The ‘choice in super’ debate rests on the traditional arguments about protectionism and freedom of choice.
At its most extreme, protectionism argues that the majority of super members are less capable of making informed choices and so cost-effective and simple infrastructure must be put in place to protect them.
At the other extreme, spurred on by products that provide insufficient choice (direct investments) and high or hidden fees, more than 200,000 Australians (with assets of $100 billion), including executives and business owners, have voted with their feet to set up their own Self Managed Super Fund (SMSF).
Master trusts (with assets of $160 billion) seek to provide a space between the simple safe haven for the majority and taking on the onerous administration and compliance responsibilities of managing your own fund.
Arguably, account balances will be a key driver going forward. Other equally important factors will include business ownership, executive status, financial literacy, family wealth (inheritance), and a plain desire for genuine investment and product choice.
One size does not fit all and the Kelloggs cornflakes tried and true, simple five-pack investment choice model clearly does not cater to all Australians.
Master trusts which offer a genuine range of direct and managed fund choices to suit investors with the financial inclination, will continue to prosper. Industry funds like Sunsuper are also realising the importance of these trends and increasing their range of investment choices.
Industry and corporate funds have been dominant players in Australian corporate superannuation. Cost-efficiency has been driven through shared infrastructure and a focus on low costs for members with low average balances (usually $10,000 or less). Traditionally offering around five to seven fund-of-fund choices, many of these products cater to members who do not have the financial inclination to warrant a wide range of choice.
This can serve to minimise investor involvement and alienate the very investors who have the financial will and inclination. These products provide a safety net for investors who can’t afford financial advice and don’t have the inclination to take a greater interest in their retirement. But what about those that do have the financial inclination, or the desire for greater choice, or to move outside managed investments?
More autonomy over one’s super equates to more choice. Just look at the growth of SMSFs. This growth confirms the desire for choice, autonomy and transparent fees. However, not all Australians want the compliance and administration responsibilities. An SMSF may not always offer what a corporate super fund can — cheaper life and income protection insurance without having to take a medical examination (a procedure not required by corporate fund providers).
To capture this segment of the executive or owner market, as well as secure the loyalty of those investors with growing account balances, corporate master trust providers and the newer style industry funds must look at offering genuine investment choice — beyond managed investments and beyond in-house funds management loyalties.
A service somewhat undervalued by many providers is advice. The greater the financial inclination, the greater the interest in financial advice.
Services that fail to provide the alternative for advice, alienate many of those with the financial means and inclination to go further.
Investors, in conjunction with their advisers, should have the alternative to set and change their own asset allocations as they see fit rather than settle for a default choice as part of the standard ‘set and forget’ five fund pack.
Executives and business owners often seek to hold a portfolio of shares in super and perhaps even shares in their own company. This would allow for direct control and the feeling that the owner or executive can ‘make a difference’ and realise the benefit. And many business owners and executives seek investment through commercial and residential property.
Index funds have become a part of the corporate landscape, but again, mainly as part of a pre-fabricated fund-of-funds formula to keep prices low. Why can’t the sophisticated investor, who has no belief in active management but every interest in asset allocation (as the consultant suggests), pick across the index sectors and change to suit?
Not everyone flies economy. Not everyone drives a Holden. The general exhortation to the super industry is the explosion of the SMSF, which demonstrates that not everyone wants a five fund investment pack or a ‘me too’ 20-50 managed investments master trust. While the invention has served us well, it’s now time to innovate on genuine choice.
— Mike Fielding is head of product at Asgard.
