Superannuation and focusing on the long-term

When it comes to retirement savings, giving Australians tangible information that is focused on the long term should help to reconnect them with their superannuation, writes Cameron O'Sullivan.

In the superannuation and advice industry we often lament the widespread apathy Australians have towards retirement savings. But we must also put the spotlight on how benefits are communicated to members, because we too often sell the wrong message.

Super is the longest of long-term investment strategies, but the industry has focused too heavily on super’s least attractive and most volatile characteristic: short-term investment performance.

Investment performance is part of the trade-off of superannuation. We sacrifice income to improve our retirement savings, but the trade-off is the savings are put in the market and subject to various degrees of risk and reward.

So why do we focus so strongly on the ups and downs of the last 12 months instead of what can be achieved over the long-term? Why do we intentionally draw investors’ attention to the short-term, and away from the end goal?

Let’s not underestimate the importance of good performance, but let’s also consider that a single 12 months’ performance has little to no lasting effect on a 30-year plus investment plan.

Funds make so much of reporting performance figures that they risk losing engaged members who are unimpressed with a year’s performance and may switch to another fund.

There is also a chance that a poor year’s performance will spur apathetic investors into action, with the possibility they will move as well. So 12-month performance is not only too short-term — it is potentially a poor motivator as well.

More importantly, 12-month performance figures do not communicate an effective retirement strategy.

The value of advice

2010 saw the foundation laid for more intense competition as the large super funds entered into financial advice and the controversial opt in requirements for financial planners were raised.

The advice industry is going to have to justify its value. The best way to justify value is to move away from short-term performance and focus squarely on retirement income.

Our industry may be able to get more investors engaged with superannuation by better connecting them with a long-term strategy.

A focus on retirement income provides clients with tangible goals and engages them in long-term planning. If a client can see what their expected retirement income is going to look like if they continue on a certain path, and how it will work with any Centrelink entitlements, then it either inspires confidence in the approach or provides an incentive to make positive changes.

By focusing this on the client’s real objective — income in retirement — advisers will have an offering that clients will want to revisit every year, and one that is far less volatile. If you concentrate on 12-month performance, that is what clients will associate superannuation with. Focus on retirement income and clients will change the way they see their advice provider, since you become part of the solution to dealing with market downturns rather than the cause. The result is that a market downturn is far less likely to result in client loss, regardless of opt in provisions.

This also has implications for platforms, where member statements and the review documents that advisers generate from their platforms are

12-month performance focused, and hence a main cause of the problem. A re-orientation towards a long-term retirement strategy needs to start in these areas, and then link back to the ongoing advice provided. In many cases this will include making better use of the Internet to store a ‘living retirement projection’ for members or clients.

Getting to grips with technology

Technology developments means there are now no more excuses. Accurate retirement income projections on all superannuation member and adviser-client statements are now possible.

Software can integrate the retirement projections with Centrelink and other advice topics, creating a living retirement plan that will show advisers and clients exactly where they stand at all times.

Investors will have something tangible to work for, and can conduct ‘what if’ scenarios with their advisers to ensure the best strategy for them. If a shortfall between expectations and reality occurs, then guidance will address them.

Super is arguably the cornerstone of this country’s wealth and future prosperity, with $100 billion in super contributions during 2010 alone bringing the total savings pool up to a massive $1.2 trillion.

If we are to fight investor apathy and successfully engage the population with their savings, perhaps a simple realignment of communications — from short to long term — is a good place to start.

Cameron O’Sullivan is the director of Provisio Technologies and a practising financial adviser.