Financial advice reform key to boosting investment outside super

New research from Vanguard has proposed several key reforms to support a ‘successful retail investment system’ for Australia, by repurposing excess savings into capital market investments.

According to the report, Core Components of a Successful Retail Investment System, Australia had the highest rate of direct ownership of retail investments through a pension or life insurance system at 83 per cent, while listed equities and bonds combined came in at 33 per cent.

The report also identified Australia as one of several OECD countries where individuals have more money in their savings accounts than in capital market investments.

As a result, Vanguard has proposed eight reforms to encourage Australians to take their excess savings and boost the capital market investment landscape. This comes as the research indicated 10 per cent of excess savings could inject over $185 billion into capital markets, based on the current amount of cash held in savings accounts.

The reforms include improving the access, affordability and quality of financial advice to help Australians make informed financial decisions; strengthening financial literacy to help build confidence and trust in investing; and introducing a tax incentive to promote the benefits to investing back into capital markets.

“While Australia stacks up relatively well on a global stage in terms of supporting retail investors, there are key opportunities for Australian policymakers to further improve the investment landscape outside of superannuation,” Daniel Shrimski, Managing Director at Vanguard Investments Australia, said.

 “Many people are missing out on investment returns by holding too much cash and could significantly improve their long-term financial outcomes by being invested in capital markets.

 “Australians hold some 23% of their household financial assets in cash and deposits, yet over the last decade the average annual return from cash has been just 2%. Other investments have produced much higher returns.

 “Vanguard’s research provides key insights on the steps needed to motivate more Australians to invest outside of their super, including through new tax incentives and by helping more people to make the best investment decisions.

 “We are keen to work with Australian policymakers to help further refine the existing regulatory system in a way that supports retail investor outcomes at all levels.”

The full list of reforms featured in the report include:

1. Auto-enrolment: Implementing retirement systems that automatically enrol eligible workers in savings plans, with contributions invested and managed on their behalf, has proven highly effective in boosting investment participation and long-term wealth.
2. Tax incentivisation: Enabling tax-advantaged investment vehicles and offering other tax-effective initiatives can significantly encourage individuals to move their cash savings into capital markets.
3. Default products: Directing customers to default or pre-approved investments can benefit those who lack the time, motivation, or skills to make informed investment decisions.
4. Spectrum of advice: Investors need access to a full range of support, guidance and advice to suit their individual circumstances. Regulatory frameworks that facilitate digital services can help meet the needs of a growing section of society.
5. Financial literacy: Policymakers should develop targeted, research-based national financial literacy plans to build consumer confidence in investing. Regular national research is essential to understand issues, track progress, and identify effective interventions.
6. Removal of conflicts in distribution chains: Commission-based remuneration models can create conflicts of interest. Regulatory regimes should ensure intermediaries are not unduly influenced by commissions when advising or distributing funds.
7. Decision-useful simple disclosures: Product providers must be required to offer clear, concise, and engaging information to help consumers compare and encourage investment firms to compete, leading to better services and lower costs.
8. Value for money: Clear total cost disclosure is vital. Every dollar/pound/euro paid in fees is a dollar less in potential returns. Investors should be able to easily understand and compare all-in costs to make informed decisions.