Home / The rise of the individual in super: what are big funds doing?

Comment by Patrick Liddy*

 “The only thing new in the world is the history you don’t know”, said Harry S. Truman, one of the most courageous US presidents in history. And Harry was right, up to a point. Themes keep repeating, the same mistakes happen and hubris abounds.

Afghanistan is such a point. Alexander the Great, the Romans, the British, the Russians and the Americans all had goes at ‘pacifying’ the place. This has been going on for more than 4,000 years and not one of them succeeded. Perhaps the Chinese may give it a try sometime, and why not every other superpower has.

Themes recur over and over again and can be ignored by many and capitalized on by a few. The rise of individualization is one such theme. In superannuation this has been reflected in the SMSF market. The SMSF segment has been pretty well disliked by government, retail super and industry super. But this has not stopped its growth. The rise of individualism in super is remarkable.  As Figure One shows, although they are only around 3 per cent of investors they make up around 32 per cent of the investment assets. Nobody can really afford to ignore them.

 Figure one: SMSFs

A number of factors, both macro and microeconomic, have changed the way people behave and invest. These have been driven by regulation, technology, demographics, professional ‘under performance’ and a lack of transparency in investments. SMSFs have benefited from all these changes.

Regulation through Basel III has meant that a retail investor/member can get a better return than that of an institutional investor on cash and term deposits. This can be as much as 100 basis points difference. This difference in a low-inflation environment is telling and is far from marginal. It is making a difference as to how people allocate their savings. It has added substantially to the growth of SMSFs. This change is systemic in nature. Put simply, it is here to stay.

Demographics are making a large play as well. The baby boomers wall of money going into savings has moved the other way. The baby boomers are now looking at how they maintain their lifestyles in retirement. They are looking at ways ‘not to be poor, rather than how to be rich’. 

Now more cost effective ways of looking after SMSFs and Australians post retirement are now being proposed.  These types of services can only be efficiently utilized with new technologies.

I attended a recent seminar, hosted by Australia’s First Minister for Superannuation and now the chairman for FNZ, Nick Sherry. The argument was that “APRA regulated funds, their members and the market in general could benefit from new technologies and services”, stated Sherry. The new technology is really ‘master custody’ for individuals. Now master custody was a phenomenon that swept through the entire wholesale superannuation market in the 90s, every fund uses it. My bet is that every major fund in Australia will have technology that gives it an SMSF like capability within its structure. “FNZ is one such technology capable of delivering pre and post retirement solutions,” said Sherry. And it seems that the industry funds are listening, with many industry funds implementing an SMSF look-alike option. This option has many of the attributes of an SMSF, but has the added protection as being under an APRA regulated fund.  Australian Super, Care Super, Telstra Super, Legal Super and HostPlus are some of the funds that have implemented a solution. There are many more funds in the pipeline.

The reasons stated are enhanced security, better returns on cash and term deposits, cheaper and more tailored post retirement solutions. The Retirement Income Specialist, Steve Berichon, noted the three different methods for post retirement solution – listed in figure two below. 

 Figure Two: the current contenders 

These solutions are enhanced through the use of new technology that allows you to tailor the product or service directly to and around the member or investor. As the managing director of JP Morgan Securities, Gregory Yu, stated: “The product becomes unbundled and transparent – this increases effectiveness and reduces costs”.

Now, I can readily see that the funds will quickly benefit from having an SMSF like service within their APRA structures. The reasons are that it will be around 20 per cent of the price of the existing ‘outside’ product, the member/investor will get better returns on cash and fixed interest (assuming ceteris paribus), it is more secure and there is greater flexibility. However, I cannot help but think that the higher level products – the post retirement products, will need a much higher level of advice than is currently being offered. Hopefully the funds will respond to this as well.

 *Patrick Liddy is principal of the consultancy MSI Group. He also spoke about this topic on a panel session at the FEAL national conference last week (see separate report this edition).