Financial institutions have for centuries put great store on ‘bigger means better’. In the early days of banking, this was manifest in the size of stone façades, vaults and ceiling height. In the explosion of life insurance companies in the 1960’s, it was to be the tallest building in town.
Now that superannuation holds the greatest sway with savings, it’s a bit more difficult for these new standalone institutions to make a great show of size. Most services are outsourced and direct employee numbers and operating revenues are small. It’s hard to justify that skyscraper.
So what should these supersize funds be doing to demonstrate the greater capacity they have to do more for members – individually?
It should be so simple. They should provide a calculation of a member’s actual average return over their period of membership based on their own cash flow of contributions and fees experienced. Technically, this is an internal rate of return. Not fund averages, not generalisations about all the members, but individual reporting, preferably in real terms.
The main metric currently focused on in advertisements by these funds seems to be around expense ratios. This is meaningful to individual members and worth being highlighted as a competitive advantage. A typical promotion of this advantage might be something along the lines of “if you pay an extra 1% each year in fees, you could lose up to 20% from your retirement benefit over 30 years”. Will these funds actually calculate individually for a 30 year member what their actual compound average fee percentage has been? They certainly have the data and technology to do this but I’m unaware of anyone doing this.
More importantly, will these funds be progressively calculating the actual investment return the member has earned over their 30 years of membership (as an internal rate of return) on their contributions? They could easily do this with the ‘big data’ and ‘big technology’ achieved by size. Just as easy to do would be the equivalent average inflation rate so that ‘real return’ would be readily available as well.
The individual calculation of average return and real return over total membership period is the missing ingredient in educating members individually from their own experience. By becoming more familiar with the stability of average returns over the long-term membership period, members can learn to avoid knee-jerk reactions to stock market gyrations which generally see them move out of long term strategies at the worst time and never return.
This information would also help financial advisers in delving deeper into finessing long term strategies for the member in the context of their own experience, knowing that the member can be expected to have a more rational future behaviour within assumed risk profile.
So how might the ‘supersize’ fund promote the benefit of their new individually targeted real return reporting. Something like:
“If you join our fund we will provide you with actual lifetime reporting of your long term returns, after inflation and fees. With this personally targeted information you can be learning about long term investing from your own actual experience. This on demand calculation service will also assist your financial adviser in evaluating long term investment strategies for you based on your own experience. For example, if you do not develop sufficient knowledge to keep to long investment strategies, a 2% pa lower average return could lose up to 30% from your retirement benefit over 30 years.”
Whilst superannuation funds put great store on generic glossy reports and newsletters to educate members, there’s nothing like the impact of an individual learning from the university of life. Best to start doing this education when balances are small.
Bruce Gregor is an actuary and demographic researcher at Financial Demographics and established the website www.findem.com.au.