The changing role of the financial adviser
The benefit structures of retirement funds are changing as retirement reform puts pressure on trustees to focus on the retirement outcomes of fund members and to offer them default investment solutions, default preservation options and default annuity solutions.
This is reminiscent of the position in the early 1980s before the shift to direct contribution (DC) provident funds.
National Treasury proposals
In its 2012 paper, Enabling a Better Income in Retirement, National Treasury’s conclusion was that the shortcomings in the annuities market are structural, requiring significant regulatory reform.
It was suggested that living annuities in particular needed to be reformed to increase competition, reduce the amount of financial advice required and reduce costs. Treasury also wished to increase the degree of automation in the retirement process by requiring all retirement funds to choose a default annuity product.
In its 2013 paper, Treasury was no longer convinced that it had to undertake a total structural reform of the annuities market and get rid of living annuities. Funds were, however, still required to implement a default annuitisation strategy.
An extraordinary aspect of the proposed solution was that these defaults could be given legal protection if the fund also offered independent financial advice for members at the fund’s cost.
The general approach was that by reducing product complexity and facilitating the price comparison of standardised products and services, the need for the services of advisers could be reduced or avoided in future, resulting in a reduction in costs. As the role of the intermediary was still under review at the time of the cost paper, and still is, no firm recommendations were made.
Blurred lines
The position of personal financial planners in the employee benefits space is complex. The likely future scenario is clear: retirement fund costs are considered as being too high. Funds will be required to standardise their offerings and implement defaults. In deciding on these defaults, trustees will have to ensure that they will provide good retirement outcomes for their members. As far as the default benefit structure is concerned, the trustees could implicitly fulfil the role of a financial adviser.
Fund members do need guidance and advice. The challenge is to do this in a cost-effective way. Most financial advisers allocated to a fund tend to focus on the top income earners.
Lower down the income spectrum, the amounts may be too small for an adviser to offer advice on a sustainable basis, and the 2013 Sanlam Benchmark Survey revealed that 63% of members are not even prepared to pay for such advice.
Serving the member’s interest
The needs of the trustees and the fund, and the business model of financial advisers may be at odds with each other.
The trustees require guidance and advice for all members, not just the top earners. Their solution is therefore to rely on process, form and procedure. The annuitisation decision is arguably the most crucial that any member must take, and many trustees agree with Treasury that this is the one area where one-on-one personal financial advice is most desirable.
To prevent advisers directing members to purchase solutions that are more expensive than the fund default in order to earn commission, trustees could secure the services of a financial adviser paid for by the fund on a fee for service or salaried basis.
Providing retirement fund members with guidance and advice is not new. What is new is the demands of the default strategy and how the services of the financial adviser will be funded. The onus is on advisers to find economically sustainable ways to serve member interests in this changing context and for creative new solutions to be found that ensure that members benefit from the fund’s default strategies.
