Financial security starts with the right advice
Today, approximately 500 super funds are operating in Australia, with assets approaching $3 trillion. Superannuation is either the largest single asset held by Australians or the second most valuable asset behind the family home. Making the most of super can mean the difference between enjoying a lifestyle as a self-funded retiree or surviving on a pension.
Yet despite its importance, too many Australians are disengaged with their super. The majority have their super invested in a default balanced account. Furthermore, only about 20% of people use the services of a financial adviser. One client I recently met has unknowingly had their super balance in cash since 2005.
The poor behaviour of some financial advisers and financial institutions that were uncovered by the 2019 Financial Services Royal Commission laid bare some terrible practices. The most damning finding was the ‘Fee for No Service’, where many investors had paid a high price (fees) for the bad behaviour of organisations. While the exposé was a positive means of cleaning up a vital part of Australia’s financial system, it also served to erode confidence and create a greater sense of disempowerment for superannuation holders.
The truth is that there is a way to get a grip on the management of your superannuation that can make a real difference to your accumulated retirement wealth. We have now clearly learned what separates the good from the bad in superannuation funds and services. It boils down to these three areas.
- What constitutes operating in the best interests of investors
- The growth in wealth from asset growth and income, net of all fees
- The mitigation of risks associated with market downturns and at the critical points of time when the investor is required to draw on funds.
Defining your best interests
The concept of best interest is straightforward. However, in practice, it is a complex one for legislators and investors alike. It can mean things like eliminating conflict of interest and making it compulsory to disclose fees fully. It can mean giving advice that is most likely to provide the best outcome for you as the investor. More subtle and critical, is the way that most advisers determine the needs of the investor.
The conventional framework employed by the overwhelming majority of superannuation advisers is flawed because it begins with an examination of an investor’s risk tolerance. Put simply; it is an informed but arbitrary assessment of how comfortable the investor will be with levels of volatility (fluctuation in value) of their super account. It is a simple way to determine an investment strategy, but it may not genuinely be in the best interests of the investor.
At WLM, we believe that investments should be managed according to the superannuation account holder’s financial goals. It seems that common sense is uncommon.
The net result
The net result at any given stage of the life of a superannuation account is the sum of growth in investments, plus income derived, minus the fees subtracted from the account. It’s a straightforward equation, but it’s less easy to compare between funds and advisers.
In recent years, Industry Super funds have become more popular, primarily because of lower fees. The comparison with other funds is typically made by measuring the net result of different ‘balanced’ funds over time. This assumes that all investors, whether they use a financial adviser or not, place their money in a default fund and forget about it. Most people do not generally expect that the best way to get ahead in life is to do nothing!
Risk mitigation goes hand in hand with the quality of investment management. And risk itself exists in two main parts.
First is the long-term performance of the investor’s super account, taking into consideration periods of growth and periods of downturn. Most funds report on the average fund growth over time and then project the same level of growth as the likely future outcome. While the past facts are correct, history does not reliably repeat itself, particularly at any given point of time, which leads us to timing risk.
The real world for individual investors is very different from the ideal of long-term averages. For example, if you plan to retire at age 65 and have some lifestyle goals for your retirement, an average growth rate means nothing if the market has just declined. This situation fails around 1/3 of all superannuation investors, according to research by Schroders.
To mitigate risk takes a planned approach and wise decisions. Investors who use a financial adviser should expect their portfolio to be managed according to their unique goals and circumstances.
Goals Based Investing
At WLM Financial, we broke away from the typical risk profile approach several years ago. We moved to an investment approach known as Goals Based Investing (GBI). GBI follows this process:
- Examination of the superannuation holder’s current position
- Identification of retirement goals. These can include a variety of lifestyle goals, coverage of health risks and even planning for the allocation of your estate and philanthropy
- A strategy is then created to show what is required to reach those goals
- The plan is then put into place and adapted over time as market and personal circumstances change.
The Goals Based approach uses an investment method known as Dynamic Asset Allocation (DAA). DAA differs from typical superannuation asset allocation by including a more extensive range of asset classes that serve to mitigate risk. Also, the fund is managed actively to meet the investor’s goals with the minimum possible volatility in the investment trajectory. So, it’s not set-and-forget.
Financial security starts now
Your retirement wealth is in your hands. It requires positive decisions about how to get engaged with your super and who you will use to gain informed advice.
The Goals Based Investing approach employed by WLM is genuinely different from the vast majority of other advisers. It’s a difference that puts your needs at the centre of your investment strategy and the active management of your wealth. It’s an approach that should be examined by every investor. In fact, the simple act of doing so gives you the confidence of knowing where you stand.
For more information on Goals Based Investing and practical advice on developing your financial security, please contact us.
To find out more about WLM's financial planning services, click here.