In a white paper on the industry entitled Too Much of a Good Thing, Arnhem pointed to the “legislated margin squeeze” created by the government’s ambition to reduce superannuation administration fees to 100 basis points for default funds.
“The burden of cost reduction will be felt at the level of administration and manufacturing – these functions usually being the domain of the large, vertically integrated players,” said the paper.
In addition, financial planning dealer groups are faced with an “immediate pressure on income” with the end of volume-based payments from platform providers under the Future of Financial Advice (FOFA) reforms, said the paper.
“As a consequence, dealer groups will likely evolve to form their own vertically integrated models – seeking to capture a product-packaging and investment margin wherever possible,” said the paper.
The financial planning channel itself is at risk of being bypassed by consumers (ie, ‘disintermediated’), according to Arnhem.
The rise of direct investment options from industry funds like AustralianSuper gives consumers the opportunity to buy and sell shares from their superannuation account – with structured portfolios recommended by third party advisers and brokers likely in the near future, said the paper.
“These two services effectively replace what would previously have been executed through a financial planner and a retail fund,” said Arnhem.
The Australian Securities Exchange’s (ASX’s) proposed AQUA system, which allows the buying and selling of retail funds directly via the stock market, will also bypass planners and platforms, according to the paper.
“Admittedly this is currently possible if a customer accesses a PDS directly, but the reality is that over 95 per cent of inflows to retail funds are made via platforms,” said Arnhem.
The rise of exchange-traded funds (ETFs) also allows clients to “disintermediate from both planners and platforms”, said the paper.
When it comes to superannuation, the ‘for profit’ retail sector of the industry is effectively locked out of half of the market.
The industry fund market, which comprises of $267 billion, or 19 per cent of total super assets, is almost completely closed to the retail sector, said the paper.
In addition, self-managed superannuation funds (SMSFs) represent the largest part of the super system ($440 billion, or 31.5 per cent) and the ‘for profit’ sector is effectively excluded from them, according to Arnhem.
But there is a glimpse of hope for planners when it comes to the self-managed sector: the government may legislate to make it compulsory for the ever-expanding SMSF sector to receive advice – but that is “a long shot at present”, according to the paper.
