Wealth management model not sustainable

The business model developed by Australia's large wealth management companies, made up of a combination of administration platforms designed to service intermediaries and a vast array of market-linked investment options, may not be sustainable.

The wealth management industry, in which the big banks play a major role, was given a report card at the Institute of Actuaries conference yesterday and it wasn't good.

The industry does not meet best practice benchmarks in any area of its operations, it does not meet the needs of the average Australian and it fails completely in dealing with the biggest emerging investment need - the provision of secure incomes in retirement.

This damning assessment was delivered by Wade Tubman, a director, and Annie Liao, a senior manager in the actuarial practice at PricewaterhouseCoopers. Their report was based on interviews with leading actuaries.

Tubman and Liao said the industry and the government had to be prepared to consider major changes. One was to do away with all the competing mastertrusts and wrap accounts and operate a single government-owned platform.

Another was to change the basis on which superannuation fund members invest, so that the fund member is no longer bearing all the investment risk. Wealth management companies would be required to develop products that mitigated the superannuant's market and longevity risks.

Liao said the industry had to accept that the majority of people had little understanding of super, did not trust their super fund and underinvested as a result.

Liao said: "Half the people in super funds don't know if they are in an accumulation or defined benefit fund, only 30 per cent know approximately what their balance is and a quarter don't know what sort of investment option they are in."

She said a lot of criticism was directed at the shortcomings of financial planners but only one in five adult Australians use a planner. Product features, costs, investment management practices and the design of retirement income options were areas that warranted just as much attention.

Tubman said the idea of having a single government-owned administration platform came from Sweden. It had a number of benefits. It offered a low-cost service; the fee is 18 basis points a year, compared to an average fee of 121 basis points in Australia.

It would create uniformity; it would do away with all the problems people have moving their super. Liao said a measure of the complexity of the system was that 40 per cent of people who tried to consolidate their super accounts into one fund gave up before completing the task.

And it would create efficiency by stopping the endless duplication of investment options. Two thirds of investment options offered by super funds have less than $10 million in funds under management.

The Minister for Superannuation and Corporate Law, Nick Sherry, speaking at the same conference, said the Government was taking a very close look at proposals for improvements to the types of superannuation pension products offered to retirees.

Conference speakers have talked about the prospects for legislation that would enable the development of guaranteed pensions, lifetime annuities and other products that would reduce market and longevity risk in retirement.

Sherry said: "We need discussions about a greater degree of annuitisation in the retirement income phase."