It’s a shame for super funds that so few of their members access advice in the years around retirement.
For members, accessing advice supports better financial decisions, which lead to better financial outcomes. And for super funds, members accessing advice means higher fund retention.
But the majority of members don’t access advice and one of the main reasons is price. For most Australians, advice is perceived as too expensive. In fact, most super fund members are unwilling to pay for advice at all and according to CoreData research those who are willing to pay think it should cost them just $250.
It’s likely that, after recent mainstream advice scandals, Australians are cautious because they don’t have enough information to differentiate between high quality advice and poor advice.
Economist George Akerlof won the Nobel prize for his work on what happens to markets when buyers lack information. Arguably his best-known paper is ‘The Market for Lemons’ and its ideas apply to the market for financial advice.
As we know, a ‘lemon’ is a slang term for a low-quality car. The premise of Akerlof’s paper is that most buyers can’t differentiate between a mechanically great car and a lemon. But the person selling the car knows.
Owing to this information asymmetry, potential buyers of used cars will be cautious and only offer low prices that reflect the poor quality they fear.
And that’s what’s happening with financial advice.
Overcoming information asymmetry with transparency
In Akerlof’s paper, the sellers of high quality cars were driven out of the market. You see, if I’m selling a car that is mechanically fine, then I can either meet the market by reducing the price, or I can walk away from the market, leaving a market for lemons.
Of course, in the real-world sellers of used cars can choose to do more than just drop their price or walk away from a transaction. They can reduce the information asymmetry by embracing transparency. They may offer a free independent mechanical check, or even an extended test drive.
And that’s what super funds seeking to engage their members with advice can do as well. They could display the quality of their service by providing more information up-front in the engagement process.
The idea is to bring your service offer to life before requiring customers to pay. This may be achieved by providing digital content in the form of client testimonials, simulators, calculators or webinars. Or maybe information about the benefits of advice can be provided face-to-face in a workplace seminar or workshop.
In the same way, the initial financial planning interview should be much more than a discovery exercise. Instead, advisers should display the value of their advice by generously exploring scenarios, making the most of preliminary, strategic conversations.
Once the client understands the potential benefits of advice to their personal circumstances, then they’re in a better position to understand its value. And they’re more likely to pay for professional advice.
Members may tell you they’re only willing to pay $250 for advice, but the experience of profitable, large scale advice firms is that clients are willing to pay 10 or 20 times that amount for professional advice, once they understand the benefits.
All you have to do is remove the information asymmetry.