It’s fascinating how systems evolve. Once upon a time, the inertia that came with Australia’s superannuation system was something of a drawback. Superannuation wasn’t always compulsory, and guaranteed contribution rates were lower. It took longer to accumulate a decent balance. It didn’t seem a grand sum of money, and people really didn’t understand the whole thing. The media didn’t care much because the public didn’t care much.
This could mean investors dawdled along, stayed stuck in dud funds, while being charged too much. The penny would drop at some point, but had there been an interest taken earlier those balances would have looked significantly better.
Changes, mergers, investors starting in funds with better performance and lower fees. Investors are now less likely to land in a stinker. Meaning inertia has become less of a drawback, but today superannuation is more at the forefront of minds. Increased guaranteed contributions have led to larger balances earlier. This means the media takes a greater interest. It only takes the mildest of market corrections and the TV, radio, newspapers, their websites and social media account are asking, “what does it mean for your super?”
Add in end of quarter. End of financial year. End of calendar year. Various research providers and government departments putting out reports and benchmarks. The media have a steady stream of stories to prompt us to continually question our superannuation performance. Usually on a very unhelpful measure of the last twelve months.
If encouraged to “ensure your super is performing” or “take control of your super” or asked, “how does your super compare?” and “will you have enough?” on a regular basis, investors may start wondering. First stop for most questions these days is the internet. Whether that be social media or google. What investors are likely to find are several comparison or review websites fishing for details.
Some aren’t run by the most reputable operators.
If investors don’t bite, that doesn’t matter. Due to the wonders of technology, our benevolent search engine and social media sites know what we’re interested in. After that first search, they will start serving us ads about super comparisons and reviews. For these reasons, inertia has flipped to urgency around superannuation. Urgency about performance, taking control, comparison, and the question of will I have enough?
What does urgency do? Take a study on gambling from 1977 by Mukhtar Ali, an economics professor at the University of Kentucky. Over 20,000 harness races were tracked and Ali found that as gamblers start to exhaust their capital, and as the race program goes on, they start betting on long odd horses in later races. Essentially overweighting the likelihood of a longshot victory to win their money back quickly.
Of course, the odds of the horse winning hadn’t changed, but their capital position had. This changed their behaviour, making it seem like those longer odds horses were now worth the risk due to their shrinking wallets. Picking the favourites would be more likely to win something back
While retirement savings are far removed from a gambler’s wallet at the racetrack, that sense of urgency and the associated feeling of “needing to catch up” later in life, is now plaguing some super investors. Not content to set and forget, they went looking for ways to improve performance and it has ended badly. Many unaware, these investors were caught in the recent failures of First Guardian and Shield Master Fund.
Example. A 56-year-old man profiled in the Australian Financial Review lost $522k. He admitted he was looking for a better return than his AustralianSuper account was offering. Another lady, who’d moved to Australia 14 years ago, had $188k with HESTA, and due to her late start, was feeling the urgency to increase that balance. Both individuals left well-known super funds, but they didn't have to.
Similar stories have appeared in several other media outlets. The common themes were “looking to catch up”, “make the most of”, “increase growth”. Unfortunately, most of them handed their details over to people promising to review their existing super fund and find them a better option.
There was only one way this would go because it was a stitch up. The review was designed to find the clients' existing fund lacking, making a switch seem imperative. This was accompanied by promises of a brighter financial future and superior returns. The claims of higher performance, which were about a 2% increase, were not outlandish. While the call center representatives who had their details were persistent, their claims about potential outcomes were kept within a reasonable range.
Most of these investors were in their 50’s and 60’s. Late to be increasing risk, given their proximity to retirement. Especially when there were other options. An honest adviser would also lay out various other paths. Paths that didn’t require the need for more risk - using the space available in concessional contributions being the most obvious.
Some of the investors fairly wondered “what’s the worst that could realistically happen?” They were still inside a retirement saving system that we’re told is “the envy of the world”? Surely, they would be protected from malfeasance.
No.
While the schemes mentioned look to be fraud, the movement of investors’ super was done on the basis of a better return. Sold as moving from a balanced portfolio to a high growth option, which comes down to understanding the whole thing. Most investors aren’t equipped with the tools to protect the large sums of money they’re urged to take control of. While risk is related to reward, risk does not guarantee reward, and even achieving 2% per annum extra over half a decade is unlikely to make a substantial difference to someone’s retirement lifestyle.
There’s certainly an argument to increase risk, if you know what you’re doing, or if it’s under the guidance of an investment adviser who has your best interests at heart. Someone who you’ve found on the internet and relentlessly calls you pushing for a binary outcome is unlikely to have your best interests at heart.
The return of a balanced portfolio will always be better than a portfolio with a balance of zero.
As 12,000 odd investors are now finding out.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
With thanks to FYG Planners for this article.