Comprehensive advice significantly improves retirement outcomes: Vanguard

Australian retirees could increase their projected annual incomes up to 51 per cent through comprehensive financial advice, according to a Vanguard study, but cost continues to be an issue.

Utilising modelling across different financial situations, the study compared how much income could be increased when retirees stick to the minimum withdrawal approach, their super fund’s “best efforts guidance” is in place, and when there’s comprehensive personal advice that considers the full financial circumstances of an individual.

Comprehensive personal advice is described as an optimised strategy that incorporates comprehensive individual and household information such as age pension entitlements, personal financial conditions, partner status, the uncertainty of a household’s longevity, and the uncertainty of market returns and inflation.

For example, the study found that those with less complex financial situations might only see a 3 per cent increase in their annual retirement income, regardless of whether they sought comprehensive advice or their super fund’s “best efforts”, compared to just sticking to the minimum withdrawal.

On the other hand, those with the most complex financial needs could see a 24 per cent increase totalling $13,220 annually through utilising their super fund’s best strategy. However, this could be increased a further 27 per cent by working with a financial adviser, bringing the annual income up $27,780 (51 per cent) from the minimum withdrawal baseline.

According to Vanguard, the primary reason for the disparity between super funds and comprehensive advice is the funds’ limited access to personal information, which ultimately hinders age pension eligibility assessment and fails to account for the individual’s financial needs outside of their super.

“Failing to incorporate personal financial information may see retirees miss out on making the most of their retirement,” the report said. “As a household’s financial complexity increases, so does the potential value retirement guidance can bring.”

While the study highlighted the clear value of personalised advice in managing retirement, Vanguard Australia head of financial adviser services, Rachel White, said accessing this crucial service in Australia continues to be a challenge.

Half of Australians surveyed cited cost as a barrier to seeking retirement planning information and guidance from a financial adviser.

“The study shows that the more personal and household information incorporated into a retirement income strategy, the greater the potential financial benefits. This underscores the critical role personalised financial advice plays in improving retirement outcomes, particularly as financial complexity increases,” White said.

“Comprehensive personalised advice, which combines financial acumen with a person’s full financial picture, is undoubtedly the gold standard. Unfortunately the cost of comprehensive personalised advice and a shortage of advisers make it hard for people to access this level of advice.” 

Another key part of the discussion though is whether everyone actually needs comprehensive advice, with White arguing that high-level advice isn’t strictly necessary for low-complexity individuals.

Pointing to the study, she explained that a hypothetical super fund’s best efforts strategy did prove valuable across the board to varying degrees, suggesting that there needs to be suitable options available across the spectrum, such as through super funds.

“But the study shows that for people with more complex financial situations, there is a substantial gap in potential retirement outcomes compared to when the full information strategy is used. We think more can be done to close this gap,” she said.

However, under the current legislation, super funds are unable to consider members’ personal circumstances unrelated to their interest in the fund when assisting them.

The next tranche of the Delivering Better Financial Outcomes (DBFO) reforms, however, could see this change by potentially introducing a new class of adviser (NCA) and expanding super funds’ service capabilities for assisting members.

Pointing to this, White said it is critical the advice gap is addressed as soon as possible.

“With millions of Australians expected to draw down on their super in the coming decade, there’s no time to waste in progressing reforms that uphold critical consumer protections and enable Australians to safely and easily access personalised advice to suit their individual needs,” she said.