Getting on With Delivering Better Financial Outcomes (DBFO Tranche 2)

Outgoing Assistant Treasurer, Stephen Jones, has consistently pushed for superannuation funds to take a bigger role in providing financial advice. At the same time, he’s acknowledged that funds have felt that financial advice laws are “holding them back and leading to bad outcomes for members.” On 21 March, Treasury released draft legislation covering the second tranche of financial advice reforms stemming from the Quality of Advice Review (QAR), which we’ll refer to as DBFO (Delivering Better Financial Outcomes) Tranche 2. This latest round:

• • Clarifies when superannuation funds can collectively charge their membership to provide advice.
  • Enables superannuation funds to send targeted prompts — nudges — to members.
  • Replaces statements of advice (SOAs) with less onerous client advice records (CARs).

We have long argued that funds need to get on with providing advice at scale and that digital financial advice is essential to doing this. While the current legislative and regulatory framework does not prevent funds from doing just that, this new package of reform should be seen as extra assurance that they can expand their financial advice offering without running afoul of the rules.

Collective charging

Superannuation funds are currently free to collectively charge members — by say, levying a flat fee — for advice provided that certain conditions are met. The proposed legislation and associated draft regulation provide superannuation funds with more clarity around when these conditions are met. Funds would be able to consider a broader set of members’ personal circumstances when providing advice on topics including:

• Superannuation contributions.
• Investment options.
• Insurance held through superannuation.
• Retirement income.

Big changes to the delivery of in-person advice by super funds will need to wait for the slated “part 2” of tranche 2 (convoluted, we know), which will introduce a new class of financial adviser. In the interim, we think the focus for funds should be on collective charging of members for digital financial advice.

Retirement incomes in particular should be front of mind for superannuation funds, given the focus on implementation of the Retirement Income Covenant by APRA and ASIC. Funds will be able to provide digital advice tools that guide members through planning for retirement through superannuation. These can consider a wide-range of topics that we suspect the average punter finds bewildering, including transition to retirement products, account-based pensions, longevity products, drawdown strategies, and the interaction of superannuation with the age pension.

Nudges

A nudge is an intervention that alters a group’s behaviour in a predictable way but is simultaneously easy and cheap for any individual to avoid. Commonly cited examples include placing healthy foods at eye-level in supermarkets (a beneficent attempt to get us to eat well) and the autoplay feature used by Netflix, YouTube, and other streamers (an insidious ploy to get us to watch 10 hours of TV without a break).

As Stephen Jones highlighted, “there is an argument to say we actually don’t need to legislate to make this happen, because the Retirement Income Covenant requires funds to do things like this.” Nonetheless, the draft DBFO Tranche 2 legislation makes it clear that superannuation funds can issue a recommendation or statement of opinion in a “targeted superannuation prompt” — that is, a nudge — and that this does not constitute personal advice.

Under this framework, funds will be able to select cohorts of members based on any relevant aspect of their personal circumstances or needs and send them nudges by:

• Email or snail mail.
• Displaying it on a digital platform — e.g. a member portal or member app.
• Some other method yet to be prescribed by regulation.

The draft legislation defines a number of steps a fund deploying nudges must take to be compliant. Among these is a requirement to make sure that these nudges are appropriately targeted — meaning they are both appropriate to the cohort the fund has defined, and every member that receives the nudge is actually in the defined cohort. We see this as a data and analytics use case. Funds that can combine data from multiple systems and perform advanced analytics on the aggregated datasets will be capable of more sophisticated targeting of nudges.

Funds will also be required to monitor the effects of the nudges they send to members. For example, a superannuation fund could send a prompt to members approaching retirement suggesting a combination of an account-based pension and a longevity product. The fund would then need to monitor the uptake of those products by members who received the nudge, ideally baselined against either past behaviour of a comparable cohort or a contemporaneous control group (though this comparison is not explicitly required by the legislation). Again, this is a data and analytics problem — data will need to be collected on member actions and linked to cohort analysis and nudges. Statistical analysis will then need to be conducted to establish the effect of the nudges, and this should ideally inform improvements and future nudge design.

Client advice records

DBFO Tranche 2 will see statements of advice (SOAs) replaced by client advice records (CARs). There are several changes distinguishing the new CARs from SOAs, but the key difference is explained by Treasury as follows:

The CAR is focused on supporting the client to make decisions about the advice, rather than demonstrating the process the provider has performed to meet their regulatory obligations.

CARs promise to be shorter, simpler documents than SOAs. The draft legislation also affirms that they can be technologically neutral — they could be a video or interactive digital format, rather than a written document. Again, this was already possible with SOAs under the existing regulatory framework, but DBFO Tranche 2 should eliminate any doubts that super funds had around innovation in format.

We think the opportunity here is to cap off a slick and user-friendly digital advice experience with an equally slick and user-friendly CAR. Funds and their vendor partners should experiment with AI video generation and other less conventional methods to develop better experiences for members.

An opportunity for improvement

As with previous packages of financial advice reform, DBFO Tranche 2 has been met with mixed reviews, with some pockets of the financial advice industry being particularly critical. Despite this, we think this latest round of changes presents super funds in particular with further incentive to improve their advice offering to members — particularly through digital means. Doing so will be crucial to providing advice at scale.

Getting on with Delivering Better Financial Outcomes (DBFO Tranche 2) is part of The Quarterly – Q3 FY25

The production of our quarterly report is led by Novigi’s Market Strategy and Propositions team: 

This article was also strengthened by a wider group of Novigi specialists, whose withering years of toil and rich experience added depth and clarity to the perspectives shared. 

Key Contributors:

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