The financial planning industry has probably accepted by now that change is a constant, stemming from legislation, regulation, or the Budget. Malavika Santhebennur wades through various issues and examines what is concerning advisers in part one of this feature.
If there is one word to describe current adviser sentiment it would be uncertainty, not in the least because of proposed changes to the superannuation system in the 2016 Federal Budget.
Federal Treasurer, Scott Morrison's stance at the beginning of the year was that the super tax regime needed to restore equity, and that, consistent with the enshrinement of the objective of super, the super system needed to facilitate Australians in funding themselves for a comfortable lifestyle in retirement while relieving the burden on the Age Pension.
If Morrison was subject to the litmus test, perhaps he would pass on the equity front through the reduction of the level of tax concessions to high income earners and the introduction of the Low Income Super Taxation Offset, while failing on upholding the objective of super through the reduction in the concessional contribution cap to $25,000.
Financial planner feedback on other changes were mixed at best, with some applauding the scrapping of minimum work requirements for Australians aged 65 to 74 who wanted to make voluntary super contributions, as well as restrictions on the bring-forward rule of non-concessional contributions, while most have decried the introduction of a $500,000 lifetime cap for non-concessional contributions for its retrospective application dating back to 2007.
In its post-budget survey of 103 advisers, financial planning software provider, Midwinter, found that 57.4 per cent of planners believed the budget would have a negative impact on clients, while 87.3 per cent felt negatively about the proposed lifetime cap for non-concessional contributions of $500,000.
While 86.4 per cent felt negatively towards the lowering of the concessional contributions cap to $25,000, 73.5 per cent were unhappy about the removal of the tax exemption for fund earnings on transition to retirement (TTR) pensions.
Only 6.7 per cent believed the changes would have a positive impact on clients.
Regardless of the mixed responses, planners, and associations remained upbeat about the opportunities these changes presented to them. After all, the more complex financial planning becomes, the more Australians would need to seek professional financial advice.
Glass half full
The fact that 80 per cent of Australians do not seek advice is a well-known statistic. What may come as a surprise are the findings in Investment Trends' 2015 Direct Client Report, which said 4.3 million Australians intended on undertaking financial activity in the next two years, but without the help of an adviser.
The non-advised population knew it needed help with financial issues, with 86 per cent concerned about their finances and 36 per cent saying they had unmet financial advice needs, but they still would not consider turning to a financial planner.
Investment Trends head of research for wealth management, Recep Peker, said: "Financial planners are an important and effective channel in helping Australians with their finances, and many people recognise the benefits of using one".
"However, financial institutions need to look beyond the financial planning channel to engage the rest of the population with their finances," he said.
The Association of Financial Advisers' (AFA's) chief executive, Brad Fox, said it was during complex financial times that planners needed to articulate their value and indispensability.
"Financial advice is becoming more needed because of the complexity of the trade-offs for investors between super, taxation, and debt reduction, and venturing across the lifestyle issues of preferences around vocation and employment, lifestyle, family, inheritance, and estate planning," Fox said.
Fox noted, however, that the cost of advice would rise during these times, as altering clients' financial plans was a distinct possibility if the Budget changes became legislation after the 2 July Federal election.
"This is where I think we will find financial advice grows: the greater the complexity across both wealth and lifestyle issues for people, the more financial advisers will add the most value for their clients, and therefore can charge higher fees because it's appropriate to the value," he said.
Eureka Whittaker Macnaught chief executive, Greg Cook, agreed, adding that any changes in regulation, Budget or investment markets presented an opportunity for advisers to re-engage with clients who might have drifted away.
"To think about it in a commercial fashion, change results in people moving to seek advice. We're winning new clients specifically because of that," Cook said.
"Some of the people my business has been seeing over the last couple of weeks have been people who previously haven't had an adviser, or they may have got some advice five or 10 years ago and now realise that the rules have changed and they need to get some fresh advice."
Turn and face the strange changes
There are three certainties in life: death, taxes, and changes to legislation. Financial planners and advisers may have become used to constant legislative changes but clients may not have kept pace and this was where advisers could prove their value to clients.
Bull Financial Group principal, Leanne Bull, said the general public remained perplexed by the constant tinkering with the super system.
The Chartered Financial Planning authorised representative's principal said there was a lot of misinformation being delivered to the public on super.
"They're confused. They still don't understand the current rules, let alone when the rules change so it just becomes very confusing," she said.
"From our point of view, the fact that we're confusing people who don't even understand the current rules and making them even shyer of superannuation is a concern."
Bull was unhappy with the Government's decision to remove the anti-detriment provision from 1 July, 2017, which means members cannot refund their lifetime super contributions tax payments into an estate where the beneficiary is a dependent of the member.
"The self-managed superannuation fund (SMSF) group lobbied to get the anti-detriment payment [scrapped]... the accountants now, because they've got to put their advice in writing now, have lobbied for the anti-detriment payments to be removed, which the government has earmarked in their proposals," Bull said.
"What that means is accountants have just been giving advice that's not in the best interest of their clients... they'll get a ‘get out of jail free' card. They've been giving advice to stay in a system that enables you to get an anti-detriment payment and have a simpler super fund arrangement and clients will now be trapped because we won't be able to re-cast if the client's over 75."
"We've now turned people in from getting an anti-detriment payment into now paying a tax position, which I think is very disappointing because we've given advice in the absolute spirit of the law and the best interests of the client and we're going to get whopped on that one."
However, Cook said that some of the advice he provided to clients a decade ago has proven useful in hindsight.
When former Federal Treasurer, Peter Costello, brought about generous changes by scrapping the reasonable benefits limits, Cook predicted that they would have to be trimmed, and that has come to fruition. Where concessional contribution limits were once $100,000, they were trimmed back to $50,000 under the Howard Government, $35,000 under the Gillard Government, and now $25,000 under the Turnbull Government.
"Most people knew it was coming. Whether it is an element of retrospectivity or not is the important political question. I would describe it as a little bit of semantics to say that it's not retrospective," Cook said.
He advised clients to have their spouses equalise their accounts, with each spouse accumulating around $1.5 million in their accounts instead of one having $2.5 million and the other accumulating $500,000.
"At the time there was no specific reason to do that but it has proven valuable now. The only thing I would perhaps say to the single person who might be just at the $1.5 to $1.6 million cap is that in this low-yield world that we now live in, it's probably only going to produce a sustainable income of perhaps $60,000 to $80,000 per annum depending on the person's age," Cook said.