A comment made by one Amercian financial adviser is that he does not have "clients with investment problems", he has "investments with client problems". He is observing that human psychology can be an investor's worst enemy. A financial adviser's role can be to protect people from themselves.
It is worth remembering this when looking at the boom in SMSFs. The human motivation -- getting control over your own savings rather than relying on somebody else -- is completely understandable. But it is not always wise. The truth is that retail investors (and fund managers) tend to get worse returns than the market average because they fall prey to their own psychology.
Fund managers struggle to mee the market average (because in aggregate they are the market average). Those stellar fees, especially as a percentage of assets, are hard to justify. But the same often applies to non-professional investors.
The AFR quotes one adviser saying that the desire to get control over their own choices is driving the SMSF market, even for young savers:
"The average Gen Y does not see their super fund as 'their' money, which is an industry-wide problem. You cannot run an accumulation-based superannuation system without engaging the ultimate owner of the funds. Superannuation funds in Australia manage money as if we still had a defined benefit system where end pension payments are guaranteed. This is simply not the case anymore," Stega says.
"We see clients get into a lot of trouble near retirement because they have no knowledge of how they will generate an income from their super fund. This would not be a problem if they started earlier with an SMSF," he says, adding that it's now possible to start an SMSF with a balance of about $100,000 if the member makes ongoing contributions to it.
?As to whether it's really sensible for someone so young to tie up their wealth in a vehicle they can't touch until much later in life, he says superannuation should always be viewed as being a long-term investment.
"If clients want to take risks like starting a business they should do this outside super and leave superannuation as the retirement nest egg," Stega says. "We would rarely recommend a younger client increase their contributions to superannuation as a forced savings mechanism unless they lacked discipline around their personal cash flow."
The latter advice is questionable. For those who are able and prepared to salary sacrifice at an early age, the returns will be extremely strong because of the compounding effect. (The longer returns compound, the better the final results.) Even the advice about risks can be questioned. The time to take investment risks is when one has a lot of 'human capital': that is, when you are young. The older one gets, the lower the level of risk ashould be taken on. This does not mean being reckless, but sensible investment risk is something to embrace early in the savings period.