To define a hybrid advice model, we need to define the traditional advice model and the digital advice model.  The traditional advice model is a client-advisor relationship model where the advisor builds a financial plan upon understanding the client’s financial needs, goals and tolerances.  This is done within the onerous regulatory framework with the primary purpose of working in the client’s best interest.  Fulfilling the regulatory requirements invariably consumes a lot of time on the part of the advisor and raises the cost base of financial advice.

A digital advice model is a client-platform interface, where the client’s financial goals and tolerances are determined using some form of preset limited format questionnaire before moving the client to several preset solutions (financial products).  Hence the majority of digital advice models tend to be product or sector specialists.  Digital holistic advisors are rare and those that exist in the Australian regulatory space do not offer product advice, just general advice, to comply with the onerous regulatory framework.

A hybrid model exists in two formats: 

Firstly, a demand side model is a tiered client platform interface model, where the platform tries to match the client’s needs to the appropriate channel.  If a client’s needs and tolerances are simple and can be solved by the platform, then there is no need to proceed to the extra step.  If the platform fails to satisfy the client’s requirements, it could move onto educational DIY digital modules and if that fails to satisfy the client, then a human interface is presented to provide a more detailed and bespoke service.

Secondly, a supply-side model is where the human advisor uses various digital tools to build efficiencies in the advice process.  This allows the advisor to play to their inherent strengths of building a relationship with the client while outsourcing the technical and regulatory aspects of the process to the digital tool.

Digital holistic advisors generally target a younger demographic and those who can’t afford to engage a financial planner. While some offer some educational tools, a demand-side hybrid model would serve as a bridge between general and directed advice, where the consumer can choose a price point they are comfortable accepting.  While this is not holistic, some advice is better than none.

Most platforms offer siloed advice paired with product offerings.  A demand-side hybrid model would serve as an intermediate step for those struggling to understand the product using an educational interface.  This can be educational videos, a chat interface with a human or AI.  The final step would be moving those struggling to a human interface via a communication platform for a more bespoke service.

The advantage of the demand-side hybrid model is a tiered service that matches the consumer’s financial literacy, confidence, and overall requirements.  This allows the level of behavioural coaching to be controlled by the consumer.  This seeks to add alpha by better matching the consumer’s needs with the appropriate offering, giving the consumer a more efficient service at a lower price.

On the supply side, if the consumer can be satisfied by a vanilla product offering, then a low-cost digital platform is all that is required.  If they need more help, various degrees of a human or AI interface can be introduced, such as educational videos, some form of directed advice, or a chat service.  If the consumer decides that they require a bespoke or holistic approach, then a human steps in, with the digital tools at hand, making the advice process as seamless, timely, and cost-effective as possible.  Ultimately, the primary value of financial advice is the comfort and well-being factor.  A hybrid model matches the client’s changing needs with the appropriate role, whether digital, human or some combination of both.  Furthermore, digital tools allow technical and knowledge-based skills to be used by advisors to create efficiencies in the advisory process, thus driving down costs.

Creating a process that hands off from digital to human and all the combinations in between will be a challenge.  Furthermore, with AI tools, the advisor has to gain proficiency in using these tools to garner the efficiencies on offer.  How best to achieve that proficiency is yet to be determined, is the education route better or the practical route better, or is there some form of both that would be the optimal route?

Australia’s defined contribution retirement system attempts to provide for the retirement needs of most Australians.  The system is further supported by the Aged Pension for those who fall short of retirement income.  We look at the genesis of the defined contribution scheme, its benefits and characteristics, followed by a sustainability and affordability analysis.  Finally, we provide a few recommendations of our own.

Moving the risk of retirement from the defined benefit model to a defined contribution model transfers the risk from the employer to the employee.  This eliminates the risk that the employer could go broke after the individual retires, jeopardizing their retirement.

The current taxation framework for superannuation rests on a 15% flat tax rate for concessional contributions, and earnings during the accumulation phase, and no tax during the retirement phase[1].  This does allow for accelerated savings for retirement for the larger section of society where the propensity/capacity to save is low and alleviates the pressure on government coffers in the future.

Chart:  Coates, B. and Moloney, J. (2023).  Super Savings: Practical policies for fairer superannuation and stronger budget. Grattan Institute. https://grattan.edu.au/report/super-savings-practical-policies-for-fairer-superannuation-and-a-stronger-budget/ pg. 14

The issue of sustainability and affordability has to be viewed through the lens of policy trade-offs.  If government coffers continue to support the super system at the current rate (please see graph above), super tax breaks will approach almost 3% of GDP by 2061 according to Grattan, with earnings tax breaks being the main driver of that increase. 66% of that benefit flows to the top 20% quintile of the population[2].  If that continues, spending will have to be reduced, taxation will increase, or the government debt will increase.  This represents a generational wealth transfer from the young to the old.

Tax breaks offered encourage high-income earners to funnel extra disposable income into super as a tax-effective strategy.  The benefit to the middle-income band in Australia is unchanged as the tax benefits of super negate the smaller Age Pension benefit.  The benefit to the lower income band is the worst off among the three as they do not take full advantage of the tax concessions offered by super and suffer the smaller Age Pension benefit when in retirement.  The unchecked tax advantages super offers are exploited by the high-income cohort and paid for by the low-income cohort in society, a wealth transfer from the rich to the poor[3].

The issue of unaffordability is due to the regressive nature of the super taxation model. This can be avoided by implementing a progressive super tax system such as the income tax model, where the top quintile of the population bears the majority of the burden.  Currently, the top 20% quintile of the population bears 62.2% of the income tax burden[4].

A regime that mirrored the income tax brackets but for super earnings with their respective tax brackets (see below as an example) would be a far more superior and equitable model. This would move in line with the tax brackets, and it would allow smaller super earnings to grow at a lower tax rate while taxing higher super earnings at a higher tax rate, moving it towards a more progressive regime. The top rate would be in line with the 25% lower company tax rate, to avoid taxation arbitrage. This would alleviate the government’s problem of the growing tax breaks in superannuation whilst increasing equity in the system.

Super Income Marginal Tax Rate Tax Payable ($)	Tax Rate	Tax Payable
$0 to $18,200	0%	0
$18,201 to $45,000	10%	10% on excess over 18,200
$45,001 to $120,000	15%	$2,680 + 15% on excess over 45,000
$120,001 to $180,000	20%	$13,930 + 20% on excess over 120,000
Over $180,000	25%	$25,930 + 25% on excess over 180,000

---

[1] There are some taxes when retiring between the preservation age and 60 years of age.

[2] Coates, B. and Moloney, J. (2023).  Super Savings: Practical policies for fairer superannuation and stronger budget. Grattan Institute. https://grattan.edu.au/report/super-savings-practical-policies-for-fairer-superannuation-and-a-stronger-budget/

[3] Coates, B. and Nolan, J. (2020). Balancing act: managing the trade-offs in retirement incomes policy (Submission to the Retirement Income Review). Grattan Institute. https://grattan.edu.au/wp-content/uploads/2020/03/Grattan-Institutesub-balancing-act-retirement-income-review.pdf.

[4] McIlroy, Read (2023) ‘Top earner shoulder more of the tax burden’, Australian Financial Review, https://www.afr.com/politics/federal/top-earners-shoulder-more-of-the-tax-burden-20230608-p5df2g

I have seen something else under the sun: The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; but time and chance happen to them all.

https://www.iasg.com/groups/bamboo-trading/programs/discretionary-macro-program

The authors argue that the recipe for success as a nation requires inclusive institutions.  We see this starting in 17^th century England, where the Glorious Revolution limited the power of the monarchy and transferred power to parliament to create and maintain inclusive institutions.  

They argue that monarchy or the elites will naturally favour extractive institutions and impede any innovation and/or technological change that has the potential to change the status quo and potentially reduce their grip on power.  Extractive institutions engender a repressive cycle whereby the greater the degree of extraction, the less incentive is there to be productive and the less one is willing to embrace innovation.  If the elite is going to take away 90% of what you produce, why bother making more?

The more power that is concentrated, the more vicious the leader must be to hold onto to power.  Many will see that as the easiest way to get ahead.  Some start off as altruistic but without any push toward creating more inclusive institutions you either have the best case of the ‘middle income trap’ or worse case – a despot. – Animal Farm syndrome.

On the productivity spectrum – slavery vs enjoying 100% fruits of your labour (embrace innovation and technological change to maximise labour output)

Elites come in many forms – not only a ruling class but an economic monopoly is also an extractive institution. 

The Western world has a higher level of living standard is essentially the rule of law, excellent property rights, equitable and easily understood laws that protect you and your property to ensure that any fruits of your labour can be enjoyed without the fear of appropriation.

Countries get stuck in the middle-income trap due to political institutions being extractive but allowing growth from a low base (as it suits them to extract from a bigger pie if it does not threaten the elites grip on power) but still being extractive favouring the ruling elite.  One of the hallmarks of middle-income countries is the control of media as opposed to developed countries where media rights are sacrosanct.

Growth under extractive institutions will eventually hit a wall as one of the conditions of innovation is the creative destruction of the ‘status quo’ and by extension, a corrosion of the elite’s hold on power.  Absolute power corrupts absolutely, and we can extrapolate that down, hence a true democracy has checks and balances on the elites.

Authoritarian growth looks great as they usually start off from having nothing and importing technology and allowing growth under the auspices of an extractive framework – cheap labour with controlled mobility.  An example is the USSR’s phenomenal growth rate in the 50-60s before hitting a wall in the 70-80’s because there was no change in the institutions that allowed creative destruction, there was no cycle of renewal, ones that would foster technological advancement and reward innovation.

Modernization theory by Seymour Martin Lipset: All societies as they grow will head towards a civilised democracy, an educated workforce will naturally lead to democracy and more inclusiveness.  There are many highly educated people with extractive elites and controlled media.  Perhaps it’s a matter of time but the elites will not give up power without a fight, which has never been the way that history has operated.

China will eventually hit the middle-income trap without allowing true Schumpeterian creative destruction which is required for true innovation to arise.  Can ‘controlled’ creative destruction can be achieved?

Summary of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu, J., Robinson, J. (2012)