Retirement asset allocation under scrutiny

Taylee Lewis
— 1 minute read

A new academic paper has taken the financial planning sector to task for providing advice that is often “generic” and “too risky” for clients approaching retirement.

The Centre for International Finance and Regulation (CIFR) study, titled Agency Theory and Financial Planning Practice, asks whether superannuation investors are receiving “value for money” in terms of financial advice fees.

Macquarie University professor and CIFR lead researcher Geoffrey Kingston noted that baby boomers should opt for safe-haven assets such as term deposits in order to avoid the risks associated with growth assets.


He warned that growth assets are particularly risky, as a major capital loss is exceedingly difficult to recuperate when approaching retirement.

“The allocation split between safe-haven and growth assets raises a potential conflict of interest between a client and their adviser,” Mr Kingston said.

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

“However, these typically result in a minimal commission to the adviser, unlike equities, where the potential commission is far greater,” Mr Kingston added.

The study concluded that the future of financial advice reforms should discourage risky allocations and ensure that financial planners offer advice in the best interest of their customers.

As a result, the study has called for the next review of financial advice to examine ways of requiring financial advisers to reveal the fragility of financial plans for clients nearing retirement.

“Commissions from product providers should be banned and there has been inadequate disclosure by planners of dollar amounts charged in fees versus percentages,” said Professor Kingston.

The study also found that asset-based fees hold value and rejected the idea they be replaced by a fee-for-service charge.

“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,” said Professor Kingston.

The report predicts that as the 65-plus population increases to around 23 per cent by 2050, the demand for financial advice will escalate.


Retirement asset allocation under scrutiny
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