Whenever the financial services industry talks of product innovation, more often than not it leads to less transparency.
The GFC should have reminded everyone how complexity of financial products works in the favour of providers and simplicity helps small investors.
There is a problem with the "balanced" options of most superannuation funds, but the supposed cure could be worse than the ills.
The problem with most balanced options (where most people have their savings) is that they are too heavily skewed to risky assets such as shares and property. They are not balanced at all, but higher-risk investment options.
The 25-year-old and the 55-year-old fund member are the same high-risk option. More than 10 years ago balanced options were actually balanced, with no more than 50 per cent or 60 per cent exposure to risky assets. But over time, as super funds felt under pressure to lift their performance, at least over shorter time periods, balanced options crept up the risk scale. They can have between 70 per cent and 80 per cent in risky assets, sometimes more.
As a result of the GFC, older fund members have had to face the prospects of working for longer, or retiring on significantly less income after the typical balanced option lost a third of its value.
Each super fund will have several diversified options, ranging from those with very high exposures to shares and property through to those where most of the money is invested in income-producing assets, such as fixed interest and cash.
The performances of the various options are easy to compare with similar options provided by other funds. Fund members can easily find out how their option is travelling by accessing the websites of the researchers. But there is a mini trend to life-stage or life-cycle funds in response to the problem of older members being too exposed to risky assets. And the trend is likely to grow. These new investment options automatically step down the risk for fund members as they age.
Some retail funds have introduced options that step down the risk each year. The idea is that fund members go in the option that is labelled according to the decade in which they were born.
There is a "glide path" of how the asset mix is changed to reduce the investment risk as the fund members age.
Their performance is not easily comparable with others, particularly over longer periods. But they are likely to be used by more employers as the default option for those employees who do not choose who manages their super. As the asset allocation is left to the fund, members need to do their homework rather than ending up in one by default.
There is a simpler solution. And that is to have balanced options return to being truly balanced and true to label, with an automatic step-down for members to a more conservative option once they reach a certain age, unless they elect otherwise.