Baby boomer investors told to be cautious


By Kristen Crawford

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Typical fee structures encouraged “closet indexing” by fund managers, while financial plans were often generic and too risky for clients nearing retirement, according to a study released by the Centre for International Finance and Regulation.

The study examined current financial planning practices in Australia and whether baby boomers were getting the advice they needed ahead of retirement, which was topical given the proportion of Australians aged 65 and over was projected to almost double in the next 30 years.

Macquarie University professor Geoffrey Kingston, who led the study, said the research supported the idea that commissions from product providers should be banned and there had been inadequate disclosure by planners of dollar amounts charged in fees versus percentages.

However, the study dismissed the idea fee-for-service should replace asset-based fees, which Kingston said still held value.

“The optimal investment strategy allows for both fee structures where income-generating assets are exposed to low risk and the remaining assets incorporate both a fixed fee and a fulcrum-style performance fee to discourage closet indexing,” Kingston said.

The allocation split between safe-haven and growth assets, however, raised a potential conflict of interest between a client and their adviser, he said.

“Approaching retirement, it stands to reason that an investor should orientate their portfolio towards safe-haven assets, such as term deposits,” he said.

He warned an excessive exposure to growth assets was risky for those on the verge of retirement.

“Specifically, if an investor suffers a major capital loss at this time, it is extremely unlikely that the full extent of the loss will ever be recouped,” he said.

“This becomes even less likely if the capital balance is further eroded by withdrawals for the payment of essential living expenses.

“Accordingly, an element of flexibility in asset allocation appears warranted in order to manage the vulnerability of a portfolio to capital losses at critical moments.”

The study recommended the Future of Financial Advice reforms should help discourage highly risky allocations and ensure planners offered advice that was in the best interest of their clients.

On top of that, the study called for the next review of financial advice to examine ways of ensuring advisers disclosed and responded to the fragility of financial plans for investors on the cusp of retirement.

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