SMSFundamentals | Nov 01 2012
SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.
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By Greg Peel
SMSF trustees may be comforted to know in excess of 40% of FNArena subscribers are fellow “smurfs”. Smurfs may also be buoyed in knowing that while the balance is made up of everyday traders, fund managers, brokers and other interested parties, a large cohort is represented by financial advisers and planners.
We're all in this together. And in “this” I mean the challenges facing Australians looking to provide for their retirement in the post-GFC apocalyptic world. Smurfs are well aware that the “old model” of financial advice was to take trailing commissions from super fund big boys (you know who you are) and dump clients into a suite of one-size-fits-all warehouse super products. Everyone was cleaning up, except of course the actual investors.
This model has been exposed for what it was worth, sending disillusioned retirees running to self-management even before the GFC hit, and prompting the government to create the MySuper default fund. Smurfs be warned – the big boys are smarting and, while slow to wake up, are now coming to get you with their own range of services for the self-managed.
But both the big boys and the growing number of independent advisers can also consider themselves warned. Successful servicing of the growing SMSF cohort cannot involve dragging out old ideas. Australia has changed, and arguably the most important change in the context is that the first Baby Boomers have now retired. The trickle is set to become a flood. To date, superannuation investment planning has been focused heavily on the “accumulation” phase – building a nest egg for eventual retirement – and has almost totally ignored the “income” phase – the point at which retirees must rely entirely on what they have and how they can balance sufficient cashflow with ongoing requirements.
"There is increasing recognition of the seriousness of Australia's retirement funding issue and general longevity risk,” said Milliman's Wade Matterson in a press release accompanying the white paper. “With a growing number of baby-boomers reaching retirement age, and the end of the bull market in Australian equities in 2008, many retirees – and their advisers – are questioning how they will meet their retirement needs in the future".
And they will not meet them under the current super advice and planning model, as far as Lonsec and Milliman are concerned. Here are some snippets from the white paper:
“There is a clear disconnect between retiree objectives and advice processes”. The core of any advice business, the paper suggests, is to deliver on the goals, desires and aspirations of clients.
“Any advice process needs to take a holistic view of the client's financial, emotional and physical; needs.” Traditional risk profiling methodology, the paper suggests, fails to adequately address the specific objectives of retirees.
Perhaps my favourite: “Focus on outcomes, not peers”. Fund managers have historically had one goal, and one goal only – to outperform the next bloke. It has had nothing to with absolute returns for the investor – a negative return of 5% is seen as an outstanding win if the industry lost 7% on average. “The superannuation industry has developed an obsession,” the white paper rails, “with peer-relative performance that has been embedded through the culture of many organisations, including compensation and remuneration incentives linked to peer-relative measures”.
Smurfs do not simply want to lose less money than the next bloke. They want to enjoy their retirement.
“There is an opportunity for smarter analytical tools that create a link between a client's goals and the advice that is given. As advice needs grow in complexity, the ability to support recommendations with robust analysis will add a degree of confidence and insight to client/adviser interaction.”
The reality is that many commonly used strategies, such as the 'bucketing approach', notes the paper, are based on loose assumptions that that will not necessarily bear out in all market environments. “Ensure the framework is independent of the product. Product should follow advice rather than lead it”.
These are mere snippets. The paper goes on to suggest the current super advice model is not “broken” but is clearly “flawed”. Lonsec and Milliman offer advice for advisers as to how to best serve their clients and in so doing so best promote and enhance their own businesses.
The place is here, the time is now, and the white paper can be accessed at this link.
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