A distinction needs to be made between portfolio selection for superannuation funds in the accumulation phase, and the portfolio composition of super-funds in the pension phase.
For me, when working I had limited time to devote to portfolio composition decision making and the many complex considerations in getting it right. Considerations such as;
- The spread between cash. fixed interest, property, Australian and International equities etc
- Sectoral balance, with over-weighting of out-performing sectors
- The inclusion of managed funds.
- The use of leveraged products including derivatives such as options, warrants and future contracts
- Today there are newer products to also consider such as exchange traded funds.
- Obtaining a balance between growth and income producing stocks.
- Limiting risk in the selection of securities.
- Formulating plans for strategy, the adjustment of stock weightings, plus contingency plans for action in market down-turns.
For this reason all our savings for superannuation in the accumulation phase were directed into insurance industry products, until near retirement when a self managed super fund was set up with the assistance of my accountant and family lawyer.
The Self Management of one’s own Super Funds in Retirement
At retirement our savings were consolidated into a SMSF to which the proceeds of the sale of our office were later added. The fund invested almost exclusively in a portfolio of Australian equities with a limited exposure to exchange traded options. An allocated pension was structured to pay monthly distributions to both superannuants.
The big plus in having a SMSF, especially in the pension phase, is in not having to forfeit ownership of your own money. This is an enormous advantage when you consider how many retirees have disastrously lost the bulk of their life savings. This may not be directly the fault of their financial adviser but retirees do expect that they will be protected from risky or injudicious investments when paying so much for the advice.
This must surely be the reason for the growing popularity of SMSF’s to now represent around 40% of retirement savings.
The inflow of retirement funds to insurance companies and other financial institutions must have been affected by the growth of SMSF’s. However almost certainly, the demand for financial advice across the whole range of the industry has no doubt sky-rocketed with the increase in total funds under management in SMSF’s.
The public I believe does not begrudge the financial adviser industry generous fees for sound advice tailored to their needs. What is a problem, depending as they do on their savings for their livelihood in retirement, is trailing fees linked to the capital under management of the order of 2%; fees unabated in market downturns when returns are negative. Such fees over the 20 year life expectancy of a retiree could well erode more than one-third of their capital.
Unfortunately it is the government which must pick up the financial tab for retirees when they lose significant savings as a result of a somewhat rapacious global financial industry. It is in their own interest for the industry to do more in the way of self assessment and self regulation.
Leave a Reply