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Financial planning, Investment and Self Managed Super Fund Article
Financial Literacy and Retirement Readiness - Part 2
By Lester Wills
1st February 2007
This article may be out of date.
Last edition I began reviewing the Mercer Wealth Solutions Financial Literacy and Retirement Readiness Study 2006 and concluded that Australians are not very ready for retirement. This month I shall concentrate on the financial literacy aspects of the study.
In an attempt to understand the level of knowledge Australians hold about their main superannuation fund, Mercer asked two questions designed to gauge understanding of fund type and investment strategy. The analysis revealed that participants’ levels of knowledge about their main superannuation funds were limited at best.
As Mercer pointed out, of concern was that three in five (61%) were not sure if their superannuation fund was a defined benefit or an accumulation style fund. Given the fact that the type of fund defines a number of critical elements in how end benefits are calculated (including managing employer contributions and handling of voluntary contributions), Mercer stated that they considered it is surprising that so few know the fund that applies to them.
Personally I was initially surprised with this finding as the two types of fund are so fundamentally different it is difficult to fathom how people cannot know the difference. Then upon taking stock I realised that I had fallen into the classic trap of assuming a basic understanding exists when much of my previous research has shown that it actually does not.
Mercer also found that two in five (40%) did not know if their funds were invested in either aggressive or conservative strategies. Given the degree of risk inherent in adopting aggressive investment strategies, it is disappointing to note that many are simply unaware of what their superannuation assets are invested in. However, again such results are consistent with much of my research and so are sadly not surprising.
…yet for many superannuation remains a mystery.
Mercer argues that the type of fund and investment strategy, broadly speaking, represent the most basic level of information consumers can have about their main superannuation fund. For most, superannuation will comprise a very large proportion of their total retirement funding available, yet for many superannuation remains a mystery.
Finally, Mercer also discovered that the message about the benefits of superannuation fund consolidation remains unheeded by many. They found that almost one in four (23%) hold two superannuation accounts, and a staggering one in five (19%) claim to hold three or more accounts. Subgroup analysis found no significant differences in multiple account holding across different demographics, suggesting it is widespread.
Mercer attempted to discover how confident Australians are in their knowledge about investments and superannuation and found that many do not feel they know a great deal about superannuation and investing.
Mercer revealed that they are undertaking research that has demonstrated a strong link between confidence in knowledge about investments and superannuation and confidence in making decisions which impact on overall financial wellbeing. Analysis of 1,659 individuals who had participated in a survey prior to attending an education seminar found a positive correlation between self-rating of knowledge about superannuation and confidence in making decisions on which superannuation fund would best suit their needs. Mercer noted that as the level of confidence in knowledge about superannuation increases, so too does confidence in making decisions on which superannuation fund is best suited to their needs (such as the appropriate investment strategy, insurance cover, etc).
However, I must add a word of caution.
Correlation does not mean causality. For instance, was the increased knowledge the cause of the confidence in decision making, or did increased confidence lead to the person seeking more information?
Mercer also found that when working Australians were asked how they would rate (out of ten) their own knowledge about both investments and superannuation, they scored an average 4 out of 10. This it is claimed suggests they readily admit that there is room for improvement. Nearly half rated themselves as having “none” or only “minimal” levels of knowledge about investments and superannuation, while less than one in five rated themselves as “strong” or “sophisticated”.
Following this Mercer asked whether working Australians see a need to improve their score? They found that many do. When asked how they would like to rate themselves, two thirds wanted to rate themselves as “strong” or “sophisticated” in their knowledge of both investments and superannuation, thereby increasing the average rating to 7 out of 10 for each person.
They also found that many were relatively unsophisticated in their current investment strategies. Almost 60% considered themselves as a “beginner”, investing mainly in bank products and superannuation, which is involuntary. A further third consider themselves to be an “intermediate” level investor (investing in managed funds, shares and property). Finally, a minority (7%) consider themselves as “advanced” (having an established investment portfolio or actively trading investments).
Not surprisingly, when Mercer explored the relationship between investment strategies and self-ratings of knowledge, they found that those who rated themselves strongly on knowledge were far more likely to be an advanced investor.
Mercer next sought to determine how confident working Australians are in making financial decisions. This was in an attempt to understand the degree to which working Australians seek to take responsibility for making financial decisions.
They found that two thirds state they are comfortable making some basic financial decisions on their own, but seek guidance when making more complicated decisions (“do-it-with me”).
Very few (14%) felt comfortable making financial decisions on their own (“do-it-myself”), and likewise, only one in five (19%) wanted to delegate all responsibility to a professional adviser (“do-it-for-me”).
Mercer concludes that Australians are seeking some degree of autonomy and ability to take responsibility for their own financial decision making. However, there is a general hesitancy to delegate all responsibility for this. Therefore it seems apparent that many are seeking solutions where they play a role in the process. In other words, they want to be guided, not told what to do.
Mercer suggests that this is one of the reasons why education seminars have the potential to be so successful, given they can provide individuals with the tools to make informed decisions. The problem is getting people to attend them. My research has found that almost two thirds had never been to one and showed little inclination to do so!
Mercer also found that retirees were equally realistic in the degree to which they were willing to delegate sole responsibility to an adviser. They recognised the need to be aware of how their finances were being managed.
Responsibility for improving financial literacy
Mercer found that almost half of working Australians believe their employer has at least some responsibility to provide them with information to help them plan for retirement.
Almost two third of Australians prefer to consult a financial adviser or accountant when they need information.
Sadly, until superannuation and issues relating to it (such as increased education) become recognised as important issues in the attraction and retention of staff (as per the US model) I am doubtful as to how far this theory will work in this country. At the end of the day it is going to come down to simple economics. Namely, who is going to pay?
Three quarters of the respondents felt the government has some or all responsibility for this issue. Quite how this would work is open to conjecture although the government could definitely do a great deal more.
However, the overwhelming majority in the survey felt they themselves play a critical role in preparing for their retirement. The questions are: where do they get the information from, how do they use it and will it be individualised or merely generic?
Critical issues
Mercer then sought to understand which current issues were of significant importance to working Australians. When presented with a list of issues, one in four (25%) felt the issue of greatest relevance to them was suggested changes to remove contributions taxes.
The next most commonly mentioned issues were particularly salient among those raising families: the superannuation co-contribution scheme and proposals contemplating access to additional superannuation contributions for those under 40.
Choice of Fund is less salient, while issues related to transition to retirement and superannuation contribution spouse splitting laws were mentioned by even fewer. Mercer suggests that this may have been because of their (potentially) more limited impact, or the fact that individuals were not aware of these new developments.
How to get knowledge
Mercer attempted to discover what Australians did to improve their levels of knowledge about superannuation and investing. The results suggested there is an acknowledgement that when it comes to accessing information relating to financial issues, the best course of action is to speak to a professional. Almost two third of Australians prefer to consult a financial adviser or accountant when they need information. This is encouraging as research I conducted in 2001 found that family and friends scored much higher than professional advice. However, this informal channel is still strong as half stated they would seek advice from family or friends.
Naturally, whilst such ‘advice’ or information has the credibility of coming from a trusted source, it may not be accurate. Mercer concludes that the reliance on word of mouth suggests people don’t know where to go for information, something that researchers around the world have also concluded; even in the US where there is much more in the way of financial education.
Mercer found that the Internet, coupled with an increasing availability of books and specialist magazines addressing financial issues, has also had an impact on the way people self educate on such matters. The Internet was mentioned by almost half of respondents as a preferred means to learn more, while specialist books and magazines were mentioned by one in three.
The study found that a further one in four would attend an education seminar, while just under one in five would approach their bank for information.
Mercer attempted to discover which profession people turn to for advice. They found that more than half had consulted at least one financial professional in the past 12 months, with the most common mention being for accountants and financial advisers.
Interestingly, many turned to financial advisers when they were contemplating exercising fund choice. Frontline representatives from potential new superannuation funds were mentioned by a third of respondents, with Mercer suggesting that this could be in the context of obtaining information which would justify a decision to switch to that fund. The next most common mentions were websites (29%); advice from family members (26%); and accountants (25%).
Mercer then asked who people trusted when it comes to seeking information on financial affairs, and just as important, who they don’t trust.
A third stated that they trust a financial adviser the most. Accountants were next most commonly mentioned (25%), followed by a family member (17%). In terms of who they do not trust, interestingly personal bankers were least trusted (23%), with lawyers next (14%), followed by close friends (11%).
Lifestyle
The research concludes with some observations from recent retirees. The two strongest lifestyle trends were the need for increased awareness of where their money is going, and the need to be more frugal. When asked what they would have changed about the way they prepared for retirement, the prevalent theme was that they were limited by a lack of knowledge.
Finally, Mercer asked what advice retirees would give those still in the workforce. A number of comments are contained in the report, but the two most pertinent appear to be, “start saving early” and “get educated”.
The two articles I have provided on this report only give an outline of the research. If you would like to read the entire report it is available at:
www.mercerwealthsolutions.com.au/financialliteracy
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