Investment risk: Do your clients understand it?

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High-risk and low-risk labels aren’t adequate in explaining the two main risks associated to superannuation saving – volatility and inflation. Many Australians have a misunderstanding of risk and volatility, and this could lead to the wrong superannuation investment.

ASIC commissioner Peter Kell says that for many consumers, their understanding of the risks they’re exposed to through their financial strategy is at odds with the real risks they’re facing. “You get this misalignment and that can unfortunately lead to significant problems down the track if that’s not corrected,” he says. “So one of the ways a financial adviser can really add value is explaining very clearly those issues of risk to the client, understanding their risk appetite, and aligning that with their actual financial needs.”

In a new poll commissioned by AustralianSuper, half of young people surveyed would choose an investment option labelled ‘low risk’, despite the fact that those options might not earn much more than the rate of inflation.

“We are urging all super funds to ensure the labelling of risk for each of their superannuation investment options includes not only measures of volatility or short term risk but also inflation, which is the long term risk,” said AustralianSuper general manager marketing and communications James Coyle.

AustralianSuper’s modelling showed that a young person investing in an investment option labelled ‘very low risk’ for 40 years could be up to $170,000 worse off at retirement than if they chose an investment option with a more growth orientation that would be labelled ‘medium to high risk’.

The poll also found:

  • Less than half of Australians would seek more information about investment options labelled ‘high risk’.
  • A quarter of people surveyed would change out of an investment option classified as ‘high risk’; and
  • Twenty nine per cent of young people either didn’t know what an investment labelled ‘low risk’ was or thought it would provide them with enough money for their retirement

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