Lessons From Down Under

The United States and Australia share many similarities. Both nations began their histories as colonial possessions of the British Empire and despite attracting immigrants from around the world speak English. Both nations were initially settled by people who saw little opportunity in their native lands and both had mid-19th century gold rushes, leading to national cultures of rugged individualism. Both have currencies based on the dollar.

Australians and Americans fought side by side in both World Wars, not to mention in Korea, Vietnam, the first Gulf war, Iraq, and Afghanistan. We’ve accepted Australians as our own in the popular cultures of music (Bee Gees, AC/DC, Keith Urban, et al.) and movies (Nicole Kidman, Russell Crowe, Mel Gibson).

The two nations’ unique historical and social circumstances have led to different outcomes, however. One such area is financial planning. Access to financial planning is more widespread in Australia, with one recent survey noting that 34% of respondents indicated they had consulted a financial advisor. Australia’s poplulation of about 21 million places it demographically between the states of California and Florida, yet the Financial Planning Association of Australia boasts a membership of more than 14,500 compared to the U.S.’s FPA with total membership of some 28,000.

At a time when the new Administration has floated a White Paper that would institute massive changes in how financial services is regulated in the United States, a review of how the Australians have come to regulate advice givers could he helpful. At a time when retirement income planning is being rethought as the boomers approach retirement age it could be instructive to consider another nationwide approach to the issue, though it’s important to acknowledge the differences as well.

“The big mistake that people make is that the U.S. and Australia are two countries separated by a common language,” quips Mark Tibergien, the internationally recognized practice management guru and CEO of Pershing Advisor Solutions, in a variation on Shaw’s famous line about the U.S. and England.

“Australians have been doing planning longer and for more people than in the U.S.,” points out Dennis Gallant, president of GDC Research in Sherborn, Massachusetts, who has consulted in that part of the world. “What I found in Australia was a very unique market, for two reasons. One is that they have compulsory retirement [savings]. Then you have what goes beyond just suitability for most reps. They have a ‘Know your customer’ or ‘Know your client’ rule. It provides a foundation for a deeper relationship with your client.”

Eliza De Pardo has a unique perspective on the discussion. She’s a native Australian who served as a senior business consultant in practice management for MLC, the wealth management division of National Australia Bank Group, before moving to the States to serve in a similar capacity with Moss Adams in Seattle. Earlier this year she teamed with another Moss Adams vet, Dan Inveen, to launch FA Insight in Tacoma, Washington, where she serves as director of consulting.

“I did notice some significant differences when I first started working in the U.S.,” she says. Chief among these was the way advisors in the two countries present their value proposition to clients. In Australia, meetings between advisors and clients are more likely to focus on broader advice needs and how the entire relationship is enhancing the client’s financial situation than on investment management. “The view is that the product the firms are selling is in fact the advice, and the investment return is a small part of the complete advice picture. They’re charging for the advice that they’re giving across multiple areas of need.”

In the U.S., De Pardo found advisors concentrating much more on investment performance. “A lot of them really do believe that is where they add value. That’s what they want to charge for and how they want to be compensated,” she says. “That works when the market is doing well, but what the recent downturn has showed us is that as the markets hit rock bottom, advisors are working a whole lot harder for their clients.”

Superannuated Savings

One of the biggest differences between the two countries, and one that has had a significant impact on the planning profession, is the approach to retirement. Under Australia’s “superannuation” law, introduced in 1992, individuals are supposed to self-fund their retirement. At age 60, they can choose to either withdraw their savings as a lump sum or as a steady income stream. By law it’s mandatory for the employer to contribute a minimum amount (currently 9%) of the employee’s salary to superannuation. Individuals can also make voluntary contributions to their “super fund” and are given tax incentives to do so. Some people also get some Age Pension assistance once they reach 65, if they can satisfy means and assets tests, which provides a government safety net of sorts. The maximum age pension today is about $15,000 a year for singles and $25,000 a year for a couple.

Geoff Davey is CEO and founder of FinaMetrica, a Sydney-based firm that helps advisors in 12 different countries and five different languages gauge the risk tolerance of their clients. The firm provides consulting on risk-related matters but from 1972 until 1989, when he sold his interest in the business to his partners, he was one of the pioneers of the Australian planning profession.

When he first launched his practice, Davey says that what he was providing clients was life planning. “The more mainstream-type planning, largely investment based, got underway in 1983 because of a change in government legislation. Essentially the government started to make people responsible for their own retirement,” he recalled during a phone conversation from his office in Sydney.

This initial legislation was in the form of a tax incentive for people who made long-term investments to fund their own retirements. “This created demand amongst moms and pops–a much more mainstream community than just the high-net-worth individual,” says Davey. “So we’ve always been further down the socioeconomic scale in terms of our client base.”

A few years later the superannuation legislation went into effect and the floodgates for advisors opened. “It started off at a compulsory 3% contribution, a few years later it went to 6%, and now its 9%,” Davey explains. “It means that for the size of the country, we have a very large investment market.”

“They have a culture of savings that’s being promoted by the government, but that’s not bad,” observes Tibergien. “It looks like the superannuation program has been a big boom to [the advisory profession] and has certainly created a legitimate career path for many people who choose to go into the financial profession. There’s an increase in both the number of people who are accumulating wealth as well as the amount of wealth that people are accumulating, the market cataclysm notwithstanding.”

Transparency and Disclosure

Regulations in Australia demand a much greater degree of transparency than is currently required in the U.S., much of it centered around two types of documents–the financial services guide and the statement of advice. “It isn’t ‘If requested,’ it’s when you begin the conversation with the client,” notes Tibergien, with approval in his voice.

Every potential client must be provided with a Financial Services Guide (FSG) which outlines what services are being offered, how the firm operates, how the advisor gets paid (including commissions), the compensation arrangements, any potential conflicts of interest, and how customer complaints are resolved.