Just before Christmas we posted a long overdue Friday Reflection dealing with Risk Analysis Questionnaires. It prompted a number of advisers to ask whether we thought a client’s superannuation investment risk profile could be, or even should be, different to their non-superannuation investment profile.

One adviser thought a good example was a young couple saving/striving for a home loan.

We think she made a very good point, and our response is set out here:

Hi Adviser name

Split personality clients

First my apologies for taking so long to write this Friday Reflection for you. I will be editing it to add in a few further thoughts later today.

You make a very good point. Your SOA is a record of your advice to your client to enable your client to decide whether to accept your advice. Your split personality theory is very sensible and the solution is simple: explain it in your SOA. I would be happy with something like this:

“At this time the priority of home ownership inside a few years dominates your non-superannuation investment strategy. It should be all stops out to get that deposit together, get that loan and buy that home. Don’t risk your deposit monies: keep the capital safe in a bank deposit or a cash management trust even though the interest rate is at a record low. The risk of losing capital with a higher income investment is not worth it, and not appropriate to you.

Your superannuation monies are a different story. At age 30 you have an investment time frame of fifty or more years. Here it’s too risky to not be heavily in growth assets, and we believe your super monies should be 100% invested in growth assets, particular Australian shares and property. The Russell ASX Long Term Investment Report 2016 tells us the 20 year average return for Australian shares is 8.5% and Australian property is 10.5%. Its highly probable the next 50 years will be more of the same, although in any given year returns can be lower or even negative, so it’s appropriate, even imperative, your long term investments are in growth mode now. Your time frame is measured in decades, even generations, not years.”

I hope you are well and all is well.

Regards,

Terry McMaster | Director


From: Adviser name and e-mail address
Sent: Tuesday, January 3, 2017 4:18 PM
To: Terry McMaster <terry@dover.com.au>
Subject: RE: Dover and risk analysis questionnaires

Terry

I have just been reading your latest article about Risk Profile Questionnaires. This has been timely reading for me because I have been thinking about better ways to structure and capture the information about risk profile, without in necessarily taking the form of a risk profile questionnaire with all its pitfalls. I like the structuring of the considerations regarding risk profile to ensure that you have considered each area regarding the risk profile.

The bit that I am left wondering about though is that usually I see two distinct risk profiles for the one client (younger clients usually). One for super and one for non-super. When you have a 60 year old these are highly likely to be the same and so one overall risk profile is appropriate. However if I have a 30 year old single contract worker with limited experience in investment, or a couple with young kids who are trying to buy their first home or repay it usually, they are reasonably conservative for outside super (moderately conservative or balanced at most). Inside super however I think things should be treated rather differently. Given the lack of access, usually long time frame until they can access it and a thought process that makes them more relaxed about ups and downs and could benefit from a higher exposure to growth investments and therefore be a Growth or High Growth investor for super purposes.

I don’t think there is anything particularly controversial about my perspective, but often it struggles to fit with the standard SOA type approaches.

To address this I wondered whether you prefer:

  1. Specify two distinct risk profiles in the SOA section. Eg ‘Your risk profile for non-super is moderately conservative because you have a variable income and low levels of cash reserves. Your risk profile for superannuation is growth because you have 30 years of investment time and you are comfortable with experiencing volatility of returns to try to achieve higher long term returns)
  2. Specify one of them in the risk profile section and then explain the reason for diverting from this for the other situation. Eg ‘While we have assessed you as a moderately conservative investor, we recommend a more aggressive approach for your superannuation because you have a longer time frame for investment…
  3. Some other way to tackle this?

Thanks

Adviser name