The trend to personalisation
When super was first introduced, there was little choice and less personalisation. Engagement with super was extremely low and only wealthy people had personalised financial strategies, prepared for them by their financial planner.
Fast forward about 25 years. Engagement has lifted (although there is still work to be done) and more people than ever are choosing their super fund. At the same time the benefits of personalisation are being recognised.
And through technology the delivery and management of personalised investment strategies is more affordable and easier to administer.
MySuper – not a single default fund
The MySuper regulation renewed the focus on default strategies. But instead of prescribing the default strategy, the Government decided that the trustee was best placed to decide the appropriate default strategy for their members, envisioning ‘a significant number of default (MySuper) funds of different shapes and sizes’*. This empowerment of the trustee endorses the idea that a single default fund is not right for everyone.
In a further nod to personalisation, the legislation also allowed lifecycle investment strategies to be introduced as default MySuper options. So while most funds opted to re-badge an existing diversified fund as their MySuper option, many retail, public sector and industry funds adopted a lifecycle approach.
The typical lifecycle approach reduces exposure to growth assets as members age and get closer to retirement. As the need for personalisation is highest for people approaching retirement, the lifecycle approach can be a good first step for funds seeking to introduce a level of personalisation.
The idea is to reduce the impact of potential market downturns as members get close to retirement. At this stage of life the impact of a market downturn is more significant than it is for younger people. This is because those closer to retirement will have accumulated the highest assets and will soon need to start withdrawing a retirement income. So lifecycle options aim to address this sequencing risk, personalising by age.
QSuper’s industry leading ‘cohort’ approach takes a further step towards personalisation considering both age and accumulated balances.
Money is flowing into SMSFs and advice
Money continues to flow into SMSFs. This is evidence not only that people want more control of their super investment, but also that they want greater personalisation.
The increased uptake of personal advice and the expectation that a super fund should provide personal advice also speaks to the markets growing need for custom solutions. This reflects the fact that engagement in super is lifting and perhaps that members don’t think the industry’s solution of default choices is right for them. They’re after a more tailored super management and advice solution. Advice promises a solution that’s right for the individual as well as removing some of the worry through an expert providing advice and direction and often implementation as well.
The cost of advice is reducing
Traditional advice can be seen as expensive, particularly for individuals with moderate superannuation balances. A one-off financial plan costing around $3,000 is 1% of a $300,000 balance or 5% of a $60,000 balance. It may be reasonable to expect that a personalised investment strategy will deliver more than 1% more than a default strategy, so the cost may make sense if your balance is $300,000. But a 5% out performance is not likely.
But advances in technology in general and the rise of algorithms in particular mean that excellent ‘robo-advice’ can now be delivered at a fraction of the cost of traditional face-to-face or over the phone advice. Robo-advice provides a “mass personalised solution, delivered electronically and cost-effectively.
The need for individual solutions, coupled with the improved accessibility and affordability of advice, will continue to drive personalisation and members will come to expect it. Just as we expect Google Maps to deliver us personalised directions to our destination, we will come to expect our super funds to provide us personalised asset allocations to help us meet our goals. One size does not fit all…and nobody expects it to.
*Super system review – Part One Overview and recommendations 30 June 2010