For a long time, product diversification has been an idea in search of the right technology. However, according to Luke Nardella of DST Systems in Australia, the capabilities that will allow growth through diversification finally exist… and that’s got to be good news for the industry as a whole.
A while ago, a colleague was telling me about a not-so-super experience he had 35 years ago. He was just starting his career and his mother insisted he take out superannuation: sage advice given that compulsory super was still more than a decade away. She invited her broker over and my colleague signed up to what sounded like a dream investment: $40 a month at a low/mid teen growth rate… fixed for life.
The one downside was that $40 was a large chunk of change for a 20-year-old in the early eighties. After two or three years, my colleague decided that ‘beer money’ was far more important than superannuation and he let the investment lapse. 35 years later, he now regards this as the single worst financial decision he ever made.
To me, this story exemplifies one of the greatest challenges (and opportunities) facing today’s superannuation industry: engagement.
Right now, the industry is being attacked from all sides by commoditisation, flatlining membership, and slowing growth. This was highlighted in the recent APRA superannuation statistics report1, which showed many funds hemorrhaged member cash flows in the year to June 2016. Meanwhile, mid-sized funds are running the gamut between bank-aligned retail providers and large industry funds.
Of course, the funds aren’t standing idle: they’re fighting back in several ways to stay competitive and act in their members’ best interests. Most are working to improve efficiency, customer experience, and competitive differentiation. Many industry funds have broadened their addressable market by introducing more self-directed investment options and inviting members from beyond their core industries: essentially blurring the lines between industry and retail funds. And merger activity is continuing unabated, driven by both competitive and regulatory demands. Rice Warner recently reported that the market fell from 872 to 244 funds in just ten years and will fall to 149 by June 2021.2
There’s no doubting that these actions are both important and valuable. Each helps to build the quality, competitiveness, and sustainability of both the industry and individual funds.
But they’re also limited in one serious way: they all focus on the fight for market share, rather than driving sectoral growth.
And that’s where engagement comes in.
Superannuation providers hold a powerful platform for growth: the longevity of their member relationships. Funds become involved the very day a person starts working and they have the opportunity to maintain their relationship all the way through to retirement and, often, beyond.
The strength of this opportunity is highlighted by the McKinsey Decision Journey database. This extensive global research shows that ‘investments’ is one of the three most loyalty-driven of the 30 purchase categories they measure. According to McKinsey, 69% of investment re-purchases are driven by loyalty, rather than by ‘shopping around’. 3
The inference here is simple. When it comes to investment products like superannuation, capturing a customer early is vitally important. And that’s exactly what superannuation does.
The problem, however, is that superannuation is a low engagement product. Most young Australians, like my colleague, barely give a second thought to their growing nest egg. That is, until they hit their mid-50s and retirement looms.
So, any opportunities created by this life-long relationship are effectively stifled by a lack of member interest.
Clearly, this is a major lost opportunity for the industry. But, how can funds address it? How can they build greater engagement and the more productive relationships that follow it?
One obvious way is by diversifying the products and services they offer.
Diversification can help funds become more member-centric by supporting other financial decisions mapped to the life-stage of each member. After all, funds are helping members with their long-term preparation for retirement. They’re also providing life and TPD insurance, which is a natural extension of super. Why not take another short step and help with all the other decisions along the way?
Through diversification, funds could be supporting the credit and savings decisions that go hand in hand with superannuation when members begin working. General insurance products when they leave the nest. Savings and loans for a wedding or home. Shorter-term investments as members build their wealth. Or lifestyle and income maximisation opportunities when they finally retire.
Taking this approach transforms the fund from a passive superannuation provider to an active guide… stepping each member through the myriad financial decisions they have to make over the course of their lives. And, naturally, offering them the solution.
This helps the member become more financially literate and better prepared for these critical decisions.
And it positions the fund to both leverage and cement their life-long relationships, leading to greater loyalty and a larger share of each member’s wallet. As such, it can provide new revenue streams for both the funds and their advisers.
Now, in truth, there’s nothing new about this idea. It’s been occupying the minds of financial services providers for years.
But, it’s only now that the technology exists to make the necessary partnerships and customer services feasible. With a smart approach to digital transformation, funds can:
All of these capabilities now… finally… exist. And they open the door to a whole range of new diversification opportunities. These opportunities have the potential to increase member engagement and value while, ultimately, improving the long-term sustainability of industry funds.
So, maybe it’s time to look beyond fighting for a slice of the superannuation pie…
And build a bigger pie instead.
1 APRA releases annual superannuation statistics for June 2016 http://www.apra.gov.au/MediaReleases/Pages/17_02.aspx. Published 01 February 2017.
2 Super mergers to continue: Rice Warner. InvestorDaily, 24 February 2017 http://www.investordaily.com.au/superannuation/40876-super-mergers-to-continue-rice-warner. Published 24 February 2017.
3 The new battleground for marketing-led growth., David Court, Dave Elzinga, Bo Finneman, and Jesko Perrey. The McKinsey Quarterly, February 2017. http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-new-battleground-for-marketing-led-growth. Published February 2017
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