Jim Wilson worked in the financial planning industry for 5 years and held a national role in marketing managed funds investment platforms, which were comparatively high fee and low return (low risk) by reference to other investment alternatives, including industry funds.
Jim was also was a part-owner of a successful financial planning business in Brisbane.
The Financial Services Inquiry (FSI) has revealed that there have been clear aberrations in the superannuation investment market and, in some institutions, these have been identified as being organizationally cultural in nature, and in clear need of change.
These aberrations have been to do with:
1. the charging of fees;
2. the level of fees relative to service to clients;
3. fees relative to returns on funds invested;
4. appropriateness of advised investments to clients; and
5. commissions from investment platforms paid to advisers and compromising the objectivity of advisers.
It is Jims’ view, the aberrations have their genesis in the takeover of the superannuation investment industry by the retail banks, who did not understand the meaning or value of “investment advice” to consumer investors. In other words, flogging “deposits and loans” is a different paradigm to the required advice model, when dealing with peoples’ superannuation investments.
The FSI has produced a flurry of press, and public and personal judgments by many people and, in some notable cases, these judgments have been made without balance and perspective, relative to the industry, as a whole.
Again, in Jims’ view, it is important for the current and future investing public to understand that they should not discard superannuation industry providers, as a whole, due to the FSI.
The investing public should focus on educating themselves on the fundamentals of how the superannuation investment markets function, and more-educated consumer input should improve outcomes.
Specifically, investors should focus on the type of service and investment solution they want, relative to their own particular needs.
The first matter investors must decide is, do they want to be an “Advice-Receiving” investor or do they want to be a “DIM” (Do-It-Myself) investor.
Advice-Receiving Investor (Advice Fees/Perhaps Lower Returns/Less Risk):
In the case of an “Advice-Receiving” investor (beneficiaries of Self-Managed Superannuation Funds or employer superannuation contributions to industry superannuation funds or otherwise), the investor needs to clearly understand 4 key points:
- Advice fees will be charged. These fees may, but not always will, contribute to a reduction of the comparative annual net return of a for-profit investment solution versus a not-for-profit industry fund investment solution. (I say “may” as it is a myth perpetrated by the not-for-profit sector, that their investment returns are unrelentingly superior to all sectors of the for-profit sector);
- The advice fees should reflect a meaningful ongoing-engagement of the investor’s needs, aimed at helping keep the investor on track with their changing expenditure needs (THE most important variable to a financially-successful retirement), relative to historical and prospective return on funds invested;
- The investment adviser will advise an investment solution that “gets the investor there” in retirement, by reference to financial modelling of a range of factors personal to the investor and, in doing so, may well prove that a more conservative return on investment (less risk assumed) is all that is required and that the investor’s investments should be managed to achieve that; and
- There is a critical need for the investor to have the investment adviser satisfy him/her that the investment philosophy and management strategies of the investment solution recommended by the adviser will “get the investor there,” in terms of the investor having sufficient funds for an affordable retirement.
Non-Advice Receiving or Retail Investor (No Advice Fees/Higher Returns/ More Risk):
Investors should understand that employer superannuation contributions, self- managed superannuation contributions, and non-superannuation investments can be made directly, either into a portfolio of retail funds or stocks, or into “return objective” managed portfolios, which may or may not achieve their goal in the long run, and may or may not have any quantifiable significance to the investor achieving sufficient funds for a satisfactory retirement.
Lack of advice fees may contribute to comparatively higher annual net returns but, again, this is only relevant if the performance of the fund is not comparatively uncompetitive over the pre-retirement and post retirement investment periods.
In this paradigm, it is up to the investor to determine the relevance to he or she of the investment philosophy; management strategies of investment solutions on a continuing basis; and investment returns, without the input of an adviser. This tags such an investment approach as higher risk than an Advice Approach, in the context of whether an investor will have sufficient funds for retirement.
Comparisons are Odious and not at all helpful:
It should be obvious from the foregoing that whether Non-Advice Receiving Investors achieve a better return, in conjunction with more-or-less investment risk, than Advice-Receiving Investors is not an intelligent debate. Such a debate would not be based on an “apples-to-apples comparison” because Advice-Receiving Investors have chosen to employ an entirely different investment paradigm.
Key Points for Superannuation Investors from the FSI:
Investors in superannuation need to better educate themselves about whether they want to be an Advice-Receiving Investor or Non-Advice Receiving Investor, and what this means for costs; risks; returns; and the ability of investment solutions to “get them there” in retirement.
If investors are not prepared to do their own personal due diligence, whether it be on the suitability for them of advice givers and/or investment solutions, then they only have themselves to blame, if they encounter difficulties. The regulators cannot protect everyone from everything.
Whether investors want to be an advice receiver or a no-advice client, they should seek more than one opinion, as they often do with advice from other professional advisers, and be prepared to pay a reasonable fee for it.
A better superannuation investment market will be aided by better regulation, plus exit from the market of non-advice appreciating investment solutions providers. However, nothing will replace the need for consumer investors to take intelligent control of how they handle the creation, protection and growth of their own wealth, whether it be on an advice or non-advice basis.
© Jim Wilson, Wilson Haynes Solicitors Coolangatta-Tweed Heads 2018.