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What can super funds learn from advisers?

The industry’s focus on delivering Australians income for a dignified retirement is heartening. Treasury recently sought industry feedback on the opportunities, barriers, and challenges to improving retirement for Australians. This follows last year’s thematic review from ASIC and APRA on the Retirement Income Covenant. When it comes to decumulation we know there are no silver bullets, but advisers have been grappling with many of these issues for years. So, what could superannuation funds learn from advisers?

Income for a dignified retirement goes beyond investments

Solid investment returns in accumulation are essential, but it’s not the main game in retirement. A key finding of the thematic review was that super funds need to better understand members’ needs and address fundamental data gaps to deliver useful assistance to members in retirement.

advisers know that delivering a sustainable retirement income comes from truly understanding their clients. It requires a more complete picture about members—their goals, preferences, risk tolerance, assets outside of super funds, pension eligibility, home equity, spending habits, and so on. The role of the modern financial planner extends well beyond simple investment advice. Strategic advice plays an important role, such as optimizing tax strategy, adjusting strategic asset-allocation settings over time, and managing behavioral factors such as the ability to stay invested during market ups and downs.

Many super funds have done a good job of playing the role of the simple investment adviser by delivering strong net returns for members. But to play the role of a strategic adviser, the clear barrier is the provision of member information. To provide a personalized retirement solution at scale, super funds need more member data and engagement. Unless the provision of data is mandated or unless super funds can integrate with government systems, including the Australian Tax Office portal and Centrelink, forming a holistic picture of a member to provide adequate income in retirement will be difficult.

Better managing longevity risk

Running out of money before you die is often cited as a key concern by Australians. Finding the optimal withdrawal amount each year to mitigate this risk is tough. Treasury is clearly aware of this and has dedicated a whole section of its discussion paper to tackling longevity and mortality risk.

How do advisers manage longevity risk and drawdown levels? Annuities are sometimes used. But more typically, advised clients attend annual check-ins to see how their assets and income are tracking, how their spending habits have evolved, and take the opportunity to reassess any future goals or preferences. This iterative process can result in more flexible withdrawal rates, which could potentially lead to higher withdrawal rates compared with other strategies, such as a fixed withdrawal rate. It has been acknowledged that a more-flexible approach works best when the investor can receive this personalized guidance. However, many Australians aren’t in the privileged position of meeting with an adviser each year.

Nonetheless, longevity risk could be better managed across advised clients through to defaulted members. After all, it’s the nastiest, hardest problem in finance according to Nobel laureate, William Sharpe. Back in 2013, Paul Keating acknowledged that the super system adequately caters for the 60- 80-year-old cohort, but the 80- to 100-year-old cohort old is not well served and that “a government-administered, universal, compulsory deferred annuity scheme, that would be fully-funded with the capital provided by the annuitant from a portion of their lump sum superannuation benefit” is required. Let’s see what feedback surfaces from the Treasury paper.

Measurement metrics must evolve

The thematic review also highlighted that super funds lacked adequate metrics to assess the retirement outcomes provided to members—specifically, the changes in drawdown rates and member confidence levels in meeting their retirement goals.

In accumulation, oversight and measurement is focused on maximizing net returns for a given risk capacity, but come retirement, the mindset shifts to the amount of income hitting the bank account and whether retirement savings "will last."

Let’s think of how an adviser operates. When it comes to the investment products that underpin their clients’ retirement strategies, the adviser definitely wants to measure the investment return. But in overseeing and measuring the success of a holistic strategy, the conversation isn’t just about an investment return; it’s about income and spending. That is, what income levels are required; what’s available from the pension or an annuity; what was last year’s spending; and what are the potential changes to future circumstances such as bequest motives? Then there’s the assessment of a client’s residual asset balance and whether it is still adequate to fund future needs and wants. This requires a very different framework to the annual "Your Future, Your Super Performance" Test.

Unfortunately, there are some elements of successful retirement outcomes that are very difficult to measure. A good example is behavioral management. Ensuring clients stay the course through market downturns can have a significant impact on their retirement outcomes. A member’s money-weight return relative to an appropriate reference portfolio could be illuminating here, but likely won’t catch everything. And some things are simply unquantifiable – such as a trusted relationship that helps you sleep at night. However, lots of retirement-related outcomes are measurable, and we must evolve the thinking to cater for retirement. Of course, a big challenge is doing it at scale.

Personalization at scale

Another key finding from the thematic review is that trustees should tailor assistance to cater to diverse member needs and preferences. It doesn’t take too much imagination to think of a technology platform whereby individual goals, preferences, and circumstances are recorded, a personalized strategy recommended, and the outcome overseen in accordance with the strategy set. Adjustments could be made iteratively through time. However, the technology stack required to support this is significant (even in a world of artificial intelligence and big data). Not to mention how this "personalized advice" would be dealt with under the Levy reforms.

But there are plenty of retail platforms that have been producing individualized performance return reporting (both time and money-weighted, mind you) for decades. And with the advent of managed accounts, some of the more progressive platforms are implementing and overseeing personalized investment solutions at scale. advisers can log in and see how clients are tracking against their personalized investment mandate. These systems are typically investment-focused, though not necessarily extending to a holistic strategy that’s more focused on annual incomes and residual balances as the yardstick, but we can’t be far off, can we?

Super funds would need a ‘chief adviser’ to oversee cohorts of members with similar characteristics. Sophisticated systems and exceptions reporting would be required to ensure trustees meet obligations, and automatic nudges and member prompts would need to be developed. This level of personalization at scale would meet the thematic review’s desire for funds to better understand their member needs, would oversee strategy implementation, and would go a long way to providing "fit-for-purpose" assistance. The problem will come when a member has a major life event (think death of a spouse or divorce) and they simply want to pick up the phone and chat with a human about it. No amount of technology can replace the value of a trusted relationship.

Solving the retirement income puzzle

Delivering a dignified retirement for Australians is edging closer. The government’s focus on longevity and mortality risk is a welcome development. The framework for retirement offered by the advice industry is worth closer examination. Strategically focused advisers who tailor personalized, holistic strategies know that successful outcomes are complex, interdependent on a web of factors that go well beyond investment products and returns. Complex challenges are seldom solved with a single, silver bullet. We need to tackle this holistically, not as individual parts. And many retirees and advisers have already laid some solid foundations for us to learn from and build upon.


Annika Bradley is Morningstar Australasia's Director of Manager Research ratings. Firstlinks is owned by Morningstar. This article is general information and does not consider the circumstances of any investor. This article was originally published by Morningstar.

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tom taylor
March 02, 2024

The reality is that self managed super is a cash cow for whichever government is in power. The obscene indusrty fund scam which is nothing more than an ALP slush fund and the constant attack on SMSF's convinced us to get out. What was once the best super system in the world has now evolved to a super dooper scam.

My advice to my children after we closed our SMSF was to put nothing into super but rather to invest outside as the money contributed to industry funds is at the mercy of the ALP vampires to fund ALP pet projects. Super is no longer there to fund your retirement but rather to ensure you will need to have your cap in hand as it is designed to control you rather than give you the means to be independent.

February 25, 2024

In regard to 'super funds learn from advisers'.
My experience was the opposite.
Was disadvantaged due to advisers receiving commissions from fund managers.
Plus of course they have the additional side focus of rearranging affairs to maximise the centrelink benefits

Stephen bury
February 26, 2024

John, understand but commissions now banned so Advisers cannot receive them. Also cannot typically move members into other products unless it can be clearly demonstrated they would be better off on basis of costs/fees.

Stephen Bury
February 22, 2024

This article by Annika nails the “elephant in the room.” That is, our complex retirement income system combined with the nuances of an individuals or couples personal situation makes it way too difficult for super funds to effectively provide their members with the optimum solution. If you want members to get the best outcome for their situation the only way that can happen for the time being is for their awareness to be raised about the value of seeking professional advice at such a critical time of their lives ie retirement

February 26, 2024

People could start by making an effort to learn about Superannuation.

Superannuation pages on FB are full of people asking the same questions, I'm 60 (to 65) my partner is +/- x years from this. We are about to retire, How can we ?????

My thought is, what the heck have you been doing for the last 20+ years to not know even some basic stuff about Superannuation.
One of the biggest if not the biggest asset someone might have and they have no interest in it for most of their lives, suddenly retirement looms and it's panic mode.

February 22, 2024

I wrote a submission for the review when it was open to submissions, I concur with their views on mortality concerns but also fear of needing funds for aged care and of course, wanting to leave an inheritance for kids/grandkids are very real thoughts too.

I also suggested they cap how much you can have in Superannuation. If the purpose of Superannuation is to fund or part fund ones retirement and provide income in a sustainable way, then a cap of $3M (indexed) is more than sufficient. If one has more wealth or attains more wealth there is no need for it to be in favourable tax environment of Superannuation. It was never meant to be a tool for wealth creation.

Existing accounts could be grandfathered but no more funds can be added to them. Those under preservation age should be allowed to take excess funds above the Cap amount out.

Employer SG payments would be taken as wages if still working.

February 22, 2024

I know what your saying. but it is another super rule change. also, who is to say 3million will be enough in 10 years

February 22, 2024

I put in brackets, indexed.

February 23, 2024

Disgruntled, I totally agree with you.

Assuming the purpose of superannuation is to fund or part fund ones retirement., and not generate tax revenue.


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