I’ve lost count of how many times I’ve had a client tell me they don’t believe in superannuation or superannuation is too risky along with numerous other misgivings surrounding investing in super.
These comments come from the association of the assets that the superannuation is invested in rather than the superannuation itself.
I feel the mistrust comes from two main sources, the early superannuation products were often restrictive and heavy on fees, and the vast majority of superannuation funds invest primarily in shares and are often more aggressive than the risk profile of the investor.
The early super funds were very rudimentary, often distributed by salesmen who were remunerated handsomely for signing up new clients. Some had restrictive terms, some had large exit fees and others were both a combination of insurance and investment. The end result was many people felt disillusioned by the whole experience.
This is no longer the case, most modern super funds are efficient investment vehicles and in most cases fairly cost effective in comparison to other investments. The advice costs in the new funds have been separated from the product cost itself with commissions replaced by advice fees that are negotiated between advisor and client.
The second issue is related to the underlying investments. Traditionally most super funds have a large exposure to the share market, which is substantially more volatile than defensive assets and in downturns clients have seen their investments fall.
This has caused problems in two areas, for many clients they are too conservative (in investment terms) to be invested as aggressively as the traditional super fund and should have had a more defensive portfolio all along. The other issue is that although many investors if properly informed about the nature of their investment would be much more comfortable with the risk, many super investors don’t receive advice in relation to super benefits and are flying blind, this leads to anxiety as they are not sure what to expect.
On a ‘Balanced fund’ investment (the most common investment selection super), ASIC gives investment guideline of an average return of 7.5 per cent with a 78 per cent chance of a positive return in any given year, this means that more than one in five years will be negative, and this is expected. Many clients if aware of this would be much less concerned when the inevitable negative year came around.
If this is too risky still, almost every fund offers more conservative investment options, it is now possible to invest in cash, term deposits as well as defensive portfolios.
Many clients would like to be more aggressive and take on more risk in order to have potential higher gains in the long term. It is possible to invest in just about all the same things you can outside of super, but inside of super.
The advantage of investing inside super is that gains are taxed concessionally and once in pension phase are tax free.
Superannuation should be viewed as a tax structure not an investment, the government offers taxation advantages to the client to encourage them to save for their retirement.
Superannuation is an outstanding tool to build wealth for retirement and if you are one that has mistrusted super previously, maybe it is worth reviewing.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.