Closing the advice gap is still a universal challenge for superannuation funds. Ignition’s CRAIG KEARY says it is clear, with imminent en masse baby boomer member retirements and the 1 July Retirement Income Covenant, that funds are keen to find scalable solutions.
For superannuation funds, finding scalable solutions to address the advice gap is being incentivised by two significant converging events on the near horizon.
Firstly, an estimated 1.8 million baby boomer members will soon retire, moving $300 billion in assets from accumulation to decumulation.
And secondly, the Retirement Income Covenant (RIC) is driving a focus on funds’ retirement income solutions and support for their retiring members.
Given the vast numbers of retiring members involved, funds need to offer advice at scale if they are to meet members’ needs and expectations. Achieving this—at reasonable cost—will only be possible by embracing a new generation of digital advice solutions.
Both the technology and members’ appetite for financial advice has matured. Digital advice solutions have progressed to a level of sophistication where pension funds can deliver (and are now delivering) compliant, consistent, robust, and personal advice via technology. The pandemic has seen even high-value services shift from in-person to online, with increasing numbers of consumers expressing a preference for digital channels.
Digital advice delivery is not about displacing human-delivered intra-fund advice. Rather, it is about leveraging and empowering a fund’s human advisers so many more members can be served, and the human advisers can focus on the more challenging needs of members.
A good digital solution for intra-fund advice offers a variety of ways in which it can be implemented, matching the needs of super fund members and the fund’s advice philosophy, such as:
Critically, adding a digital advice capability fundamentally changes the economics of advice delivery for super funds. Currently, advice delivery through human advisers is essentially a variable cost model with no inherent scalability – increasing capacity means adding more head count, which substantially increases costs.
While digital advice solutions usually have a fixed cost component, they allow for capacity expansion without costs rising in the same proportion.
Over and above the economics, implementing a digital intra-fund solution provides five key benefits to funds:
It is widely accepted that super funds cannot provide intra-fund advice (let alone broader personal advice) to all members who would benefit from it via traditional human-led advice. With major funds having hundreds of thousands or even millions of members, the ability to scale human delivered advice quickly becomes prohibitive.
Digital is the only realistic solution to expand funds’ advice capacity in a significant way which is still affordable. Ignition’s European experience suggests that financial institutions investing in a digital advice solution experience:
While funds can choose to limit the member segments for which digital advice is made available, there is ultimately no cap on the number of members a super fund can service with the deployment of digital advice.
Even the most effective risk-management processes cannot entirely remove differences in human behaviour from one adviser to another. The more advisers on staff (or external panels), the more natural variance in that behaviour, and potential for differences in advice quality and member service.
A quality digital advice solution removes these issues because the solution is designed to adhere to all regulatory requirements and advice compliance standards while accommodating the desired member experience.
Digitalised data capture means nothing falls through the cracks, and any conflicting data is identified and addressed. Consistent algorithms means that two hypothetical members with the same circumstances would receive the same advice recommendations. Most importantly, this can be achieved alongside a personalised member experience that speaks to members in simple language that educates, explains, and advises them to take actions in their best interests.
The outcome is:
Members’ needs for assistance changes throughout their lives – some triggered by life events, others by the passage of time and growth of their account. Certain needs can be met by guidance or general advice, others by a defined set of topics by intra-fund advice, and some only by broader personal advice.
Traditional human-led advice capabilities are an expensive approach to solving these very different needs, and usually require member instigation.
Digital advice however allows super funds to offer a pro-active and much broader advice solution across the entire member lifecycle, such as:
This allows a fund’s valuable human advice capability to be leveraged and focused (via a triage process) on the most challenging member situations, or when specifically desired by the member.
Long-term member retention often results in better outcomes for both members and super funds. Members can avoid associated switching fees, and any potential risk that the fund (or self-managed super fund) they switch to turns out to be less appropriate than their original fund. Super funds benefit by retaining member and asset scale, resulting in lower costs and better investment performance for every member.
However, achieving that long-term, and ideally lifetime, retention can be an ongoing strategic issue for super funds.
Digital intra-fund advice contributes to member retention by providing positive, personalised, and frequent member engagement that we know is pivotal to member retention. Funds that offer digital intra-fund advice can access an additional and scalable level of personalised contact with members that is simply impossible to replicate through call centres or general member email updates.
Digital also allows super funds to provide members with intra-fund advice as they grow their super over years or decades, including helping them understand what their ‘next best action’ would be, based on their personal situation at any given time. This allows super funds to:
Australian super funds have objectively performed very well for their members compared to global peers. However, the behaviour of many retirees indicates that confidence to enjoy a dignified or comfortable retirement is not as high as it could be.
Research has shown that many members are unsure about whether they will have “enough” assets to fund their retirement and that large numbers of retirees do not feel comfortable drawing more than the minimum pension in retirement despite financial modelling indicating that they could afford to spend substantially more than they do.
It is challenging to overcome this reluctance to draw down on capital and instead live solely on the yield generated. There are some rational reasons for this behaviour, including concerns around future health, aged care costs, and fears of running out of money.
But part of the issue is that many funds have not been able to educate, guide, or advise enough members to address those concerns and build the confidence needed for members to enjoy a more comfortable lifestyle.
Digital advice, as part of a fund’s overall service offer, increases the potential for many more members to enjoy a higher level of confidence in retirement.
The benefits of going digital with intra-fund advice to complement an existing human solution are clear for both funds and their members. It is the only scalable solution that will meet the future advice needs of members.
As evidenced in the European market, funds that implement digital advice can expect an increase in member advice capacity at similar or lower cost levels than their current human-led advice solution, a substantial reduction in advice delivery times and improvements in the quality of advice, compliance outcomes and member satisfaction and relationships.
To understand more about the rationale, opportunities, and issues of digital intra-fund advice for Australian super funds. read Ignition’s blueprint: Going Digital with Intra-Fund Advice.