The first comprehensive review of Australia's retirement system has acknowledged that affordable financial advice is what people need to navigate the retirement system.
After the Royal Commission exposed deep flaws in Australia's financial advice sector the industry has faced a crackdown from regulators, but now the Retirement Income Review has called for greater access to financial advice.
One of the key observations of the report was: "The retirement income system is complex. There is a need to improve understanding of the system... People need better information, guidance and good, affordable advice tailored to their needs."
The need for more affordable financial advice can be seen throughout the report.
For example, considering how superannuation assets could be used more efficiently accessing equity in homes could boost retirement incomes without the need for additional contributions, the report found professional advice was needed.
"A range of measures could help people have the confidence to use their assets more effectively, including focusing retirement planning on income streams rather than balances, better quality and more accessible advice and guidance," it said.
The report does not offer recommendations, instead aiming to achieve a comprehensive view of the issues facing the retirement income system.
It said there was a clear need to improve the understanding of the system and that this lack of understanding was being exacerbated by a lack of advice and guidance.
One of the retirement income conundrums the report attempted to untangle is what exactly should be the objective of Australia's retirement system.
It suggested the objective should be: "To deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way."
To achieve this the retirement income system must focus on equity, be cost-effective and sustainable and the system's processes and incentives must be cohesive.
"The retirement income system should be as simple as possible, although the range of issues covered are such that it will inevitably involve a degree of complexity. The aim, nevertheless, should be to keep the complexity to a minimum," the report said.
"Where complexity cannot be avoided, mechanisms are needed to help people understand and navigate the system, including giving them access to advice and guidance to do so."
And, the vast majority of people do not seek advice about retirement income planning, the report found. The barriers to seeking that advice are cost, small finances and lack of trust.
The report found super funds are uniquely well placed to provide financial advice, however, it acknowledged there is likely to be a conflict of interest between the interests of members and maximising funds under management.
"Funds are also restricted in what they can consider when providing intra-fund advice. Changes would need to be made to the regulatory framework to facilitate funds providing more guidance at retirement," the review said.
"Automated or digital advice could be more accessible and affordable. The take-up of such advice is currently low, with people lacking trust in this form of advice and thinking it should be free."
The review pointed to research by First State Super (now Aware Super) which compared unadvised retirees with those receiving advice.
Among the unadvised cohort, 7.7% switched investment options between February and April 2020 (during the market volatility sparked by COVID-19) and on average they moved 84% of their account balance. Only 1.8% of retirees receiving advice switched options during the same period, and they only moved an average of 33% of their account balance.
Earlier research by First State found that 83% of members over age 50 who switched to a more defensive option during the GFC missed the rebound in markets and had not switched back by the end of 2009-10.
Meanwhile, research from Investment Trends found that people who access financial advice feel more confident about their retirement incomes. MLC Wealth research also found that people feel more peace of mind making decisions and Vanguard found that most who receive financial advice have positive emotions around the experience.
While addressing the many positives Australians could benefit from by receiving professional advice, the review did also touch on the dark clouds that hang over the advice sector in the wake of the Royal Commission.
"In 2018, ASIC reviewed the quality of financial advice and compliance provided by vertically integrated firms and found that 75% failed to comply with the requirements associated with the best interests duty, but the quality of advice had improved after the Future of Financial Advice reforms. However, ASIC found only 10% of files showed that consumers would be significantly worse off as a result of following the financial advice," the review said.
"In 2019, ASIC looked at financial advice offered by 25 superannuation funds and found 49% complied with the best interests duty, with the member at risk of suffering detriment in 15% of cases, and the other failures mostly due to disclosure and record-keeping failures."
However, it did go on to acknowledge the changes following the Royal Commission have made advice more transparent and are likely to improve adviser competence.
"These reforms may reduce the supply of financial advisers if some advisers fail or choose not to meet the new standards. The effectiveness of reforms aimed at improving the quality of financial advice will be reviewed by Government in 2022," the report acknowledged.