clients in any circumstances.
And I know that for the vast bulk of advisers who carry out their day job with diligence, this is by no means a scary proposition – it's situation normal.
These last two reforms, in particular, will help to rebuild the consumer trust and confidence in the industry which was lost in the wash-up of corporate collapses like Storm Financial and Westpoint.
The financial advice industry has already come a long way in a short time in promoting itself as a professional body.
And I believe that the Future of Financial Advice reforms are crucial to further developing the industry.
In particular, the removal of conflicted remuneration structures, the "best interests" duty, and the review of professional standards for financial advisers are important measures that align with the FPA's commitment to promote and embody the standards of professionalism, accountability and integrity.
Access to advice
The Galaxy research indicated that one of the main reasons people don't seek advice is price.
Evidence the fact that only seven per cent of Australians aged 16-24, and only 21 percent of those in the 25-34 year age group, access financial advice.
This is why the Gillard Government is firmly committed to ensuring that Australians have greater access to affordable financial advice.
One of the guiding principles of the Future of Financial Advice reforms is that financial advice should be affordable for the very people who would most benefit from it.
Expanding the provision of low-cost, simple or limited advice will particularly benefit individuals and families who may not currently have access to financial advice.
The core of our challenge is to build trust and remove barriers to the provision of low-cost, simple advice.
This will allow advisers to expand their existing customer base, reaching younger people and those with less complex needs. Ultimately, these reforms will encourage more Australians to seek financial advice and open up new revenue streams for financial planners.
We want to create a level playing field so that all financial advisers can provide consumers with simple or limited advice, both inside and outside superannuation.
These reforms complement the work of professional associations like the FPA to dismantle commission-based fee structures, and enhance the professionalism of the financial planning industry.
Friends, I think it's pretty clear that we share common goals.
Our mutual endeavour to build trust and confidence in the financial planning industry, as well as the work of bodies like the FPA to establish financial planners as professionals, are critical to achieving the Government's goals of increasing retirement adequacy for all Australians.
It's vital that the Government gets the Future of Financial Advice right.
This will provide us with a solid foundation to improve the adequacy of retirement incomes through measures such as increasing the Superannuation Guarantee and the Stronger Super initiative.
I know that we can achieve a great deal by progressing these issues together.
There has been some good old Platonic/Socratic dialectic in our discussions to date - and the synthesis of all this worthwhile exchange in the FOFA reforms soon to be announced is a testament to the maturity of your profession's relationship with the Government.
I trust that I have your support as we move forward on the Future of Financial Advice reforms.
Once again, thank you for inviting me to speak with you today.