The pitfalls in failing to consider financial advice

The financial services royal commission damaged trust in the sector, but SuperRatings’ Camille Schmidt explains the dangers in turning your back on financial advice.

We are in the midst of challenging times. The COVID-19 pandemic, coupled with oil price shocks, has caused turmoil in investment markets. When events such as these occur, it can be very stressful, but SuperRatings emphasises the importance of taking a long-term view. Looking back at previous events, such as the Ebola outbreak in 2018 or the SARS epidemic back in 2003, Australian super funds have proved relatively resilient to short-term market movements. Furthermore, it’s important to provide some context to these types of events, analysing the median Balanced Option, which has around 60 to 76 per cent invested in growth assets such as shares: 1. $100,000 invested at the peak of the market, prior to the global financial crisis (GFC), is up around 80 per cent. 2. $100,000 invested at the depth of the GFC is up by around 121 per cent. 3. If you put $100,000 into cash at the bottom of the GFC and stayed there, your balance would now be close to $90,000 behind the median Balanced fund. Recent events round out a period of significant change for the financial services industry. A spotlight was shone on the industry through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which revealed poor conduct and had a severe impact on consumers’ trust. New standards took effect on 1 January 2019 through the Financial Adviser Standards and Ethics Authority (FASEA). Members now need to confirm annually if they wish to continue receiving advice services, and we have seen a greater focus on transparency with the regulator, the Australian Prudential Regulation Authority (APRA), releasing ‘heatmaps’ that show expensive and poorly performing funds. Wealth management arms of the big banks have been sold and the government has introduced new legislation, with Protecting Your Super and Putting Members’ Interests First bills that focus on changes to inactive accounts, fees and insurance. Across the industry, superannuation funds continue to merge, with more consolidation expected.

What makes a good super fund? SuperRatings has researched superannuation funds for more than 17 years and has developed a methodology that assesses more than 300 characteristics of a fund. When SuperRatings analyses a fund, we consider the investment performance delivered with a focus on long-term periods, how much the fund charges and the insurance offering. We provide information on these areas at SuperRatings Top 10 site.

The importance of financial advice when selecting an investment strategy There is significant value in obtaining financial advice, however very few Australians access these services through their superannuation fund. When considering the type of investment option that suits you, there are several things to consider including your age, investment goals and risk tolerance. Accessing advice to ensure that the investment option you’re in is aligned to these characteristics is crucial. If you are more risk averse and try to avoid the ups and downs of the market, then being invested in an option with a lot of exposure to growth assets, such as Australian and international shares, may not be suitable. We have seen considerable market movements in 2020 and this reinforces the importance of this decision, as these markets can be volatile. A Conservative Balanced or Capital Stable option, which is less exposed to these asset classes,

Growth in $100,000 invested over 15 years to 31 January 2020

$350,000

$300,000

$250,000 SR50 Growth (77-90) Index SR50 Balanced (60-76) Index SR50 Australian Shares Index SR50 International Shares Index SR50 Cash Index

$200,000

$150,000

$100,000

Source: SuperRatings $50,000 Nov-04Nov-05Nov-06Nov-07Nov-08Nov-09Nov-10Nov-11Nov-12Nov-13Nov-14Nov-15Nov-16Nov-17Nov-18Nov-19

may give you more peace of mind. However, some members are comfortable with the ups and downs and would prefer to gain exposure to these asset classes to maximise their retirement savings. The chart on page 12 shows the growth in a balance of $100,000 over the 15-year period to 31 January 2020. The type of investment option can have a significant effect on the balance you achieve in retirement, although it is important to consider the bumpiness of the ride in light of your risk tolerance. The table below provides summary performance for Balanced Options based on pension products, to provide an indication of the range in performance outcomes across the market. The top quartile indicates the highest performing funds, the bottom quartile is the cut-off for the lower performing funds, and the median represents funds that sit between highest and lowest returns.

Pension return benchmarks – Balanced Options 1 Year 3 Years 5 Years 7 Years 10 Years Top quartile 16.3% 10.8% 9.1% 10.5% 9.7% Median 15.6% 9.9% 8.2% 9.7% 9.0% Bottom quartile 14.2% 9.1% 7.2% 8.8% 8.4% *As at 31 January 2020. Based on SuperRatings’ SRP50 Balanced (60-76) Index containing pension options with growth asset ratios of 60% to 76%. * Returns are net of investment fees, tax and implicit asset-based administration fees. Annualised returns for each period are shown.

The table below provides a summary of the performance for Balanced Options based on superannuation products for members who are in the accumulation phase.

Accumulation return benchmarks – Balanced Options 1 Year 3 Years 5 Years 7 Years 10 Years Top quartile 14.6% 9.7% 8.3% 9.4% 8.7% Median 13.5% 9.1% 7.6% 8.8% 8.1% Bottom quartile 13.0% 8.4% 7.0% 8.3% 7.8% * As at 31 January 2020. Based on SuperRatings’ SR50 Balanced (60-76) Index containing superannuation options with growth asset ratios of 60% to 76%. * Returns are net of investment fees, tax and implicit asset-based administration fees. Annualised returns for each period are shown.

The importance of financial advice in assessing fees and charges Considering the fees charged by funds is also important. This following table summarises fee benchmarks for Balanced Options across the main pension products in the market, using an account balance of $250,000. The top quartile indicates the cheapest funds, the bottom quartile is the cut-off for the more expensive funds, and the median represents funds that sit between cheap and expensive in terms of fees. The following table shows that there is a considerable range in fees being charged by funds, with the most expensive 25 per cent of funds charging $3788 or more, compared to $2280 or less, for the least expensive 25 per cent of funds.

Pension fees on a $250K account balance – Balanced Options Fee as a % of $250K balance Total Member fee Percentagebased administration fee Investmentrelated fees fees and costs Top quartile 0.9% $2280 $0 0.19% 0.57% Median 1.1% $2862 $78 0.31% 0.80% Bottom quartile 1.5% $3788 $100 0.61% 0.96% * Fees used in the analysis are as at 31 January 2020, using most recent data available to SuperRatings at the time of preparation. Fees include percentage-based administration fees, member fees, investment management fees (incl. performance-based fees), indirect cost ratios (ICRs) and taxes, but exclude any applicable employer rebates.

This table summarises fee benchmarks for Balanced Options across the main accumulation products in the market, using an account balance of $50,000.

Accumulation fees on a $50K account balance – Balanced Options Fee as a % of $50K balance Total Member fee Percentagebased administration fee Investmentrelated fees and costs Top quartile 1.0% $513 $58 0.14% 0.61% Median 1.2% $588 $78 0.26% 0.78% Bottom quartile 1.5% $740 $91 0.56% 0.95% * Fees used in the analysis are as at 31 January 2020, using most recent data available to SuperRatings at the time of preparation. Fees include percentage-based administration fees, member fees, investment management fees (incl. performance-based fees), indirect cost ratios (ICRs) and taxes, but exclude any applicable employer rebates.

Accessing financial advice To ensure you have access to sufficient information to drive the best retirement outcomes, SuperRatings suggests contacting your superannuation fund to find out what advice services are available.

The government provides information on how to select a financial adviser through the MoneySmart website. You can also find useful tips at https:// www.moneysmart.gov.au/investing/financial-advice/ choosing-a-financial-adviser.

Amid challenging market times such as these, review your financial situation and seek input from your fund or an adviser to see whether you’re on track. Such a move can also provide peace of mind and help provide comfort to ride out this period of ups and downs.

Camille Schmidt is market insights manager at SuperRatings. She has a PhD in finance from Macquarie University.

DISCLAIMER: Report issued by SuperRatings Pty Limited ABN 95 100 192 283 AFSL No. 311880 (SuperRatings) The information used in compiling this data comes from sources considered reliable and is not guaranteed to be accurate or complete. Past performance is not a reliable indicator of future performance. Any expressed or implied rating or advice presented in this document is limited to General Advice and based solely on consideration of the merits of the superannuation financial product(s), without considering any person’s particular financial circumstances. The reader should read the Product Disclosure Statement and seek personal advice before making a decision on the financial product. SuperRatings’ research process relies upon the participation of the superannuation fund or product issuer(s). Should the superannuation fund or product issuer(s) no longer be an active participant in SuperRatings’ research process, SuperRatings reserves the right to withdraw the rating and document at any time and discontinue future coverage of the superannuation and pension financial product(s). © SuperRatings Pty Ltd. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited.