David Hartley is perplexed.
The argument for superannuation funds to adopt objective-based investing over risk profiling has been around long enough, yet risk profiling continues to remain the primary tool the industry uses to engage with individuals relating to their retirement savings.
“The problem with it is people are using risk profiles like a derivative - they might not be looking for a wild ride, but they are being told that’s how they get the best returns,” says Hartley, who has more than 30 years’ experience in international and Australian investment markets, previously as Sunsuper’s chief investment officer, now chair of Catholic Super’s investment committee.
In its purest form, there’s actually nothing wrong with risk profiling as a concept, Hartley explains.
The problem is that risk profiling tools have been simplified and appropriated by super funds, to the point now that in many cases it barely resembles its original principles, he says.
“Based on the approach many super funds are using, we shouldn’t be surprised retail investors are selling or making the wrong decisions at the wrong time,” Hartley says in conversation with InFinance.
Most funds categorise superannuants as on a spectrum of risk from growth to conservative based on a series of questions.
“If you’re a growth investor you go into a growth product and that’s that… But let’s say the market is volatile and the same investor goes back to the questions with a knot in their stomach and all of a sudden their profile comes out a lot different; they go into a more defensive product and they sell when the market goes down, in fact they’re instructed to sell,” Hartley outlines.
Objective-based investing on the other hand engages members to set aside money based on how they intend to use it.
“If you want a lump sum on the day you retire to buy a caravan or a boat, you might think about contributing your super guarantee amount into cash for 10 years before that day comes. That way you’ll be guaranteed to have a year’s salary to spend on whatever you want,” Hartley says, explaining how objective-based investing works.
“The problem with the current system is people see the risk of the product as the primary way of choosing but they need to be looking at what they want to do with the money instead,” Hartley comments.
Talking about outcomes in this way is more akin to the way defined benefit plans are set up, where risks were shared and pooled in a model that’s being phased out globally as highlighted here.
“We actually need the defined contributions to mirror the defined benefits more in that we need to have an income stream as a wage substitute rather than some random output,” Hartley says.