Life-cycle funds no substitute for advice

Managed funds with a “life-cycle” component won’t take the place of financial advisers but are the next best option for the large number of people who don’t use advice, an expert says.

Wednesday, November 14th 2012, 6:51AM 1 Comment

by Niko Kloeten

A review is underway into the KiwiSaver default scheme system and Mercer, one of thedefault providers, is pushing for a life-cycle component linking asset allocation to age to be included in these funds.

A similar call has been made by fellow default provider ANZ, which has estimated such a change could boost lifetime returns for the average default scheme member by $72,000.

Graeme Mather, leader of Mercer’s defined contribution client unit, Australia and New Zealand, said life-cycle funds are becoming increasingly sophisticated and are based on many of the principles advisers use when determining asset allocation for clients.

He said advisers should see these products as an opportunity rather than a threat.

“One of the key issues is: are we doing the financial planners’ job for them? Do I think the financial planning industry is going to disappear because of this? No,” he said.

However, he said international evidence shows that many investors in superannuation schemes don’t seek financial advice and remain stuck in default funds that often don’t match their investment profile; life-cycle funds would help these investors, he said.

“I don’t believe it’s good putting a 20-year-old and a 70-year-old in the same fund; they have different risk profiles,” he said.

The government’s discussion document said that “in an ideal world”all investors would be fully informed and sufficiently knowledgeable to make an active choice of superannuation scheme provider and fund.

“The reality is very different,” it said. “Decisions around investing are hard. The subject matter is complex and requires a level of research, time and commitment that is beyond many people.

“And while a large and active market of financial intermediaries does exist, anecdotal evidence suggests the account value threshold often set by advisers before offering advice serves to exclude many KiwiSaver members with small balances.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 14 November 2012 at 8:11 am Stan Charles said:

The problem the fund managers have currently is that the default funds are consistently outperforming the other funds.

The fees on the other funds tend to be higher for the managers, thus giving them a vested interest in shifting. I would suggest that this is the reason there is a drive from fund managers for life cycle investing.

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