COVID-19 crisis: Implications for advisers as industry super funds disappoint members

According to recent reports, ASFA has written to the Treasurer suggesting “the ATO fund upcoming hardship payments as a ‘loan’ to the impacted industry funds as it may ‘stretch their liquidity’”.

Would this be considered a bailout? Or the government underwriting industry funds?

Our business has seen a lot of potential and existing clients switch to industry funds in the past few years and so I’d go so far as saying they have been our biggest competitor. Yet, how do you compete on a playing field that isn’t level? 

The first question we are asked by a potential client is "what does your ‘model portfolio’ look like", and we have to provide granular detail of every investment. However, when they decide to switch from their existing super fund they receive no clear picture of what they actually own.

The industry super fund sector has generally delivered strong investment returns; however, what level of risk has been taken to achieve these? The answer is being felt by members now.

The current period of volatility has the potential to unwind many of the benefits the sector has leveraged in recent years and level the playing field for advisers. 

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There are many reasons for this:

  1. Fees for service – Industry funds cannot deliver tailored advice in a cost-effective manner, nor guide nervous investors through periods of volatility. A phone call to one fund directed me towards an iPhone app to make investment changes without speaking to a human. The decision to switch investment options is one of the most important and potentially costly decisions someone can ever make, but is being made without any advice.
  2. Liquidity – The sector has some structural issues, in that it offers daily liquidity to investors but holds unlisted asset exposures of up to 30 per cent in some cases. Many balanced funds hold as little as 3 to 5 per cent in cash – in fact a CIO was quoted as saying 10 per cent in cash was "a hell of a lot". Yet this is around the average cash allocation of an SMSF. There will be a greater focus on balancing both liquidity and returns or alternatively they may choose to freeze redemptions from certain options as flagged in 2018.
  3. Transparency – Without quoting Warren Buffet, in my experience the one thing clients are looking for in times of volatility is the one thing that industry funds do not provide: transparency. Most investors are comfortable with volatility if they know what they are exposed to personally; industry funds need to match to deliver this.
  4. Age mismatching – Growth in members has been incredible, yet we can’t help but question if becoming bigger is in the best interest of all members. As you grow in size, your investment universe shrinks and the demographics of your membership changes. You either need to offer a broader set of options, or greater support, otherwise you must prioritise either liquidity or returns; not both.
  5. Valuations – Structural issues mean that members are not always treated evenly. The overnight revaluation of Australian Super’s unlisted assets by 7.5 per cent applied only to those who remain in their funds; anyone who redeemed before this valuation was better off. Some have suggested the threat of legal action on the basis of the mistreatment of existing members.
  6. Targeted changes – The sector continues on the ‘one-size fits all’ approach, which does not allow for any nuance in risk profiles. A ‘balanced’ 22-year-old is different to a ’balanced’ 72-year-old. Yet, the options to change investments are limited to substantial asset allocation shifts. You can’t decide to hedge currency, or reduce your unlisted asset exposure, or increase overseas investments; your main option in volatility is going to cash, as many have.

By no means am I suggesting the sector is broken, I simply believe that change needs to occur and this change will level the playing field for advisers and SMSFs.

Drew Meredith, director and adviser, Wattle Partners

COVID-19 crisis: Implications for advisers as industry super funds disappoint members
Drew Meredith
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