The need for financial education is rising with the increasing individualization of superannuation but a void remains in the provision and delivery of that education in a cost-effective manner. Chris Condon and Peter Vann believe they can fill at least part of that void with their new service.
As previously reported, Condon, former chief investment officer at MLC and previously at Russell Investments, and Vann, a former quant-orientated manager with Constellation Capital and before that with what became UBS, have formed CV Solutions.
They have built a “stochastic engine” which estimates retirement income for individuals or families. The estimates incorporate investment volatility and demonstrate the three-way trade-off between investment risk, level of retirement income and longevity.
The individualization trend, sometimes referred to as mass customization, follows the continued leakage of high-balance members from big super funds to the SMSF market. The funds’ fight-back through new SMSF-style platforms under their trusteeship will increase the need for financial education too.
CV Solutions offers five services ranging from a simple individual report to members showing the likely outcome of their super through to a calculation engine which can be licensed by the fund or other organization giving them control over future customization and updates. The company also offers a more dynamic reporting service showing attribution of changes to retirement estimates and a white-labelled website giving members direct access to the calculator. The final service involves consulting on retirement strategies and products, including an assessment of non-investment parameters on retirement incomes.
Condon and Vann’s model is different from standard calculators because it includes investment risk. Standard calculators show, for instance, that higher returning strategies deliver better outcomes. But ignoring volatility is misleading. As was obvious through the global financial crisis, volatility can have a devastating effect on members nearing retirement.
Condon and Vann have cracked the maths so they don’t have to rely on time-consuming Monte Carlo simulations. This makes it possible to run reports for all members of large funds.
Condon says: “We believe that the real problem funds have is engagement. This probably won’t improve much if you expect members to go to a website and use a calculator. You have to do more than that, with all the information you have, and provide a tailored report.”
The service does not constitute advice but it can prompt members to go contact the fund’s help desk or financial planners.
He says that engagement with the member should be happening early, not when he or she is approaching retirement. But early on, however, is when members are least likely to be concerned about their retirement.
Vann says the company is trying to make the member the focus of the discussion.
“We’re turning the discussion away from just investments towards what the member wants in retirement,” he says. “Only then can they make sense of it all… We’re not trying to sell anyone an investment product.”
Condon believes that the MySuper regulation is a “cop out on engagement”. He says: “It’s paternalistic and gives them a lowest-common denominator default. Why don’t members understand super? Because we haven’t given them the information.”
Another misleading aspect of what has traditionally been presented to members is a focus on the account balance at retirement rather than on retirement outcomes.
“Even at retirement most members still have an investment horizon that extends a couple of decades and may benefit from a moderate allocation to growth assets, unless growth assets are overly expensive,” Vann says.