The Australian Wealth Management Industry

Evolving to meet the needs of all Australians

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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:1. Advice / education / engagement

2. Product features and costs

3. Investment Management

4. Retirement Income

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Advice

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Advice - Debates we are familiar with

Regulatory restrictions“Cost of delivering advice is high … know your client rules, 10 page questionnaires, statement of advice etc.”

actuary

Price maker vs price taker“Remuneration for financial advisers has not

necessarily been aligned with their value proposition but has been primarily driven by the product design”

Martin Mulcare (“The Personal CFO” 2008)

Financial planner vs investment consultant“Financial planners are NOT asset consultants”

actuary

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 PDS”advisory executive

Value of advice vs cost of advice“Financial 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)

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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?

Source : ICI, IMA, ASX, Morningstar (excludes industry and public sector funds), All figures $A / Dec 2008 (where available)

More Australian equity options than shares

listed on the ASX (2439 vs 2086)!

Australia has 13% of all the world’s investment

options, but under 2% of the FUM!

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

The median Australian investment option is $4.1m –

including wholesale!

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)

90% of the investment options contain only 20%

of the total FUM

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But…

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• 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

Average Australians

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• Lacks financial education

– Only 16% have strong knowledge about their super– Half don’t know if they have accumulation or defined benefit fund– 30% don’t know their approximate balance– 24% don’t 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 • Education gap engagement gap confidence gap• Exacerbated by

– perceived accessibility and affordability of advice– complexity of product

• Can result in – underinvestment – underperformance– underinsurance

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“I'm not optimistic we will be able to successfully turn individuals into informed decision makers”

Senator Nick Sherry

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Where we are• Access & affordability – intra-fund advice

– Objective is to increase access to low-cost, simple advice about a person’s 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?

Source: The Age – “The sum of all years” – John Kavanagh 11/2/09

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“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-ifs”

The Age

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Global comparisons• UK’s 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

ADVICE(Independent)

SALES (non-advice)

EDUCATIONMoney Guidance

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Are we meeting the product needs of the average Australian?

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Dealing with the system

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

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ost • 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

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Global comparisons• Swedish PPM System – 5.5 million members• Public administration with private investment management to

– Minimise cost– Promote investment choice

Public Administration Private Investment Management

• open architecture “platform”• large scale electronic clearing house

– contributions– investor transactions

• open to any manager (currently 84)• each restricted to 25 options• currently 780 investment options in total

• admin fee currently 18bps• due to fall to 4bps over next decade

• average IM fee of 32bps• manager must scale down fee as FUM

increases (12bps over $1.2bn)Pro

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Global comparisons?• 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 • 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”

Sources: Mercer Superannuation Sentiment Index Feb 2009, IMA UK Asset Management Annual Survey

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“Households are now the shock absorber of the economy”actuary

“The point about old balanced is that it wasn’t very balanced. It was substantially weighted towards equities.”

IMA

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An Average Australian• Asset allocation is often left to the financial planner, or worse,

the investor?– 1/4 of investors don’t 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.

Source: Mercer Superannuation Sentiment Index Feb 2009,

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“Choice forced people to make decisions for which they are not well-equipped”

“The risk to a manager is the risk of deviation from peers”actuary

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An Average Australian• This process has unwittingly left many Australians with risky

exposures, unbalanced with their objectives

Source: AFR Smart Investor

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“We have let Australians' down”industry executive

“If most [customers] are more worried about losing money than making it, there should be more focus on preserving capital

than outperforming rivals”Penny Pryor / AFR

“What part of targeted inflation plus 3% results in negative 20%?”

actuary

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Solution ideas • 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• 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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• Customers underprice risks because they don’t understand the value of protection against longevity and market risk – if a bank can’t 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

An Average Australian

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“There is a lack of integration between the 3 pillars” actuary“The industry is lazy, let someone else innovate, then copy” actuary

“All of the focus is on the accumulation phase” actuary“There is no default system for retirement” actuary

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Solution ideas• 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• 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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• 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 riskO

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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

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Thank you

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 IMA’s 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 super’s 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• The Financial Services Authority (FSA) publication 2006 - Treating Customers Fairly – towards fair outcomes for consumers• Fact sheet from www.unbiased.co.uk - Independent Financial Advice• Citibank Australia media release 26/1/09 media release - Aussies say ‘no worries’ to financial doom and gloom this Australia day • Palmer E., 2007 – Sweden’s mandatory financial scheme and individual choice• The Financial Services Authority (FSA) April 2008 - Retail Distribution Review – Interim report• The Financial Services Authority (FSA) November 2008 - Retail Distribution Review – Key to our retail strategy• FSA HM Treasury - Money Guidance Pathfinder• CHOICE, Super choice survival guide• Website - www.asx.com.au