Friendly advice: manage your own fund

Many retirees have received poor advice … taking control makes sense.

PORTFOLIO POINT: Investors looking to industry super funds should consider starting their own SMSF. Having more control over your financial destiny and low costs both add up.

It was Sunday evening and the phone rang. It was an old friend from my newspaper days who had worked for a newspaper on the so-called “stone”, where lead was used to shape the paper each morning.

These were times when print dominated the dissemination of news information.

He is now aged in his mid 70s and has been retired about 10 or 15 years. My friend was in some agitation over money.

We had met on a number of occasions over the years but we’d never talked about money. I can recall asking him when he retired whether he was financially OK and he said that he was and that was about the extent of our conversations about his savings. He was trying to insulate me.

Until that phone call what I didn’t know was that over the last 10 or so years he had been embracing an investment policy that was totally unsuited to his age needs and aspirations.

Over the last decade his superannuation savings had fallen from in the vicinity of $650,000 to well below $400,000. And during that time he had taken a distribution of between $10,000 and $15,000 a year, probably averaging around $12,000. He had paid big fees for bad advice. And then he asked me what to do? His plan was to switch his money to one of the industry funds. Yet when I looked at what they had available it really wasn’t what he wanted.

So today I am going to go through our conversation, which shows that there is a role for those with self-managed funds to tell people about just how much better it can be when you have your superannuation in the self-managed sphere.

And it really doesn’t matter whether you have $200,000 or $2,000,000, the self-managed fund system is so much better, particularly for older people. It need not be so. In time we will get better balanced funds that can cater for older people’s needs, particularly when they go into the retirement phase.

It is no coincidence that around three-quarters of the superannuation money that is actually currently funding retirement is in the self-managed fund movement.

So let’s look at what happened to my friend and what his alternatives now are. Here is a person who knew nothing about the sharemarket but was told it would yield him about 7% a year over a longer term. He was warned that there might be one or two years of bad results, but overall he was much better having his money in shares.

And so his advisors (he did what they told him) exposed around three-quarters of his funds to equities and they chose an equity investment policy that was higher risk than it should have been. He got taken to the cleaners.

What really got up his gizzard was that, not only had he lost a huge slab of his retirement money but he had been charged $8000 to $10,000 a year in fees for the privilege of losing his money. He and his family live on modest means and can just about manage on the aged pension, even though he doesn’t get the maximum pension because of the superannuation situation.

He is absolutely sick of the loss of sleep this superannuation loss has caused. He wants his money invested in absolutely secure situations and would be delighted if he got a 5%  return, which in his case would lift his income from say $12,000 to $18,000 and still leave his capital intact. I looked at the industry fund and found that when it came to interest-bearing securities they were offering a cash security, an Australian corporate bond mixture and a similar mixture overseas. I scratched my head and said, ‘why does my friend want to have all those different sorts of interest-bearing security investments, some of which may have higher risk?’

He could go to an Australian bank and put his money in a five-year term deposit and gain ,say 5.2%. Maybe not all the money should be invested in that way, but his life is going to be a lot longer if he stops worrying about the security of his money. I pointed out to him that if he sells his equity and there is a rise in the sharemarket he would have made a mistake.

“I don’t care. I just want out,” he said. The best answer for him was to set up a self-managed fund. It will cost less than $2000, and it will cost about $1000 to run each year. And so his management fees are slashed from the current level. But you say, how can a person with no investment knowledge run a self-managed fund? It is simple: the fund takes an investment plan off the shelf, adopts it and then puts the money in the bank or banks, which will be Commonwealth government guaranteed.

If he wants some semi-equity exposure he could put a small amount in a big four bank hybrid or buy into ASX-listed investment company shares like Australian Foundation Investment Company or Argo Investments.

It’s simple and easy, won’t require a lot of management, and he is well able to carry out those tasks under the supervision of a small suburban accountant. My regret is that I didn’t press him to tell me where his money was, because had I known that he was so exposed to the equity market I would have at least warned him of the risks he was taking. Risks he couldn’t afford.

At the moment self-managed funds are around 35% of the superannuation market, and unless the balanced funds get off their tail and start offering bank securities for interest-bearing sections of portfolios they are going to lose a lot more market share and the self-managed total will go well beyond 50%.

And financial planners need to sit back and think about what they are telling their clients. I know a great many (probably a majority) do just that, but too many are youngsters who are being driven by formulas which says that people should have 50% or 60% of their money in equities. That’s perfectly OK if you’re a younger person, but it’s simply not the right strategy for somebody in their mid 70s who does not have vast amounts of money available.

Financial planners need to think about the needs of their customers and the risks in the equity market and not simply gabble out the formulas they get in their instruction sheets.

There is an important role for financial planning, particularly when it comes to coordinating with the aged pension and setting up proper strategies for younger and older people. But my friend didn’t find one of those financial planners. He believed the person he spoke to when they said that he would get an average of 7% return over the longer term. And, of course, that might be right over another 10 years but the ‘mid-term’ losses are just too great---especially when you are aged in your 70’s.

Many say that the experience of my friend is so widespread that this is a signal of the death of the equity market. I don’t think so. I think people will return to the equity market, but hopefully when they do return the level of equity investment will be tailored to their needs.

What my friend really needed longer term is an annuity, but that is a different subject and would require a very different approach, and in your mid 70s you wonder whether you really should do that.

Related Articles