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

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The Australian Wealth Management Industry
Evolving to meet the needs of all Australians
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(No Transcript)
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• 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.
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Approach

• Interview and collect the perspectives of
  influential actuaries and industry experts
  covering each of these areas
• Interview industry representatives from IFSA and
  ASFA
• Research some of the industries myths and
  misconceptions
• Research some of the innovations and solutions
  from around the globe

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

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Advice
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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
2006)
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)

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Product
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Product

• 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?

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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)
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Some international comparisons
Source ICI, IMA, Morningstar (excludes industry
and public sector funds), All figures A / Dec
2008 (where available)
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But
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Average Australians

• Only one in five adult Australians use financial
  planners
• 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
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Are we meeting the needs of the average
Australian?
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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
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An Average Australian
Access / Education / Engagement

• Education gap ? engagement gap ? confidence gap
• Exacerbated by
• perceived accessibility and affordability of
  advice
• 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
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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
  Clitheroe
• Engagement end-benefit projections in super
  statements focus on adequacy/retirement income,
  not investment option?
• Super is compulsory, so why is education/advice
  not?

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
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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
  government

EDUCATION Money Guidance
SALES (non-advice)
ADVICE (Independent)
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Are we meeting the product needs of the average
Australian?
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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
  understanding
• 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
  returns

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 /
Rainmaker
Sources Virgin Money - Roy Morgan Research ,
Ernst Young - The Super Iceberg, Rice Warner
Actuaries, AFR, The Australian
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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

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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
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Are we meeting the investment needs of the
average Australian?
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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
economyactuary
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
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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
2009,
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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
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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
  objectives

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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
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Are we meeting the retirement needs of the
average Australian?
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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
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Solution ideas
Meeting retirement needs

• Compulsion required for some form of retirement
  income solution?
• Need to consider both market risk and longevity
  risk
• 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
  debt
• 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
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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
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Vision Australia as a Gold Standard Access
for all Australians to a sufficient and
sustainable retirement income for life
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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

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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
  Australians

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.
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References / Sources

• Richard Cornwell 2006 The Value of Advice The
  Financial Adviser, Value Creation and
  Remuneration
• 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
  report
• 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
  stranglehold
• Mercer Superannuation Sentiment Index February
  2009
• John Kavanagh 11/2/09, The Age - The sum of all
  years
• 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