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(Feb-2005): Choice - a roar or a meow?
Last year was a strong year for the industry and investors. Will 2005 be the year of the superannuation industry ‘roar’ or more like a dull whimper? Clearly, that is the question surrounding the introduction of super choice on July 1.
2004 was a happy one for investors with very strong returns. After the poor investment years that started the new millennium it was good to see investors rewarded in 2004.
My view is that 2005 and the impact of super choice will bring both strong positives in some areas, and some disinterest in others. The industry is going to make a lot of noise in the lead up, but consumers are likely to whisper back in the short-term. It will be the longer-term that will be the test. Super choice is an issue consumers will need to be educated on, rather than seeing them respond of their own volition.
The extra complexity on how choice will affect life insurance is likely to be a further confusing factor.
Initially, consumers may not take up alternative offers in large numbers. Superannuation in Australia is still exceedingly complicated so that is likely to be a turn-off in the early stages. It is daunting for most consumers, especially around retirement. This is a strategic issue for the industry in the longer run. Complexity blunts consumerism and adds cost. In time, superannuation will have to be simplified to make it more understandable to consumers and cost effective.
However, as financial education programs kick in and, hopefully the system is simplified, super choice may become a major dynamic in the investment arena. But probably not in 2005.
So what does the year ahead hold for investors, investment managers and other major participants in the industry?
The year just completed was highlighted by bumper investment returns. It wasn’t so long ago that everyone was saying the era of double digit investment growth was a thing of the long-distant past.
2005 may be a year of significant adjustment in the global economy. Most commentators believe growth assets will struggle to produce net double-digit returns. It may be that a period of low returns or even negative returns on the horizon, hopefully not in 2005, but it may come soon.
The industry therefore, needs to start thinking about choice and how it may affect consumer prospects for achieving their longer-term savings objectives. Relating fund returns to benchmark leaves the average investor cold. In a tough investment year, there is no consolation in the information that you have lost less than the benchmark. Consumers tend to think in terms of absolute returns. Those with larger sums and thereby greater economic power could see the chance to move to do-it-yourself (DIY) funds. I would expect that trend to continue to be strong.
A perception of involvement with one’s investments and influence on the future is also important. The intellectual arguments around better returns from lower-cost pooled assets carry little sway for those who believe they can better make investment choices themselves.
DIY is here to stay and will grow especially in a lower-return environment.
Clients’ best interests are typically served by the recommendation of a long-term strategy, reflective of their needs and which may be maintained in the face of various market conditions. Any organisation or adviser that markets on the basis of double digit returns in 2004 will be doing everyone a disservice. Especially if they qualify those statements in fine print at the end of advertising. The regulators will be very vigilant about this sort of behaviour.
An industry that asked consumers to stick with it during a period of poor returns must not over promise and then have to report under-delivery in a subsequent hard market.
That brings me to the other challenge for the industry in the year ahead. As I have said, Australia’s superannuation structure is highly complex and, because of that complexity, it is a turn-off for nearly everyone.
For the investor, getting advice is difficult and expensive with new Financial Services Reform regulations. For the adviser it is complex and time expensive to comply with all the disclosure and accountability rules. And for the fund, compliance is exacting and a cost-burden.
This year should be one where Government, industry and consumers get together to work out how best to make the system work, while protecting the investor and making sure costs are kept to a minimum.
It would also be great if the Federal Government uses its control of both houses to completely overhaul the tax structure applying to super so investors get better returns for their dollars.
A reasonable trade-off for people locking up funds is to give them good lower-cost, understandable structures and real tax benefits within those structures.
In the end the consumer must win and I am sure will, in time.
— Jim Minto is chief executive of Tower Australia
AUTHOR
Mike Taylor
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