Can superannuation funds close the knowledge gap?

With many superannuation funds and financial institutions adding retirement incomes products to their offerings, Mike Taylor writes that new Metlife research urges a need to close the knowledge gap.

Making the transition from the accumulation phase of superannuation to the de-accumulation phase is a challenge that needs to be met with more than just Government regulation, according to Metlife senior vice-president and behavioural economics expert Joseph Jordan.

Jordan, who addressed last August’s Financial Services Council annual conference on the Gold Coast, told Super Review that the financial services industry could not rely on governments to make things happen, but they had to engage more appropriately with clients.

“People have to become more self-educated and need to learn how to manage an income stream,” he said.

Jordan’s views are expressed in a position paper developed in association with other Metlife experts, Dan Weinberger (Retirement Incomes Strategies) and Joel Franks (Behavioural Finance Strategies).

The position paper said that for years investors had based most of their financial decisions on asset accumulation models, with savings and investments being based largely on an analytical process driven by historical performance and fund holding analysis in the form of some basic investing principles — dollar cost averaging, diversification and rebalancing.

“This set of tools and experiences did little to help clients understand that some day it will all have to be converted into a lifestyle sustaining retirement income that needs to last as long as their retirement may last,” it said.

“Armed with a wealth of knowledge and experience on how to save money, retirees stand on the precipice of the rest of their lives with incomplete financial knowledge to weather the new challenges they will face during retirement,” the paper said.

For his part, Jordan said clients tended to spend too much time utilising the more rational left side of the brain when making financial decisions rather than the more emotive right hand side of the brain, and it was the role of advisers to help clients use both sides of the brain and to manage behaviour.

He said that understanding the need to help clients engage both sides of the brain and become more self-directed could help shape product design.

Jordan and the other position paper authors claim “implementing behavioural approaches that accommodate the emotional elements in client decision-making opens up new ways to serve clients more fully”.

They point to the fact that financial institutions have to accept that as they enter retirement, retirees become less an investor and more their own income provider.

“Before they can make educated decisions about retirement income, they need to comprehend the scope and consequences represented by the problem as reflected in the way we frame the information we provide,” the position paper said.

The position paper pointed to research conducted in the US which showed that, given the choice, retirees would rather have predictable and secure incomes in retirement even it meant accepting a slightly reduced lifestyle.

It concluded on the note that lasting client relationships would rely on engaging clients about the new retirement risk and help them participate in the decision-making process that made them feel better about the retirement income options they choose.

“You cannot wait for your clients to ask questions about concepts they were not taught to think about,” it said.

Referring to studies conducted in both the US and the United Kingdom, the Metlife paper said that while people could understand the difference between growing assets and generating income, they might not understand how much income they would actually need or the impact of the new retirement risks.