Assistant Treasurer and Minister for Financial Services & Superannuation
14 September 2010 - 14 December 2011
The Future of Financial Advice
Address to the Association of Financial Advisers Luncheon
Darling Park, Sydney
27 June 2011
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Thank you for inviting me to speak here today. The Association of Financial Advisers or AFA plays an important role as a voice for financial advisers and as a training ground for the next generation of talent.
When you've have been established for 65 years, as the AFA has, you understand that it's an unusual industry that doesn't have to face change. In fact there is no better example of this than the AFA's own development over its 65 years.
As you'd be aware the AFA has undergone three name changes, but it started life as the Life Underwriters Association (LUA) in 1946.
1946 was an interesting year for the formation of organisations. The first meeting of the United Nations General Assembly occurred in London and the first meeting occurred to establish the
International Monetary Fund and Bank, as it was known at the time.
Australia's population was just over 7.5million and there were 18 banks servicing this population, including a branch of the Bank of China.
Some of the members of the LUA were known as collector agents and they would visit the suburbs of our towns and cities talking to mums and dads about savings accounts for their kids or life insurance cover. Many of these conversations happened over the kitchen table and payment was made by cheque or cash, as we didn't have EFTPOS and credit cards, let alone the internet. The big brand names in wealth management were Mercantile Mutual, National Mutual and AMP. It's interesting that some of these brands remain today.
The formation of the LUA preceded a long-term structural shift in the Australian economy, a trend that continues to play out today – the rise of the services sector. Some ten years after the LUA was founded, manufacturing's share of GDP was to peak and the rise of the mining and services sectors commenced.
By the mid 1990s, when the Australian Life Writers Association became the AFA, the services share of the economy was around 63 per cent. The 1990s was also the decade of compulsory superannuation, a reform that was to turbo-charge the subsequent growth of the financial advice industry.
Today the AFA is the longest running professional financial adviser organisation in Australia, representing over 7,000 members.
Before I discuss the FOFA reforms, I'd like to provide a brief snapshot of the global and domestic economy.
The IMF expects the global economy to grow by around 4.5 per cent in both 2011 and 2012.
Emerging and developing economies will continue to drive the global recovery, with the IMF expecting developing Asia, which includes economies such as China and India, to record growth of around 8.5 per cent in both 2011 and 2012.
The uncertain aspect is that the global recovery remains exposed to a number of significant risks.
These risks include the build-up of inflationary pressures in emerging economies, the threat of a further sustained rise in oil prices, and uncertainty over the direction of medium‑term fiscal consolidation in advanced economies such as the US.
And of course, the biggest risk to the current global outlook, the sovereign debt crisis in the euro area, particularly in Greece, continues to pose the risk of contagion to global financial markets.
The transmission mechanism to the Australian economy of the events in Greece is a qualitative, rather than a quantitative one. These events affect investor and market confidence, as your own market analysis will tell you.
Nevertheless, Australia's economic fundamentals are strong.
Our GDP has been growing steadily. It's notable that, today, Australia's GDP is significantly higher than it was before the onset of the global financial crisis. Even as other advanced economies struggle to make up lost ground, Australia has been steadily moving forward.
Our unemployment rate is holding steady at under five per cent. Since the Labor Government was elected in 2007, we have created over 700,000 jobs — an outstanding result among Western economies.
And the most recent National Accounts figures show that our terms of trade rose 5.8 percent over the March quarter to be over 22 percent higher over the year, In 2010‑11, the terms of trade are expected to reach their highest sustained levels in 140 years.
But to continue making headway, we must be open to change and innovation.
I believe we can't afford to take our current good fortune for granted.
I believe that the rest of the world does not owe us a living.
Our Australia is a relatively small nation, fortuitously located on the edge of Asia, is blessed with natural resources, a stable and effective system of government – including good health and education - and a large capital market.
We have challenges and we have competitive advantages. The biggest fault however would to be complacent about either.
We need to be clear-sighted about the forces currently at play on our economy, and have an optimistic sense of what our economy will look like in 20 or 30 years.
Australians should not fear our future.
Our economy is in transition, and the forces acting on it are complex.
The re-emergence of Asia, an ageing population, a services economy, the power of information (and therefore education), a sustainable society and economy. These are all forces which will consistently govern public and private economic activities over the next decades.
I'd like to dwell on the first two of these forces, as I think they are particularly relevant to the financial advice industry – the re-emergence of Asia and ageing of the population.
An economy in transition: re-emergence of Asia
The re-emergence of Asia has seen the centre of economic gravity shift to this part of the globe.
It is important to say re-emergence, because in 1850 what is now modern Asia was the world's largest economic region.
Our recent history with this re-emerging part of the world has been enthusiastic no doubt. But I believe the time is upon us to deepen not just our economic links with Asia but more and more of our cultural and social links too.
In 1990, Japan and Korea were already among Australia's top five export markets. Today, with the rapid rise of China and India, four of our five largest export markets are in Asia.
Asian countries constitute seven out of our top ten trading partners.
The continued rapid growth of emerging economies will continue to shape our trade and economic environment.
For example, according to Tourism Australia, in 2010 the China inbound market contributed over $3.2 billion to the Australian economy.
By 2020, this market has the potential to contribute $7 to $9 billion annually.
Building financial services is crucial, as the opportunities will only keep growing to manage the new Asia based wealth – both private and institutional.
Education, including professional development, is another crucial area for investment and ongoing export focus.
For an organisation such as the AFA, the question is not just about guiding the professional development of the next generation of advisers in Australia, it's about training the next generation of financial advisers in the region.
In India alone there are 750million people under 35 that need to be trained. Imagine an AFA professional development school in Mumbai or Singapore?
An economy in transition: Ageing population
While the gift of longer life is something to celebrate, longer life brings new challenges.
As highlighted in the Government's Intergenerational Report 2010, the number of Australians over 65 years old is projected to grow from three million in 2010, to 8.1 million by 2050.
During the same period, the ratio of working-age Australians to those aged over 65 will decrease from 50 to 10 to just 27 to 10.
Inevitably, these changing demographics will have consequences for economic growth and government finances. We can expect an increased demand for age-related payments and higher quality health care services.
At present we spend about 9 percent of GDP on health, the United States spends upwards of 16 percent – so we're not doing too badly. But increased health demands spike as you go past 80 years of age – so we know we know health costs is a big part of an Australian population growing older.
On the upside, an ageing population will also provide opportunities for new industries to develop to meet the needs of mature consumers. And the opportunities to retain older workers in the workplace.
Government's policy responses: Ageing population
As I mentioned earlier, our ageing population brings its own set of challenges and opportunities.
While a quarter of a century longer life is the great gift of 20th Century Australians to 21st Century Australians, we need to start preparing for its working age ratio and fiscal implications – they are big.
Successive Labor Governments have long-recognised that the current Superannuation Guarantee rate of nine per cent is inadequate.
In fact, gaining support for the increase in the Super Guarantee to 12 per cent has been something of a personal crusade for me. The increase will gradually come into effect from 1 July 2013 to 1 July 2019.
This increase, together with the increases in the age pension which we introduced in 2009, will allow many Australians to enjoy a significantly higher standard of living in retirement.
These changes will provide a 30 year old on average wages with over $22,000 a year more, in real terms, than they would receive on the age pension alone. And a real benefit of $108,000 more than if the Super Guarantee had remained at nine per cent.
As well as providing hard-working Australians with a more comfortable retirement, increased super is boosting national savings.
On 9 June, APRA released statistics showing that Australia now has $1.36 trillion invested in superannuation. That's a substantial pool of domestic capital available for investment.
And that figure will grow, thanks to the increase in the Superannuation Guarantee and other super reforms we announced in May last year. This Government's super reforms are projected to boost Australia's total superannuation savings by $550 billion by 2036.
However if you are exporting services into the Asian region or managing a growing pool of domestic retirement savings you must have the right business model.
A business model that operates in the interests of consumers.
Financial advice reforms
As I said at the outset, it is an unusual industry that doesn't have to face change. I understand that the financial advice industry has faced its fair share of change recently.
In the late 1990s, the process of development of the Financial Services Reform Act or FSRA, took around five years from concept to the commencement of legislation.
The foundations for the FSR regime were laid by the Financial System Inquiry (FSI) report, provided to the then Treasurer in March 1997.
Under the then Howard Government's Corporate Law and Economic Reform Program (CLERP) a reform proposal paper was released in 1997 and a consultation paper with further detail on the legislative proposals was released in March 1999. The draft FSR Bill was released for consultation in February 2000, introduced into Parliament in April 2001, and received assent in September 2001.
While FSRA has a number of admirable elements I think it failed in one major area – it did not improve trust and confidence in financial advice.
As a result, the financial advice industry was be-set by a lot of red-tape, but did not see any upside in terms of accessing new customers or improved community perceptions.
We will not make the same mistake with our FOFA reforms.
Access to advice
Research conducted by ASIC show that cost and mis-trust are factors that prevent many Australians from seeking advice.
There is also another barrier – a mis-match between the "holistic" advice that is actively promoted and the type of advice many Australians want.
ASIC research indicated that many Australians, particularly those who have never previously seen an adviser, want piece by piece or simple advice, rather than a full-blown plan.
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.
We are determined to remove the red-tape that has prevented the provision of more affordable forms of advice – particularly simple or "piece by piece" advice.
The Future of Financial Advice will expand a new type of advice called 'scaled advice' which will particularly benefit individuals and families who may not currently have access to financial advice.
This will allow advisers to expand their existing customer base by offering limited scope advice for those with simpler needs, such as younger people, at an affordable cost.
Ultimately, these reforms will encourage more Australians to seek financial advice and open up new revenue streams for financial planners.
We are creating a level playing field so that all financial advisers can provide consumers with scaled advice, both inside and outside superannuation.
We are also investigating the merits of restricting the term financial planner or financial adviser.
We expect these reforms to increase the number of Australians receiving advice and open new markets for advisers and licensees.
Opt-in and insurance commissions
I appreciate that the AFA have been supportive on some key areas of the FOFA reforms including the "best interests" duty and the review of professional standards for financial advisers.
There are two key areas where the Government and the AFA disagree - the opt-in requirement and the ban on insurance commissions within superannuation.
In relation to opt-in, I have chosen to make it a two year opt-in to reduce the administrative burden on advisers. However, we shouldn't lose sight of the fact that opt-in is simply a requirement that the adviser check-in with their client on a regular basis and seek their agreement for ongoing fees.
I believe it is no more than what a client is entitled to expect from a professional adviser acting in their best interests.
I also believe that it is no more that what the best advice practices are already doing as regular contact brings it own rewards in terms of customer satisfaction.
Indeed, a survey by the Association of Superfunds of Australia (or ASFA) found that:
- 55 per cent of the respondents currently review their relationship with their planner at least annually.
- Respondents who have an ongoing relationship with a financial adviser were more likely turn to financial planners for advice, whereas those who don't see their planner very often were more likely to do things themselves.
I'd also like to clear something up.
We don't propose to slap $200,000 or million dollar fines on advisers who may fail to collect all their opt-in notices. Any penalties imposed will be in line with the severity of the breach – the most severe penalties will be for breaches of the fiduciary duty and I'm sure you'd agree this is appropriate.
I am keen to continue a close dialogue with industry to ensure that to the greatest extent possible, opt-in can fit in with the existing advice process and that the compliance regime is not heavy-handed.
Richard Klipin and his team have been very clear about this issue and we have taken that feedback on board.
In relation to insurance commissions, there are some unique features of insurance provided within superannuation. Fees and charges within superannuation come at the cost of foregone retirement savings and expenditure on insurance is tax deductable to the fund.
As you know after careful consideration and extensive consultation, the Government has decided to ban up-front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013.
This is consistent with the recommendation of the Cooper Review that insurance commissions within superannuation be prohibited as they have the potential to affect the quality of advice and the findings of ASIC shadow shopping surveys that illustrate that in case of poor advice, over half involved poor life insurance advice.
I'd like to work with the industry on how this is implemented and I am willing to listen about how we can implement these policies in a way that minimises the impact on those consumers who wish to have different levels of insurance cover through super.
So in summary, the Government is willing to listen on these two issues.
The coming decades will see a profound shift in Australia's economic evolution as we respond to the challenges of the future.
But Australia has already proved that our nation is responsive to change and this industry is no different.
We have adapted since the time of Federation, from being a primarily agrarian economy... to a manufacturing economy during the World Wars... to the knowledge-based economy that we are today.
And we must be prepared to continue to adapt and change.
The key to reaping the rewards of the 21st Century is that we cannot expect opportunities to just fall into our laps.
Taking advantage of these opportunities will require a significant change in the structure and mindset of the Australian business sector.
We don't know how long the demand for our mineral and energy resources will last.
But we do know that, in the longer term, the increasing numbers of people in the Asian middle class, with disposable incomes to match, will generate rising demand for our goods and services.
It is here where our future prosperity lies. To make the most of these opportunities, we will need to embrace the changes they bring.
I'll conclude by saying this.
Be wary of those who tell you want you want to hear.
Those who tell you that nothing needs to change.
The best financial advisers don't tell their clients what they want to hear.
That's how they earn their clients' respect and trust.
So thank you for your time today and for the AFA's ongoing contribution.
Enjoy your diamond anniversary.