But the “administrative complexity” of providing customised investment programs and advice will be an initial challenge for industry, public sector and corporate funds, says Kim Bowater, senior consultant and head of research at Frontier Investment Consulting, which advises on $116 billion in client assets.

This will likely require some technological development. Retail funds, however, have created distribution platforms and will find it easier. “If funds are looking to provide a full set of solutions in retirement, it might require being able to administer individual solutions for members,” Bowater says.

Funds should not use a “one-size-fitsall” approach but look for other sources of income that members have – such as the age pension, property and spouse savings – in developing retirement plans, she says. This will require advice and specific investment products, ranging from capital-guaranteed options to strategies investing in growth assets, such as equities. “An advice-based model and suite of investment options makes sense,” Bowater says.

“Plus web-based tools that allow members to see what kind of financial situation they will be in.”

Advice, certainty are critical

The rapid growth of self-managed superannuation funds (SMSFs) shows why collective funds need to develop financial advice strategies. SMSFs held $391 billion at June 30, 2010, according to the Australian Prudential Regulation Authority. The amount of capital in SMSFs is growing at an annual rate of 8 per cent, says Andrew Baker, managing partner of Tria Investment Partners, a wealth management industry researcher.

He forecasts that by 2020 the sector will manage more than $1 trillion. This growth has come at the expense of collective super funds that have until now managed the lion’s share of Australia’s mandated savings. Many industry, retail, corporate and public sector funds with more than $1 billion in assets have been involved in mergers since 2005.

However, their collective market share has not increased during these years: any gains in size made through consolidation have been lost to the SMSF market.

“We’re essentially seeing a Cbus roll over into SMSFs this year,” Baker says, referring to the $17 billion industry fund. “Next year a Sunsuper, and a REST Super a year after that,” he adds, indicating that $19 billion and then $20 billion will be lost to SMSFs in the next two years.

Providing retirement investment products and other services, such as direct share trading and term deposits, to match the flexibility of SMSFs will not be enough to stop this, Baker says. Funds need financial advice channels through which members can access these strategies.

“There is this myth that everyone is lining up around street corners to buy an SMSF. The fact is it’s the first thing your accountant sells to you after doing your tax return,” Baker says. “Advice is going to be critical in fending off SMSFs.”

More specifically, funds must focus on how they will serve each broad category of their memberships: people with balances up to $100,000; those with balances between $100,000 and $500,000; and those with up to $1 million or more.