The decisions we make regarding our superannuation portfolios are more complex than we realise. Professor Paul Gerrans from the UWA Business School suggests from his experience that doctors, who often work in high-risk environments, may approach their financial investments more conservatively than is necessary. And he has some interesting things to say about cognitive decline and the repercussions on Self-Managed Super Funds.
“My initial interest in retirement savings began with UniSuper [University Superannuation Scheme] in 1998.
Members were offered a significant choice – whether to move from a defined benefit into a defined contribution scheme.”
“Some people made choices that didn’t make a lot of sense, and these were individuals who were on quite high incomes at a relatively young age.
They opted to make that move even though they were transferring to a scheme with increased risk to themselves, the employee.”
“I was struck by how people actually came to a decision and interested in what sort of information they were relying on. That started the ball rolling for me and I’ve been looking at individual choice with a particular interest in retirement savings.”
“The overarching thing is that people tend to run with the flow and it seems fairly pervasive across the professional spectrum. Most of us tend to go with the status quo.”
Doctors are firmly positioned in a high net-worth bracket within a broader, high status demographic. Nonetheless, it is undeniably stressful at times and carries some degree of professional risk. Given this, might there be some indication as to their inherent style of financial decision-making?
“Extrapolating from their professional background there may well be a tendency for doctors to head in a certain direction. This revolves around the specific level of ‘background risk’. If an individual is involved in what is deemed to be a ‘high risk’ sector you might reasonably expect them to seek out a compensatory lower risk strategy in their financial planning.”
Another area worth considering, and one with a strong affinity with the medical consult, is the nature of the client/adviser relationship and the critically important issue of disclosure.
“One area we’ve looked at is a person’s level of embarrassment or fear in relation to their current situation. They may be frightened of what’s in store and the steps that might be needed to rectify it. So the big question here is disclosure, the extent to which an individual might withhold certain things.”
“It’s a given that the delegation of responsibility ultimately relies on a full exchange of information. If that doesn’t happen it will weaken the relationship and, in fact, it’s one of the key aspects of being a financial adviser.”
“If they feel that they’re not getting the complete picture they’re bound to provide a disclosure to the client that they must consider their broader circumstances before acting on any financial advice. The confidence within the relationship needs to flow both ways otherwise the quality of the information can’t be assumed.”
“We actually borrowed this patterning of information exchange from the world of medicine. There’s an established medical scale teasing out issues surrounding anxiety levels linked with both disclosure and/or evaluation. We’ve taken research from a medical model and we’re using it in the financial sector.”
A consideration of financial literacy inverts the dynamic of relationship ‘anxiety’. In this instance it may well be the alpha-personality medical professional who needs support.
“There’s often an incorrect assumption that everyone is able to develop a capacity to be financially literate. It’s interesting to see how people contract that out. Who do people delegate to? How successful is it?”
“For some people the anxiety engendered by delegating that advice may prevent them seeking it in the first place.”
Another of Paul’s research interests is financial decision making within the context of cognitive decline. This can be a tricky area, a tangled web of impaired intellect, family dynamics and individual greed.
“We now have a greater proportion of people with significant assets and there are important considerations for their later years. Particularly with Self-Managed Super Funds (SMSF) more work needs to be done on the relative evidence of decline and the types of decisions individuals are making.”
“It needs to be a lot more context specific than ‘people with cognitive decline perform poorly on financial literacy tests.’ There needs to be some applied research that will provide more accurate measures of judgement and then we’ll be able to draw a more effective link between the two.”
Paul stresses the importance of the adviser/client relationship and the fact that the landscape of superannuation itself is often depicted in more complex terms than is actually warranted.
“The interaction is dynamic, it changes over time. And there’s always a balance, from the client’s point of view, between trying to make assessments regarding the technical expertise of the adviser and the perception of the person themselves – whether he/she is a ‘nice’ person?”
“It’s interesting to think about how and why a level of confidence develops that leads to the client feeling they’re going to get a good outcome. In one sense, perhaps the investment industry is its own worst enemy. At times they can create a sense of complexity and change that is more acute than is actually the case.
There will always be change but it’s over-egged at times.”
Finally, Paul makes some broader points regarding superannuation.
“I think there’s a somewhat entrenched view that Super is set apart from a broader portfolio. It’s never a good thing to rely on just one particular investment vehicle and it should be one of a range of products that an individual has in their portfolio.”
Take-Home Points
• ‘Background risk’ may well be a factor in decision making.
• Full disclosure in a client/adviser relationship is critical.
• Confidence and trust needs to flow both ways.
• Financial ‘anxiety’ needs to be acknowledged and taken into consideration.
• Superannuation is not always as complex as it seems.