Financial illiteracy and a shortfall of financial advisers are compounding an already tricky superannuation landscape, according to new research conducted by Griffith University.
It found that Australia’s compulsory superannuation system may be the primary driver behind a tremendous growth in the managed fund industry, but the change to an employee-nominated system may also be leading to costly, uninformed investment decisions.
A Griffith University researcher said the system was being undermined by questionable decision-making.
“There is clear evidence that investors base their decisions primarily on past performance of the funds,” Dr Rakesh Gupta, a senior lecturer at Griffith Business School, wrote in a research paper published in Accounting Research Journal.
Gupta joined forces with Professor Thadavillil Jithendranathan at the University of St Thomas in Minnesota to study asset allocation patterns in the managed fund industry in Australia, which claims to be the first study of its kind here.
Data from more than 20,000 individual funds was analysed, with researchers examining quarterly flow of funds and fund return data from 1998 to 2008 to determine reasons for asset allocation.
At an average $63,794 per person, Australia has the largest per capita investment in managed funds in the world, compared to $43,458 in the US, which is next highest.
Compulsory superannuation was introduced in 1992 with a view to moving towards self-funded retirement. It commenced with a 3 per cent employer contribution and currently the contributions rate is 9.25 per cent.
In 2005 the government introduced super choices to provide more flexibility and choice of nominating any complying superfund for employees.
“Investors need to ask themselves, ‘If they give me the choice, am I the right person to make that choice?’ They may end up pursuing short-term strategies purely based on past returns of the funds, which can be detrimental to their long-term investment goals.
“Misallocation of funds by uninformed investors may result in significant under-performance of portfolios, leaving the public sector and ultimately the taxpayer left to service and support retirement. This is money down the drain in every respect,” said Gupta.
He added that Australia is no better and possibly worse than other OECD countries when it comes to financial literacy, and this needs to be addressed.
He also identifies a shortfall of financial planners in relation to existing demand for this service as a concern. In 2007, the shortfall was estimated to be about 20,000.
“There is also widespread reluctance among investors to seek financial advice,” he said.
“There needs to be a change in mindset. People need to think about the bigger financial picture, and see past the accountant they visit once a year.”