Superannuation Fund Members and Financial Planning Advice

Financial advice has become a major public policy issue in Australia. Following the introduction of compulsory superannuation in Australia in 1992 superannuation assets have rapidly increased to more than $1 trillion. As superannuation assets grow and fund members are increasingly responsible for deciding how those assets are invested, it is imperative that members make informed decisions. To make informed decisions members need to either have an adequate level of financial knowledge and skills, or consult experts, such as financial advisers. Prior research has found low levels of financial literacy among the general population which necessitates reliance on expert advisers. However, there has been much criticism of the role of financial planners in delivering reliable and effective advice to clients on wealth maximisation. Conflicts of interest and inappropriate fee structures have been frequently cited as major reasons for a lack of confidence in the value of the advice provided by financial planners. Despite the concerns about the value of the advice provided by financial planners there is little evidence on why investors seek or do not seek the services of those experts and whether other sources of advice act as substitutes or complements. Based on this motivation, this study seeks to identify factors that explain the choice of financial planners and whether financial literacy is associated with this choice. These issues are examined using a unique sample of superannuation fund members in a large Australian superannuation fund. Based on 1,935 survey respondents the findings show financial literacy is a key factor that explains the decision to seek the services of a financial advisor. Interestingly however, it is those members with more advanced (investment) financial literacy rather than those with general financial literacy or low levels of financial literacy who are most likely to use a financial planner. Demographic factors, including age (older members), gender (male), work status (full-time workers), and region (metropolitan) are associated with the choice of a financial planner. Not surprisingly, fund members with more at stake (with large superannuation balances) and who invest in more risky investments (equities) tend to use financial planners. Importantly, we find that using a financial planner is associated with using other sources of financial advice which suggests that advice sources are complements rather than substitutes. These findings have a number of public policy implications. First, financial planners tend to be used by those with greater financial literacy which suggests that those that potentially have more to gain from the use of financial planners are not using planner services. Second, the underrepresentation of younger, female, and non-metropolitan members in the group that uses financial planners suggests that those members are more at risk of lower retirement savings and potentially, a high reliance on the public pension in their retirement. Finally, the complementary finding that members using financial planners also use other sources of financial advice suggests that those not using financial planners do not avail of other (non-financial planner) sources of financial advice. Consequently, those members may not be well informed about their investment choices leading to sub-optimal investment choices.