ASX Australian Investor Study€¦ · 46% 40% 15% 75% Diversification is still not well understood of investors claim to be diversified and hold 2.7 investment products of investors

ASX Australian Investor Study2017

Brochure / report title goes here | Section title goes here ASX Australian Investor Study | 2017

ContentsTop 10 findings 01

Executive summary 03

1. Retail investment in Australia 11

1.1 Definitionsusedinthisreport 11

1.2 Thevalueofinvestingtoindividuals 11

1.3 Thevalueofawell-functioningfinancialexchange 12

2. The investment landscape is changing 14

2.1 Lowinterestrateenvironment 14

2.2 Policychange 15

2.3 Digitalinnovation 17

2.4 Demographicshifts 17

3. Who is investing? 20

3.1 ChangesininvestmentownershipinAustralia 21

3.2 TheprofileoftheAustralianinvestor 27

3.3 Understandingpotentialinvestors 40

4. What are Australians investing in and how? 46

4.1 Australianinvestors’portfoliosarenotverydiversified 46

4.2 Useofadvisoryservices 52

4.3 Useoftransactionservices 54

5. Why do Australians invest? 59

5.1 Awareness,knowledgeandattitudes 62

5.2 Australians’attitudestorisk 66

5.3 Diversification 71

6. Seeking a more diversified future 72

References 73

ASX Australian Investor Study | 2017

Top10findings

60%Australian adults or 11.2 million people hold investments outside of their institutional superannuation fund

37%

31% 7% 11%

of Australian adults or 6.9 million people hold investments that are available through a financial exchange

ofAustralian adultsholdshares

ofAustralianadultsholdderivatives

holdotheron-exchangeinvestments

10% to 20%

24% to 39%

More and more young people are investing outside their institutional superannuation funds

Overthelast5 yearstheproportionof18-24 yearoldsinvestinghasdoubledfrom

Theproportion of25-34yearolds hasincreasedfrom

overthe sameperiod

62% 56% 37%

On-exchange investments are a more common investment choice than cash or property

ofinvestors holdon-exchangeinvestments

ofinvestors holdcash

ofinvestorsholdinvestmentproperty

15% 13% 8%

Self-managed superannuation funds (SMSF) use will continue to grow, with 30% of Australian adults that do not currently use an SMSF planning to set one up in the future

ofadultsclaimto haveanSMSF

ofadultswithoutanSMSFareplanningtoestablishonewithinthenextyear

arefurtherplanningtoestablishoneinthenext13-24 months


1

46% 40% 15%

75%

Diversification is still not well understood

ofinvestorsclaim tobediversifiedand hold2.7investmentproducts

ofinvestorssaytheydonothavediversifiedportfolios. Theyhold1.6 investmentproducts

ofinvestorsdon’tknow ifthey’rediversified

ofshare ownersholdonly Australianshares

65%

40%

42%

of investors holding on-exchange investments transacted in the last 12 months

tradedusingnon-advicebrokersandonlinetradingplatforms

ofshareownershavetradedinthelast12months

71% ofinvestorsthattradedinthelast12monthsmadefewerthan10trades

81% 21%41%ofinvestorsunder35areseekingguaranteedorstableinvestmentreturns

ofthemostriskaverseinvestorsexpectreturns over10%

ofinvestorsover55arecomfortablewithsomevariabilityintheirreturns

Disconnect between investor risk profiles and their return expectations

Younginvestorsaremoreriskaversethanolderinvestors

60% of all investors use some form of professional advice (financial planner, full-service stockbroker, accountant, and/or lawyer) to help them make investment decisions

41%

84%of lapsed investors intend to return to investing

intendtoreturninnext2 years


2


3

ExecutivesummaryInvestingisacriticalactivityinanymoderneconomy.It’showbusinessesprepareforservingcustomersinthefuture,howanationgrowsovertime,andhowindividualsandfamiliescanparticipateinfinancialsuccessesofbusinessesandearn anincome.

Investingisasoldaseconomies themselves.Andyet,theearly Twenty-FirstCenturyisalsoatimeofconsiderablechangeintheinvestmentlandscape.Thechangingstructureofourpopulationisreshapingwhoisinvesting andwhy.Newdigitaltechnologieshavebroughtnewwaysforpeopletoinvest,alteredwhattheyinvestin,andhowtheyreceiveadvice.

IntheaftermathoftheglobalfinancialcrisisandtheEuropeansovereigndebtcrisis,therehasbeenaslowingofglobalgrowthandlownominalinterestrates,whichhavecontributedtoloweryieldsandledtoinvestorsreconsideringtheirriskappetite.OverthepastdecadetheAustralianfinancialsectorhasbeensubjecttosignificantpolicychangewhichhasseenatighteningofregulation.Thischangecontinuestounfoldandwillimpactthebehavioursoffinancialintermediaries andinvestors.

In2016,theAustralianequitymarketgenerallyoutperformedotherdevelopedequitymarketsglobally(RBA,2017).Atthetimeofwriting,theS&P/ASX200wasatitshighestlevelsincepriortotheglobalfinancialcrisis.Tradingvolumeshaveincreased23%overthe12monthstoMarch,andcontinuetogrow(ASX,2017a).Thedomesticequitymarketcapitalisationisatahistorichigh,reaching$1.8trillioninMarchthisyear(ASX,2017b).

Atthesametime,significantglobaleventshaveinfluenceddomesticmarketsoverthelastyear.TheannouncementsofdecisionsbyBritishvoterstoleavetheEuropeanUnionandbyUSvoterstoelectPresidentTrumpcoincidedwithincreasedtradingvolumesonASX.Thesetwolargelyunexpecteddevelopmentsarekeyexamplesofaglobalenvironmentcharacterisedbysignificantuncertainty.Geopoliticaldevelopmentsarelikelytocontinuetobeafocusforinvestorsinthenearfuture(InvestmentMagazine,2017).Againstthisbackground,riskmanagementwillbeanimportantconsiderationforallinvestors,increasingtheimportanceofhavinganappropriatelydiversifiedportfolio.

Thisstudydoesnotprovideanassessmentaboutwhetherretailinvestors(hereafterreferredtoas‘investors’)aredoingtherightthing,nordoesitofferadvicefortheseinvestorstofollow.Instead,thisstudyseekstoshedlightoninvestorbehaviourinthiscomplexandchanginginvestmentlandscape,andprovidessome‘foodforthought’fortheinvestmentindustrythatcaterstothem.

This2017editionofthestudyhasbeenpreparedbyDeloitteAccessEconomics, asuccessortodecadesofeffortbyASX, whichhasbienniallypublishedaprofile ofAustralianshareownershipsince1986. Thisstudyisbasedonanonlinesurveyof4,000individuals(arepresentativesample oftheAustralianadultpopulation). ThefocusisonAustralianadultsthat investoutsideoftheirinstitutional superannuationfundarrangements.

Theinvestmentlandscapehasbecomemoresophisticatedovertime,andwhileAustraliahasrankedwellagainstglobalmeasuresoffinancialliteracy,thereisscopetoimprove.Australianinvestors’portfoliosarenotverydiversified,andtheirawarenessoffinancialproductsdeclinesquickly outsideofshares.

Atthesametime,theinvestmentindustrymaynotbeengagingwithinvestorsaswellastheycouldbe.Someofthesurveyfindingsmaychallengeexistingindustryperceptionsofinvestors.Thereisanopportunityfortheindustrytochangeandbecomemoreresponsivetoitscustomers,whichcanhelpdeliverimprovedfinancialoutcomesforAustraliansand theeconomy.

This study also identifies some ‘food for thought’ for the investment industry.

Food for thought for the investment industry

• Do you have a good understanding of how these changes will impact investors?

• Is your business model geared towards supporting investors as the investment environment and their preferences change?


4

Investment ownership trends Thelevelofownershipof‘on-exchangeinvestments’(whichisdefinedtoincludeinvestmentproductsthatareboughtandsoldthroughafinancialexchange,forexample,sharesandderivatives)hasremainedbroadlyconsistentsincethe 2014study,ataround37%ofthe adultpopulation.

However,investingisbecoming morecommonamongyoungpeople. Theproportionof18-24yearoldsinvestinghasdoubledinthepastfiveyears,from 10%to20%.

Ownershipofinternationalshareshas alsoincreased.Today,nearly8%oftheadultpopulationsaythattheydirectlyholdshareslistedonaninternationalfinancialexchange,upfrom5%in2014.1

Profile of the Australian investor Three-fifths(60%)ofAustralianadultsdirectlyholdinvestmentsofsomesort(includinginvestmentsnotavailable onafinancialexchange)outsideof theirinstitutionalsuperannuationfund (Figurei).ThismeansthatmanyAustralianadultsarecomfortableinvesting, buttheyarenotnecessarilyinvesting inon-exchangeinvestments.

Mostcommonly,Australianinvestors holdtheirinvestmentsinapersonalcapacity.Ofinvestorsholdinginvestmentspersonally,younginvestorsaretheleastprominent.Thismaypartlyreflectthereal orperceivedbarriersthatthisgroupfaces,orthefactthattheyhaveotherpriorities.

Younginvestorsaremoredigitallysavvy, andwhiletheadventofdigitalwealthadvisory(i.e.roboadvice)offersopportunitiesforbothinvestorsandfinancialadviserstotakeadvantageof digitalinnovation,usehasbeenlimited. Thisismostlyduetoalackofknowledgeabouttheseproducts,whichsuggeststhattheinvestmentindustrycoulddomoretoeducateinvestors(andraisesquestionsaboutwhethertheseinnovationstrulymeetinvestors’needs).

Food for thought

• How is your business responding to the growth in numbers of young investors and self-directed investors?

• Do you promote the use of specific investments, like exchange-traded products, to facilitate easy access to international markets?

Figure i: Investment structures used, proportion of adult population

Investments

ShareoftheAustralianadultpopulationholding:

Investmentsinselfmanaged

superannuationfunds*

Investmentsincompanystructures

Investmentsinfamilytrusts

Investmentsinapersonalcapacity

60% 51% 15% 10% 7%

*ThisishigherthantheATO’sSMSFstatisticalreport–December2016,whichindicatesthataround6%ofAustralianadults aremembersofSMSFs

Note: Optionsdonotsumto100%becausemanyinvestorsholdinvestmentsthroughmorethanonestructure;2017(n=4000)

1Itispossiblethatrespondentsmayhavemisinterpretedthequestionandareinpartreportinginternationalsharestheyholdindirectly.


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Atthesametime,andcontrarytoconventionalexpectations,younginvestorsalsoappearmoreriskaversethanolderinvestors–with4in5younginvestorspreferringguaranteedorstableinvestmentreturns.Theinvestmentindustrycouldseektobettertailortheirproductsandadvicetomeetthisneed,forexample,byconsideringcapitalprotectedproductsandprovidingeducationonriskmanagement.

On-exchangeinvestmentscollectivelycomprisethemostcommonlyheldinvestments–62%ofallinvestors(thatis, ofthe60%ofAustralianadultsthatinvest insomeway)holdtheminsomeform. Thisisfollowedbycashsavings(56%) andinvestmentproperty(37%).

Irrespectiveofhouseholdincomelevels,cash,shares,andpropertyarethemostcommonlyheldinvestmentsinAustralia,althoughwealthierhouseholdstendtoinvestrelativelymoreinpropertyandshares.

ThereisasignificantdomesticfocusinAustralians’investmentportfolios,with75%ofallshareowners(thatis,thoseinvestorsthatholdsharesofsomekind)onlyholdingdomesticshares,althoughtheymayhaveoverseasequitiesexposurethroughtheirinstitutionalsuperannuationfund.

Overthenext12months,moreinvestorsareplanningtomoveoutofcashthanotherinvestments.Thisislikelyaresultofrecordlowinterestratesandthelowrelativereturnsoncash.However,cashislikelytocontinuetobeoneofthemostpopularinvestmentchoices.

Why Australians invest Australianstypicallyinvestforthelongterm.Retirementandwealthaccumulationarefrontofmindforallagegroups,andindividualsareinvestinginproductsthatreflectthesegoals.

However,investingcanbeapathtoachievingotherlifeoutcomes.Forexample,asreflectedinthesurveyresultsandthecasestudyonWealthEnhancersPtyLtd(seeBoxAonpage34),youngerinvestorsmaybeincreasinglyconsideringinvestingasawaytosavefortheirhomedeposit.Theinvestmentadvisoryindustryisalreadyshiftingawayfrombusinessandproduct-ledoperatingmodelstocustomer-ledones.Byfocusingonbuildinglong-termclientrelationships,financialadviserscanhelptheirclientsinvesttoachieveabroaderrangeofoutcomesthroughoutdifferentlifestages.Thiswillrequirefinancialadviserstohaveabetterunderstandingoftheirclients'individualneeds.Makingbetteruseofcustomerdatawillbeanimportantenablertoachievingthisatscale.

Investors,onthewhole,feelconfidentinvestingincash,shares,andproperty, butquicklyloseconfidencewhenaskedaboutotherinvestments.Lessthan20%ofallinvestorsfeelconfidentinvestinginunlistedmanagedfunds,derivatives,andotheron-exchangeinvestments(suchasbonds,hybridsecurities,andexchange tradedfunds).

Therearelikelyanumberofreasonsforthis,whichmayincludethelingeringinvestorscepticismfromtheglobalfinancialcrisis.Itmayalsobepartlydrivenbyalackofunderstandingoftheseinvestmentproducts.Atthesametimeover30%ofinvestorsarenotawareoftheseproducts.Onewaytoimproveawarenessandunderstandingcouldbethroughimprovingfinancialeducation,includingthroughgreateruseoffinancialadvice.

Food for thought

• Does your business model cater for investors at all life stages?

• Are you developing low cost entry level products to cater for investors just starting out?

• How will you help educate young investors about the pros and cons of investing and of the value of professional financial advice?

Australian investors’ portfolios are not very diversified Diversificationisaboutaninvestor limitingtheirexposuretoanysingleasset(ASIC,2017a).However,Australianshaverelativelyconcentratedinvestmentportfolios,holdingprimarilycashsavings,shares,andinvestmentproperty.Thisonlyreflectsinvestors’holdingsoutsidetheirinstitutionalsuperannuationfund,and couldbebalancedoutdependingonhowtheirsuperannuationisinvested.Typically,superannuationassetsareprimarilyheldinequities(ABS,2017a).

Food for thought

• How can you help investors think about diversification?

• How can you engage investors to improve their awareness of and confidence with different financial products?


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Australians’ attitudes to risk Australiansareriskaversebyglobalstandards.Aglobalinvestmentsurveyfoundthatonly29%ofAustralianinvestorsarepreparedtoincreasetheirriskprofilefortheopportunitytoearnmoreincome,comparedto66%ofinvestorsglobally (LeggMason,2015).Thisstudyfindsthatnearly70%ofallAustralianinvestorsareseekingstable,reliableorguaranteedreturnsfromtheirinvestments(Charti).

Thisriskaversionisparticularlystrongamongyounginvestors,challengingthestereotypethatolderpeoplearemoreriskaversethanyoungpeople.Thisisalsoreflectedinyounginvestors’higheraversiontoloss(Chartii).Thismayberelatedtotheeconomicenvironmentthattheyoungercohortshavegrownupin–witnessingtheimpactoftheglobalfinancialcrisisintheirformativeyears.Atthesametime,relativelylowerfinancialknowledgeandfinancialexperiencemayalsobedrivingthishigherdegreeofcautiousness(Kanetal.,2016).

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart i: Investors attitudes to risk, proportion of investors

0

Accepthighervariabilitywiththepotentialforhigherreturns

Acceptmoderatevariabilityinreturns

Preferstable,reliablereturns

Preferguaranteedreturns

MaleFemale

Notes: n=2391

Overall

The rise of SMSFs Self-managedsuperannuationfunds(SMSFs)havebecomeincreasinglypopular.Thisstudyfoundthat30%ofinvestorsthatdonotcurrentlyuseanSMSFintendtosetoneupinthefuture,suggestinggrowthinthenumberofusersofthisstructure.

SMSFinvestorsarelong-termfocused– inlinewiththepurposeofsuperannuation.Theirtopinvestmentgoalissavingforretirement.Theyarealsomorelikelytouseprofessionaladvicethantheaverageinvestor,citingtheadvantagesoftailoredadvice,andthecomplexitiesoftaxandadministrativeproceduresastheirmainreasonsfordoingso.

SimilartoAustralianinvestorsmorebroadly,SMSFsareinvestedheavilyincash,shares,andproperty,thoughthecasestudyonClassLimited(seeBoxBonpage36)revealedthatsomeSMSFinvestorsarealsointerestedinalternativessuchascrowd-fundingandpeer-to-peerlending.

Food for thought

• How can you help investors think through whether an SMSF is right for them, including educating them on portfolio construction, administrative and regulatory requirements?

• Given the expected growth of SMSFs, can you afford not to be an SMSF expert?


7

Notes: n=2391

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart ii: Reaction to investment balance dropping 20%, proportion of investors

0

I'dinvestmorefundstotakeadvantageofthelowerunit/sharepricesexpectingfuturegrowth

ThiswasariskIunderstood–I'dleavemyinvestmentsinplaceexpectingperformancetoimprove

I'dbeconcerned,butwouldwaittoseeiftheinvestmentsimprove

I'dcutmylossesandtransfermyfundstomoresecureinvestmentsectors

Losesleep–SecurityofmycapitaliscriticalandIdon'tintendtotakerisks

Overall 35-44 75+45-54 55-6425-3418-24 65-74

Moreriskaverseinvestorsareexpecting (onaverage)lowerreturnsthanlessriskaverseinvestors.However,1in5ofthemoreriskaverseinvestorsareseekingdoubledigitreturns.Giventhatinterestratesarecurrentlyathistoricallows,theseinvestorsmaybeunrealisticallyoptimisticabouttheirreturnexpectations.

Diversificationisoneofthemosteffectivewaystomanageinvestmentrisk(ASIC,2017a),andgiventhelevelofcautiousnessamongstAustralianinvestors,itmaybeexpectedtobewidelyused.However,around40%ofallinvestorsreportthat theydonothaveadiversified investmentportfolio.

Althoughsomeinvestorswillhavemadeaclearchoicetohavemoretargetedportfolios,othersmaybeconstrainedbyalackofaccesstoorknowledgeofcertaininvestmentproducts.

Whiletheinvestmentindustryhastakenstepstoimprovepublicunderstandingofthebenefitsofdiversification,theremaystillbeaninsufficientunderstandingofdiversificationamongstinvestors.Thiscouldmeanthattheinvestmentindustryisstrugglingtoconnectwithinvestors.Theindustryneedstoconsidernewapproachestohelpinvestorsbetterunderstandandnavigatetheirinvestmentjourney.

Food for thought

• How can you help investors understand what returns are reasonable for different asset classes in the current environment?

• How are you helping investors think through the risk and return trade-off?

• How can you help investors to understand the benefits of diversification?


8

How Australians approach investing Financialadviserscanassistinvestorswithunderstandingandaccessingtheirinvestmentoptions.Newtechnologiesbeingintroducedinthisspacehavethepotentialtosubstantiallychangethefutureoffinancialadviceprovision.

Currently,around60%ofallinvestorsusesomeformofprofessionaladvice(fromafinancialplanner,full-servicestockbroker,accountant,orlawyer)tohelpguidetheirinvestmentdecisions.Financialadvice(fromafinancialplannerorfullservicestockbroker)ismorecommonlysoughtbyhigherincomeinvestors,althoughthedifferencesaremodest(Chartiii).

Ownresearch Financialplanner oradviser

Fullserviceoradvicestockbroker

Accountant LawyerFamilyandfriends

10%

20%

30%

40%

50%

60%

70%

0%

Chart iii: Use of professional advice, by household income

Lessthan$80,000 $80,000-$150,000 Over$150,000

Notes: Investorscouldselectmorethanoneanswer,n=2391

Investorssaidthatthetopreasonsthey useadvicearethattheadvicecanbetailoredtotheirpersonalcircumstances,andthatanadviserhelpsthembettermanageriskintheirportfolio.Forthosenotusingadvice,theirmainreasonsareapreferencetobeincontrol(‘do-it-yourself’investors),andthattheyarenotconvincedthatadviceaddsvalue.

Ofthese‘do-it-yourself’(DIY)investors,theymaynotbeaversetousingfinancialadvice,butitcouldbethatthecurrentformofadvicedoesnotsuittheirpreferences.Innovationssuchasdigitalwealthadvice(i.e.roboadvice),whichoffersadvisoryserviceson-demand,maybemoresuitabletothisgroupofinvestors.Forexample,OwnersAdvisorysuggeststhatmanySMSFusershavetakenupthisservice(seeBoxD onpage56).

However,whenaskedaboutroboadvice, themajorityofinvestorssaidthatthey didnotknowenoughaboutroboadvicetoconsiderusingit.Younginvestorsweremorepositiveaboutusingroboadvice thanolderinvestors.

Providersoffinancialadviceneedto betterdemonstratethevalueoftheirservicestoinvestors.Whiledevelopments intheindustryhavesoughttoincreasetheuseoffinancialadvicebyimprovingitsqualityandaffordability,convincing investorsofthevalueofadvicehasbeen anongoingchallenge.

Developmentsintechnologycanhelpadviserstoengageinvestorsthrough moreefficientandconvenientchannels. Thiswillcontinuetobeanimportantfocusfortheindustry.

Food for thought

• Are you thinking about how you can engage DIY investors?

• How can you demonstrate the value of advice to counter the perceptions of a lack of value and high cost?

• Are you considering the development of your own technology or partnering with other organisations (white labelling) to increase the range of lower cost investment options for investors?


9

Understanding potential investors Non-investorsarepotentialinvestors.Understandingthebarrierstheyface andtheirattitudestoinvestingwillhelp torealisethatpotential.

Manynon-investorsareyoung,andas suchhavelowerincomes.Of18-34yearoldswhodonotinvest,61%haveanannualhouseholdincomeoflessthan$80,000. Themainreasoncitedbyindividualsthathaveneverinvestedfornotinvestingwasthattheydidnotthinktheyhadenoughmoneytodoso.Threeinfiveindividuals thathaveneverinvestedthinkthattheyneedmorethan$5,000tobegininvesting.2 Astheincomesoftheseindividuals increase,theywillbemorelikelytoinvest.

Individualsthathaveneverpreviouslyinvestedarealsomoreriskaversethaninvestors.Oftheseindividuals,36%wouldwantguaranteedreturnsontheirinvestments,comparedtoaround18% forinvestors.Theseindividualsarealso lessfinanciallysavvythaninvestorsand havelowerawarenessofalternative financialproducts.

Non-investorsthathavepreviouslyinvestedwerenotaversetostartinvestingagainoncetheirpersonalcircumstancesallowed.Around84%oflapsedinvestorssaidthattheyplantostartinvestingagainatsomepoint,with41%ofthisgroupintendingtoinvestagainwithinthenexttwoyears.

Thebarrierstonon-investorsbecominginvestorsaregenerallysurmountable.Improvingfinancialliteracywillencouragemanytostartinvesting.Theinvestmentindustrycouldreviewthetypesof‘entry-level’productsandservicesthatare offeredtoneworreturninginvestors, andhowtocommunicatetheiravailability tothesegroups.

Conclusion InvestingisimportantforAustralians. Asthepopulationages,andpeoplespendmoretimeinretirement,wealthaccumulationisbecomingcriticalto supportstandardsofliving.

Asinglepersonseekinga‘modest’lifestyleinretirementrequiresalumpsumofatleast$370,000(withouttheagepension)investedandreturning7%p.a.(SuperGuide,2017).Forcouples,thislumpsumneedstobeatleast$400,000.Inordertohavea‘comfortable’retirement,householdswillrequiredoubletheseamounts(SuperGuide,2017,andASFA,2016).Compulsorysuperannuationwillnotalwaysbeenoughtomaintainindividuals’lifestyleexpectations inretirement.

Investingearlytoaccumulatewealthwillmakethedifferencebetweenamodestandacomfortableretirementinthefuture–andwhetherornotindividualswillneedtorelyontheagepension.

WhilethemajorityofAustralianadultsholdinvestmentsofsomekind,thereremainsasignificantminoritywhodonotinvest.Thereisabigopportunity–engagingnon-investorswouldsignificantlyincreasethepoolofinvestedfunds,aswellasassistingthosepeopletofurthertheirfinancialgoals.

2Excludesthoseindividualsthatdidnotknoworwereunsure.

Whilemostinvestorsfeelcomfortablewithshares,cash,andproperty,diversificationremainsanissueimpactingoverallrisk.Thismaybeconstraininginvestors’abilitytobestmatchtheirinvestmentbehaviourstotheirfinancialgoals.Furthermore,investorsmaynotbeoptimisingtheirreturnforthelevelofrisktheyaretakingon.

Currently,mostinvestorsinAustraliaareself-directed,andchoosetoconducttheirownresearch.Manyalsoprefertodefertotheirfamilyandfriends.Moreknowledgeableinvestorsmaymakemoreuseofawiderrangeofinvestmentsproducts.However,manyinvestorssimplydonotseethevalueinseekingprofessionalfinancialadvice.Thissuggeststhattheindustryneedstoreconsiderthewayinwhichitinteractswithinvestorstodemonstrateitsrelevanceasapartnerin aninvestor’sjourney.

Thismaybethroughadoptingbusinessmodelsthatarecustomer-ledandfocusingonhowitcanhelpinvestorsachievetheirdesiredoutcomesthroughoutdifferentlifestages.Aswellasadoptingdevelopmentsintechnology.Theimpactofongoingpolicychangealsohasthepotentialtoimprovethevalueandreducethecostoffinancialadvice.Allofthesedevelopmentshavethepotentialtoenhancethevalueoffinancialadvice forinvestors.

Thereisalsoanopportunitytosupportparticipationofnon-investorsbyraisingfinancialliteracythroughfinancialeducationinitiativesandgreateraccesstofinancialadvice,aswellasofferingentrylevelproductstoinvestorsthataretaking theirfirststeps.

Australiahasover11millioninvestors.Butthiscouldbehigher.Thebarrierstoachievingthisarenotinsurmountable.

Food for thought

• How can you engage individuals that have never previously invested or have lapsed?

• Do you offer investment products with low entry costs and appropriate risk profiles for new investors?


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11

TheAustralianShareOwnershipStudyisalongstandingASXinitiative.Firstconductedin1986,thestudyprofilesinvestorstoprovideanunderstandingoftheinvestmentlandscapeinAustralia:perceptions,attitudes,behaviours,anddemographicsofinvestors.

This2017AustralianInvestorStudy isthemostcomprehensiveiterationyet.Thisstudydiscussessomemegatrends andtheirimpactontheinvestmentlandscape,aswellasincludingmorecomprehensivequestionsaboutriskattitudes,familiaritywithalargerrangeofon-exchangeinvestments,useofdiversificationamonginvestors,andviews ofnewtechnologiessuchasroboadvice.

Thisstudyalsoidentifiessome foodforthoughtforthe investmentindustry.

Asurveywasconductedonline,withanationallyrepresentativesampleof4,000Australianresidentsansweringquestionsabouttheirinvestmentactivities.Afullexplanationofthesurveymethodology canbefoundinAppendixA.

Beyondthequantitativesurveyinsights,casestudieshavebeencompiledfromdiscussionswithsixindustryparticipants,whichprovideinsightsintoinvestingfromtheperspectivesofserviceproviders suchasfinancialadvisersand full-servicestockbrokers.

1.1 Definitions used in this report Thisreportfocusesonretailinvestors,specifically,thoseinvestorswhochoosetoinvestoutsideoftheirinstitutionalsuperannuationfund(thatis,superannuationheldinretail,industry,publicsector,andcorporatefunds),andthosewhotakeamoreactiveroleinmanagingtheirsuperannuation,suchasusersofself-managedsuperannuationfunds(SMSFs).

Inthisreport,investmentisdefinedasany'asset acquired for the purpose of producing income and/or capital gains for its owner' (ASX,2017c).Thisincludesinvestmentproperty,cashsavings,andfinancialproductsavailableonafinancialexchangesuchasshares,derivatives,bonds,andexchangetradedfunds.Italsoincludesinvestmentsheldthroughunlisted managedfunds(excludinginstitutional superannuationfunds).

1.2 The value of investing to individuals InvestmentisanimportantsourceofincomeforAustralians.Forthemedianhousehold,approximately20%ofweeklyincomecomesfrominvesting(ABS,2015).3Itprovidesawayforindividualstodiversifytheirsourcesofincome,managefinancialrisk,growtheirwealth,andplantheirretirement.AlmostallAustraliansareinvestorsthroughtheircompulsorysuperannuation,buttheirlevelofparticipationindecisionsaroundtheirinvestmentscandiffersignificantly.

1.2.1 Investment income and wealth creation Wealthcreationisaboutaccumulatingassets.Individualscanbuildtheirwealthmorequicklybysupplementingtheirwageswithreturnsfromtheirinvestments.

3Thisfigureincludeshouseholdsinthedrawdownphaseoftheirinstitutionalsuperannuation.

1.RetailinvestmentinAustralia

Key definitions

Adult population refers to all Australians aged 18 years and older.

Financial advice is advice provided by a financial adviser/planner or full-service/advice stockbroker. This is a subset of Professional Advice.

Lapsed investors are people who have held investments in the past, but do not currently do so.

Never invested are people who have never owned investments.

Non-investors comprise both Lapsed Investors and people that have Never Invested.

On-exchange investments is a term used in this report to refer to listed investments and other financial products available on a financial exchange and held through unlisted managed funds. This includes shares, derivatives, and other products such as bonds and ETFs.

On-exchange investors are people who hold some form of on-exchange investments.

Other investors are people who invest, but not in on-exchange investments. Instead they hold at least one of the following: commercial or residential investment property, cash or term deposits, or other investments that are not on-exchange investments.

Professional advice is advice provided by a financial adviser/planner, full-service/advice stockbroker, lawyer, or accountant.

Share owners are investors who hold shares, either domestically or internationally. This is a subset of on-exchange investors.


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Labourincomeisthemainsourceofincomeformostpeople(ABS,2015),butitisrelativelydifficultforpeopletoadjustthisincomequickly.Whilesomeindividualsmayworklongerhoursthisislimitedbythenumberofhoursinaday(andotherphysicallimits).Otherindividualsmay seekouthigherpayingjobs,butcould beconstrainedbytheirqualifications andexperience.

Ontheotherhand,theirmoney(suchassavingsaccruedovertime)maybeeasiertoreallocatetomoreproductiveuses.Individualscanmakeachoicetoallocatetheirmoneyintodifferentassetswithincomegeneratingorcapitalgrowthpotential.Effectively,investingisaboutmakingthemostoftheirmoney,andbydoingsohelpingthembuildwealth morequickly.

Wealthcreationisimportantforsustainingqualityoflife,particularlyinretirement.Afterretiring,individualsrelyontheirsavingsastheirsourceofincome,andhavingaccumulatedmorewealthintheirworkingyearsmeansamorecomfortableretirement.Similarly,wealthaccumulationenablesindividualstoachievefinancialgoalsthroughoutlife,whethertheybehomeownership,payingforchildren’seducation,travelling,orsomethingelseentirely.

1.2.2 Risk management and diversification Withoutinvestmentincome,wages/salarieswouldbetheonlysourceofincomeformany(ABS,2015).Ifpeoplestopworkingorretirewithouthavingaccumulatedsufficientsavings,theymayhavetorelyongovernmentsupport,e.g.agepension.Maintainingtheirdesiredstandardoflivingcouldbechallengingiftheyrelypurelyonwelfarepayments.Investmentallowspeopletodiversifytheirincomestreams,protectagainstlossofasinglesourceofincome,andmaintainahigherstandardoflivinginretirement(ASIC,2017a).

Diversificationisaboutanindividual investormanagingtherisk/rewardtrade-offoftheirinvestmentportfoliotoachievemoreconsistentreturnsovertime,bylimitingtheirexposuretoanysingleasset(ASIC,2017a).Thisconceptofriskmanagementappliestoanindividualwithlabourincomewhoalsoholdsinvestmentpropertyanddividend-payingshares.Thefactthatthisindividualhasmultiplesourcesofincomemeans thattheymaybelessimpactedby aneventsuchasjobloss.

Atthesametime,aninvestorthatspreadstheirfundsacrossawiderangeofassetswilllimittheimpacttotheirportfoliofromthelossofvalueofanyoneasset.Thatis,bydiversifying,individualscanreducethechancethatthevalueoftheirentireinvestmentportfolioisimpactedbya singleevent.

1.3 The value of a well-functioning financial exchange Financialexchangesplayanumberofimportantrolesintheeconomy,includingbeinganinformationsourceandaidingefficientpricediscovery,andaplatformofexchange.Theyprovideindividualswithaccesstocapitalmarkets,assistwithensuringresourcesareallocatedefficiently,givebusinessesacosteffectivewaytoraisecapital,andallowgovernmentstoincreasethedepthofthebondmarket.

Theyalsohaveinstitutionalvalues, providingaframeworkandsetofguidelinesforensuringfinancialtradingisdoneinawaythatmanagesindividuals’riskandstabilityofthesystem.

Australiahaswelldevelopedfinancialmarketswhichofferinvestorsaccessto awiderangeofinvestmentproducts. Thesemarketshavedemonstratedeconomicresilienceandadaptability, makingAustraliaasafe,low-riskenvironmentinwhichtoinvest(Austrade,2017).Morebroadly,theAustralianfinancialservicessectoralsocontributestoeconomicgrowth.In2015,itcontributed$140billiontoGDP(TheTreasury,2016).

Individualscanparticipateinfinancialmarketstodiversifytheirincome,managetheirrisks,andaccumulatewealth.Individualsarealsoabletoaccessinvestmentopportunitiesthattheymayotherwisebeunawareoforunabletoaccess.Forexample,sophisticatedfinancialproductssuchasoptionsandhybridsecuritiesaremadeaccessibleto individualsthroughfinancialmarkets.

Byprovidingtransparencyaroundthespectrumofinvestmentoptionsandthehistoricalreturnandriskofeachoption,exchangesfacilitatedecision-makingbyinvestors.Thiscancontributetoimprovingtheallocationofcapital,asfundsarelikelytobedirectedtotheirmostproductiveuse.Improvingtheproductivityofcapitalcontributestoeconomicgrowth (Musonera,2008).

Exchangesalsocreatesubstantialvalue forbusinesses.Benefitsincludeaccesstoawiderpoolofinvestors,increasedabilitytoraiseequity,andreducedtransactioncostsofcapitalraisingachievedthrough aplatform.


13


14

In2016,theAustralianequitymarketgenerallyoutperformedotherdevelopedequitymarketsglobally(RBA,2017a).Atthetimeofwriting,theS&P/ASX200wasatitshighestlevelsincepriortotheglobalfinancialcrisis.Tradingvolumeshaveincreased23%overthe12monthstoMarch,andcontinuetogrow(ASX,2017a).Thedomesticequitymarketcapitalisation isatahistorichigh,reaching$1.8trillion inMarchthisyear(ASX,2017b).

Atthesametime,significantglobaleventshaveinfluenceddomesticmarketsoverthelastyear.TheannouncementsofdecisionsbyBritishvoterstoleavetheEuropeanUnionandbyUSvoterstoelectPresidentTrumpcoincidedwithincreasedtradingvolumesonASX.

Thesetwo,largelyunexpected,developmentsarekeyexamplesofa globalenvironmentcharacterisedbysignificantuncertainty.Geopoliticaldevelopmentsarelikelytocontinueto beafocusforinvestorsinthenear future(InvestmentMagazine,2017).

Theworldofinvestingisfastpacedandrespondstochangequickly.Astheunderlyingenvironmentevolves,sotoo dotheinvestmentspeoplechooseand thewaytheyinvest.

Megatrendssuchasthelowinterestrateenvironment,policychanges,digitalinnovation,anddemographicshiftsareinfluencingthewaythattheAustralianinvestmentmarketoperates.

Thischapteroutlinesthesechangesandhowtheywillinfluenceinvestors’approachtoinvesting.

2.1 Low interest rate environment Globally,interestratesareathistoricallows,evenatnegativelevelsinsomecases (seeChart2.1).

2.Theinvestment landscapeischanging

0

1

2

3

4

5

6

7

8

-1

Chart 2.1: Selected policy interest rates (%)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

UK USA Canada EU Japan Australia

Source: RBA


15

SincetheGFC,Australianmonetarypolicyhasbeeneasedinanattempttostimulategrowth,leadingtoaperiodofsustainedlowinterestrates.Priortothe2008financialcrisis,Australia’scashrateaveraged6.4%.Since2008thishasdroppedto3.1%,andiscurrentlyatarecordlowof1.5%.Chart2.2showsthatinterestratesonbanktermdepositshavefallensignificantlyoverthelast20years,reducingthereturnoncashinvestments.

Thelowinterestrateenvironment hastwomainimplicationsforinvestors.

Firstly,lowinterestrateshaveanimpactonreturnsacrossarangeofinvestments,notjustcash.CreditSuisseanalysisshowsthatlowinterestratesareassociatedwithlowfutureequityreturns(Buttonwood,2013).Asaresult,investorsmaybeforcedtoseekoutriskierinvestmentsinordertomaintainthereturnstheyareusedtointheirportfolios(Yeates,2016).

Secondly,lowerreturnsmeanthatfeesasaproportionofreturnsarehigher–essentiallyithasbecomemoreexpensivetoinvest.Therefore,investorsmayseekout low-feeinvestmentopportunities,forexampleinexchangetradedinvestments(suchasExchangeTradedProducts)ratherthanunlistedmanagedfunds.Alternatively,someinvestorsmayturntofinancialadvicetohelpthemnavigatethisnewenvironment.

2.2 Policy change TheAustralianfinancialsystemhasbeensubjecttoextensivereviewoverthepastfewyears.Whiletheheadlineshavebeendominatedbybankingsectorregulation,Australianpolicymakershavebeenmorewidelyfocused,withinitiativesthathaveimplicationsforfinancialadvisers,recipientsoffinancialadvice,andinvestors.

Opportunitiesandchallengeshavebeencreatedforbothinvestorsandfinancialadvisersthroughthesereforms.Achangingpolicylandscapecreatesuncertaintyandinvestorsmayturntoprofessionalstohelpthemnavigateit.Conversely,someofthesereformsaimtoempowerinvestorsandimprovefinancialliteracy,andthereforeadvisersmaybeusedlessbyinvestorsorindifferentwaystointhepast.

Akeystreamofreformhasaimedtoimprovethequalityofadviceandfacilitateaccesstofinancialadvice.TheFutureofFinancialAdvice(FoFA)legislationwasintroducedin2012andmandatedin2013,withaspectsofitrefinedin2016.FoFAaimedtoimprovethequalityofadvicewhilebuildingtrustandconfidenceinthefinancialadviceindustrythroughreducingconflictsofinterestandbetteraligningtheinterestsoftheadviserwiththeclient.Atthesametime,thereformsalsoaimedtoincreasetheavailabilityoflow-costsimpleadvicetomakefinancialadvicemoreaccessibletothepublic(Treasury,2010).

0

2

4

6

8

10

12

14

16

18

Chart 2.2: Australian banks' term deposit rates (% per annum)

1982

Source: RBA

Notes:Averagesofthefivelargestbanks'rateson$10,000termdeposits,exceptpriortoApril2001,whentheaveragesareforthefourlargestbanks.

1986 1990 1994 1998 2002 2007 2011 2013

1month 3months 6months 1year 3years


16

The2014FinancialSystemInquiry(FSI)alsorecommendedfurtherreformstostrengthenconsumeroutcomes,andhadaviewthatthecurrentframeworkwasnotsufficienttodeliverfairtreatmenttoconsumersaroundtheperformanceoffinancialproductsandservices.Inparticular,theFSIidentifiedaneedtoaddressshortcomingsindisclosureand financialadvice.

TheGovernment(2015)respondedto theFSIandcommittedtoanumberofreforms,including:

• Raisingthestandardsoffinancialadvisersbyintroducinglegislationwhichprovidesaprofessionalstandardsframework;

• Improvingthecustomerfocusoffinancialproductdesignandmarketbyintroducinglegislationtomakeissuersanddistributorsoffinancialproductsaccountablefortheirofferings;

• DevelopinganewproductinterventionpowerfortheAustralianSecurities&InvestmentsCommission(ASIC)thatcouldbeusedtomodifyproductsorremoveharmfulproductsfrom themarket;and

• Enablinginnovativedisclosureforfinancialproductsbyintroducinglegislationtofacilitategreater useoftechnologyinfulfilling disclosurerequirements.

Morebroadly,ASIChasfocuseditssupervisoryeffortsonconcernsaroundconductandculture,inthecontextofconsumerandinvestorprotectionandmarketintegrity.Thebehaviourof“gatekeepers”–suchaspromotersofinvestmentproducts–willbepaidparticularattention.Investorresponsibilityremainsa“cornerstone”offinancialmarkets,andimprovingdisclosureforconsumersisa keygoalfortheindustryandregulators.

Suchreformsareaimedatimprovingconsumerprotectioninfinancialmarkets.Theywillimpactthewaythatinvestorsreceivefinancialproductinformationandobtainfinancialadvice,andcouldencourageindividualstoinvest,aswellaschangingwhatproductstheychoosetohold.Theaimofthereformsistoimproveinvestorconfidenceinfinancialmarketsandtoincreasetrustin,andaccessibilityof,financialadviceinAustralia.Someoftheseinitiativesmayhelpaddresssomeofthebarrierstoindividualsseekingfinancialadvice(Section4.2).Ontheotherhand,thestricterrequirementsaroundqualificationsoffinancialadvisersandapproachtoprovidingadvicecouldhaveimplications forthesupplyoffinancialadvisersand thepricetheychargeforadvice.

Otherdevelopmentshavesoughttoimproveinvestoraccesstoinvestmentproducts.Forexample,theAsiaRegionalFundsPassport(ARFP)establishesamultilateralframeworktofacilitatecrossbordermarketingoffundsacrosscountriesinAsia.TheARFPisexpectedtocommencebytheendof2017,andwillmeanthatlicencedmanagedfundmanagersareabletotradeacrossnotjustAustralia,butalsoNewZealand,Singapore,theRepublicofKorea,Japan,Thailand,andthePhilippines(APEC,2017).

ThiswillprovideinvestorswithgreateraccesstoinvestmentoptionsintheAsiaregion,andshouldenablegreaterinvestmentflowsbetweenparticipatingcountries.Theincreasedcompetitionfrominternationalexposurecouldalsomeanthatlocalfundmanagersbecomemorecompetitive,increasingefficiencyacross thefinancialmarket.

TheParliamentrecentlypassedlegislationtoenablesmallandmediumbusinessestoseekcrowd-sourcedequityfunding.Thelegislationwillallowunlistedentitiestoadvertisetheirbusinessplansonlicensedcrowdfundingportals.Thiswillopenthemarketuptoretailinvestors,whereitwaspreviouslyonlyavailableto‘sophisticatedinvestors’,andsetsoutvariousinvestorprotectionprovisionsincludinganinvestorcapof$10,000ayear.


17

Thisreformwillfurtherexpandtheuniverseofinvestmentproductsavailabletoinvestors,andmayhaveimplicationsforinvestorsallocatingmoreoftheirportfoliooutsideoftraditionalinvestments.Italsobroadensthescopeofinformationandproductsthatadvisersneedtobeacross.

Overallthesepolicychangesarelikelytoofferinvestorsmorechoiceandvariabilityinhowandwhattheychoosetoinvestin.

2.3 Digital innovation Digitalinnovationisoccurringatanincreasinglyrapidpace,facilitatingmoreefficienttrading,fasterandbetteraccesstoinformation,andcheaperandwideraccesstoglobalmarkets.

MobilephonesarebeingusedtotradesharesinAustraliamorethaneverbefore.Infactin2015,6outof10Australianonlineinvestorsusedamobiledevicetotrade(InvestmentTrends,2015).Onlinetradingplatformssuchasnabtrade,CommSec,WestpacOnlineInvesting,andHSBCOnlineShareTradingallowcustomerstousetheirphonestobuyandsellshares,viewtheirportfolios,createwatchlists,andobservemarketmovements.Accordingtothissurvey,onlinetradingplatformsarethemostfrequentlyusedtradingmethodamongstAustralianinvestors(seeSection4.3).

Thesedevelopmentsarechangingthewaythatinvestorsconducttheirtradingactivity,andalsohowtheyaccessadvice.TheefficiencyofthesedigitaltechnologiesandAustralians’propensitytoadoptsuchinnovationsmayleadtoashiftawayfromuseofmoretraditionalmethodsoftradingandadvice.

Australiansarestrongadoptersoftechnology,forexample,86%ofAustralianhouseholdsownsmartphones(DAE,2016a),makingAustraliathesecondmostconcentratedsmartphonemarketintheworld(SMSGlobal,2016).Thisisoftenusedasameasureofopennesstotechnologicaladvance,andmayimplythatdomesticinvestorsaremorewillingtoadoptfinancialtechnology(‘fintech’)innovationssuchasroboadvice.

Roboadviceusescomputingprograms togeneratecustomisedinvestmentadvicebasedoninformationaboutanindividual'sportfolio.Thiscanbeanattractive,lowercostalternativetoinperson professionaladvice.

However,thereisuncertaintyamongstsomeinvestorsastothereliabilityoftheadvicegenerated,andusingfinancialadviserswillremainanimportantpartoftheinvestmentprocess.Furthermore,whileroboadvicemaybeabletomoreefficientingeneratingtransactionaladvice,andrecommendsoundinvestments,itreliesontheinvestorknowingwhatinvestmentsupporttheyneed.RoboadviceisdiscussedinmoredetailinSection4.3.2.

Withdigitalinnovationcomesanewconcern:cybersecurity.Astheeconomybecomesmorereliantoncomputingsystems,theimportanceofprotectingthosesystemsfromattackincreases.Cybercrimeisnowthesecondmostreportedtypeofeconomiccrimeinbusiness(behindassetmisappropriation)andisrising(Layer8Security,2016).Thistrendcouldslowthepaceofadoptionofnewtechnologies.

Overall,digitalinnovationislikelytohavemoreofanimpactonthemethodsoftrading,andthewaysinvestorschoosetoaccessadviceabouttheirinvestmentsthanonthetypesofinvestmentstheyhold.

2.4 Demographic shifts Australia’spopulationisageing.TheproportionoftheAustralianpopulationaged65andoverhasalmostdoubledfrom8%in1964to15%in2016(AIHW,2015&ABS,2017b).Decliningfertilityandfallingmortalityratesmeanthatthistrendisexpectedtocontinue,andthenumberofpeopleagedover65willagaindoubleby2055(Treasury,2015a).

Onaverage,olderAustraliansarewealthierandinvestmorethanyoungerAustralians.4 Thisgroupisbecomingalargershareofthepopulation,andtheyhavedifferentpreferencesaroundhowtheyreceiveadvice,executetheirtrades,andwhat theychoosetoinvestin.

TheageingpopulationhasimportantimplicationsfortheriskprofileofAustralianinvestors.AstheGovernoroftheReserveBankofAustraliaputit,'Older workers tend to become more risk averse when it comes to investment decisions…' (Lowe,asquotedinPickering,2016).RiskattitudesinAustraliawillchangeasthepopulationages,andthiswillhaveabigimpactoninvestmentbehaviour.However,resultsfromthisstudyfindtheopposite,atleastinthecontextofinvesting(Chapter5).Eitherway,theageingpopulationwillchangetheoverallmixofinvestmentsheldbyAustralians.

4Averagehouseholdwealthforthoseaged65andoverwas$900,000in2012,and$710,000forthoseaged35-55(GrattanInstitute,2014)


18

Intheshortterm,anageingpopulationcouldcounteracttheeffectofdigitalinnovationonthewayinvestorsobtainadvice,asolderpeoplearemorelikelytousein-personfinancialadvicethannewtechnologiessuchasroboadvice.However,thistrendcouldlessenasthecurrentgenerationofyoung,technology-savvyinvestorsage.

TheageingpopulationshouldmeanthequantityofinvestmentandtradinginAustraliawillincrease.OlderAustralianshaveexperiencedthelargestincreaseinwealthofanyagegroupoverthepastdecade.Householdsaged65andoverhaveexperienced2.7%annualgrowthinwealthoverthepastdecade,while55-64yearoldhouseholdshaveexperienced1.9%annualgrowthoverthesameperiod(GrattanInstitute,2014).

Food for thought

• Do you have a good understanding of how these changes will impact investors?

• Is your business model geared towards supporting investors as the investment environment and their preferences change?

DemographicchangesintheAustralianpopulationshouldseethetypesofinvestmentsindividualsholdchange,andalsothewaytheyobtainadvice.Forexample,findingsfromthisstudyshowthatolderpeoplearemorelikelytorelyontheirownresearchregardinginvestmentthanyoungpeople.Thissuggeststhatasthepopulationages,useoffinancialadvicedecreases(astheyoungercohortwhoarenotconfidentenoughtorelyontheirownresearchmatureandgainconfidence).Alternativelyitcouldmeanthatfinancialadvisersadapttheirroletobecomelessprescriptive,morelikeasoundingboard totestideaswithorageneratorofideas oninvestmentoptions.


19

Investor profiles

Next generation Wealth accumulators Retirees

Top 3 financial goals 1. Accumulatingwealth

2. Savingforahomedeposit

3. Savingfortravel

1.Planningforretirement

2.Accumulatingwealth

3.Supplementingcurrent orfutureincome

1.Planningforretirement

2.Supplementing currentorfutureincome

3.Accumulatingwealth

Risk appetite 81%areseekingguaranteed orstablereturns

67%areseekingguaranteed orstablereturns

60%areseekingguaranteed orstablereturns

Return expectations Expectonaveragea8.2% returnontheirinvestments

Expectonaveragea9.2% returnontheirinvestments

Expectonaveragea8.0% returnontheirinvestments

Mix of investments • 44%holdcash

• 31%holdshares

• 25%holdinvestmentproperty

• 22%holdotheron-exchangeinvestments,includingderivatives

• 53%holdcash

• 51%holdshares



• 68%holdcash

• 58%holdshares



Use of financial advice 37%usefinancialadvice 44%usefinancialadvice 52%usefinancialadvice

Top 3 reasons for using financial advice

1.Obtainadvicetailoredto theirpersonalcircumstances

2.Getinvestmentideas

3.Helpthemdiversifytheirportfoliosandminimiserisk



3.Gainaccesstoinvestments theywouldotherwisenot beawareoforabletoaccess



3.Helpthemnavigatetheadministrativeandtaxrequirementsofinvesting

Use of robo advice 15%woulduseroboadvice,28%wouldnot,(therestareunsure)

13%woulduseroboadvice,29%wouldnot(therestareunsure)

4%woulduseroboadvice,41%wouldnot(therestareunsure)

Trading methods of investors that have transacted in the past 12 months

1.42%usedanon-advice brokeroronline tradingplatform

2.36%usedanadvice orfull-servicebroker

3.24%usedafinancialplanner







Notes:‘Nextgeneration’isdefinedas18-24yearoldinvestors;‘Wealthaccumulators’isdefinedas25-59yearoldinvestors;and‘Retirees’isdefinedtobeinvestorsaged60andover.


20

3.Whoisinvesting?


21

Three-fifths(60%)ofAustralianadultsdirectlyholdinvestmentsofsomesort(includingthosenotavailableonafinancialexchange)outsideoftheirinstitutionalsuperannuationfund.Thischapterexamineswhotheseinvestorsare,aswellasprovidingsomeinsightintowhytheremaining40%ofAustralianadultsdo notinvest.

Beforedivingintothedetail,thischapterbeginsbyreviewingsomeofthehigh-leveltrendsininvestmentownership.

3.1 Changes in investment ownership in Australia Ownershipofon-exchangeinvestmentshasremainedbroadlyconsistentsincethe2014study.Therehasbeenanincreaseinyounginvestorshowever,whohavebeenengagingmorewithon-exchangeinvestments.Theproportionof18-24yearoldswhoholdon-exchangeinvestmentshasdoubledinthepastfiveyears.Therehasalsobeenanincreaseininternationalshareownership inthistime.

Around37%oftheadultpopulation heldon-exchangeinvestmentsasofFebruary2017,upslightlyfrom2014.Ownershipwashigheramongmenthanwomen,with44%and31%holdingon-exchangeproductsrespectively.Therateofon-exchangeinvestmentownershiphasbeenfairlystableoverthepastfiveyears,followingasignificantdeclineafter theearly2000s(Chart3.1).

10%

20%

30%

40%

50%

60%

Chart 3.1: Ownership of on-exchange investments, proportion of adult population

Notes: 1986(n=1304),1988(n=2637),1991(n=3018),1994(n=3253),1997(n=1174),2000(n=1200),2002(n=2401),2004(n=2402),2006(n=2405),2008(n=2400), 2010(n=2400),2012(n=2000),2014(n=4009),2017(n=4000)

01985

9% 9%

16%

21%

34%

52%50%

53%

47%

41% 42%

38%36%

37%

1990 1995 2000 2005 2010 2015 2020


22

3%

4%4% 4%

5%

8%

6% 6%

7%

Thesignificantincreaseinownershipinthe1990smaybepartlyexplainedbythelargeinitialpublicofferings(IPOs)overtheperiod.Forexample,theCommonwealthBankin1991,Qantasin1993,andTelstrain1997(RBA,1997).TheGlobalFinancialCrisis(GFC)in2007-08shookinvestorconfidenceglobally,andsomeinvestorsmaystillberecovering.Atthesametime,recordlowinterestrateshaveledtoincreasedpropertyinvestmentandhighpropertypricesincapitalcities(ABS,2017c).

ASXdataindicatethat,sincethe laststudy(in2014),thenumberofETFs onissueinAustraliahasincreasedby61%,to203.Overthesameperiod,theproportionoffundsundermanagementallocatedtoglobalequityhasincreased by7.7percentagepointsto39.2%.

Ownershipofinternationalshares,boughtdirectlythroughoverseasexchanges,hasreturnedtoitspre-GFCpeak(Chart3.2).Thismaypartlyreflectimprovedappetiteforoverseaslistedinvestmentsaswellasbetteraccess.However,investingdirectlyininternationalsharescanbeexpensive,andmanyindividualsinsteadinvestthroughmanagedfundsorexchangetradedfunds(ASIC,2016a).5

1%

2%

4%

5%

3%

6%

7%

8%

9%

Chart 3.2: International share ownership, proportion of adult population

Notes: 2017(n=4000)

0%2000 2001 2003 2005 20072002 2004 2006 2008 2009 2010 2011 2012 2013 2015 20172014 20182016

5Againstthisbackground,itispossiblethatsomerespondentsmayhavemisinterpretedthequestionandareinpartreportinginternationalsharestheyholdindirectly,forexample,throughexchangetradedproducts(ETPs).


23

3.1.2 Change in investor profile YoungAustraliansareinvestingmore.Between2012and2017theproportionofinvestorsagedbetween18and24yearsoldthatholdon-exchangeinvestmentshasdoubledtojustover20%,andtherehasbeena15percentagepointincreaseintheproportionof25-34yearoldsinvestinginon-exchangeinvestmentsoverthesameperiod(Chart3.3).Theagedistributionofinvestorshasbecomeflatter,theproportionofeachagerangeinvestingiseveningout.

Theshareofadultsthatownon-exchangeinvestmentshasbeenbroadlyunchangedformoststatesandterritoriesoverthepastdecade(Chart3.4).On-exchangeinvestmentrateshavehistoricallybeen(andcontinuetobe)highestinNewSouthWales(42%in2017),theAustralianCapitalTerritory(40%),andWesternAustralia(40%),andlowerintheNorthernTerritory(26%),Queensland(32%),and Tasmania(33%).

Notes: 2017(n=4000)

10%

20%

30%

40%

50%

60%

Chart 3.3: Age profile of on-exchange investors, proportion of adult population

02008 2010 2012 2014 2016

18-24 25-34 35-44 45-54 55-64 65-74 75+


24

*DataareunavailableforACTin2008andNTin2010.

Notes:2017(n=4000)

Notes:2017(n=4000)

10%

20%

30%

40%

50%

60%

Chart 3.4: Incidence of on-exchange investors by location, proportion of adult population

0

2008 2010 2012 2014 2017

WAVICTASSAQLDNT*NSWACT*

In2017justover40%ofadultslivinginmetropolitanareaswereon-exchangeinvestorscomparedto32%ofadultsinregionalareas (seeChart3.5).Theshareofadultsincapitalcitiesthatheldon-exchangeinvestmentshasreturnedtoitsdecadehigh.

25%

30%

35%

40%

45%

Chart 3.5: Incidence of on-exchange investors by metro/regional split, proportion of adult population

20172010 2012 20142008

Capitalcities Regionalareas


25

Notes:2017(n=605)

Investorsusingthismethod Investorsnotusingthismethod

3.1.3 Changes in investor behaviour Non-advicebrokersandonlinetradingplatformshaveremainedthepreferredtradingmethodforinvestors,andhavebecome morepopularsince2014(Table3.1).

Table 3.1: Changes in method of trading, proportion of on-exchange investors who have traded in the last 12 months

Method 2014 2017

Non-advice broker or online trading platform e.g. nabtrade

An advice or full-service broker e.g. Bell Potter

Through a financial planner/adviser

Purchased directly via a prospectus of a company listed on a stock exchange

Through an employee share scheme

Other

58% 65%

15% 22%

16% 17%

17% 11%

8% 4%

4% 1%

Therehasbeenanincreaseintheshareofinvestorsusingbothnon-advicebrokersandtradingplatforms,andfull-servicebrokers comparedto2014.Therehasbeenadeclineintheshareofinvestorsdirectlypurchasinglistedinvestmentsthroughacompanyprospectusandemployeeshareschemes.Digitalinnovationislikelyinfluencingthistrend.Technologicaladvanceshavemadeiteasierformoreinvestorstodirectlyparticipateintradingthroughonlineplatformssuchasnabtrade.

Whilechangestothesurveymeanthatdirectcomparisonwiththe2014resultsarenotpossible,manyinvestorsinon-exchangeinvestmentscontinuenottouseadvicefromprofessionals(Chart3.6).Otherinvestorsusemorethanoneformofadvice;forexample,13%ofinvestorsselectedboth‘financialplanner/adviser’and ‘ownresearch’.

Food for thought

• How is your business responding to the growth in numbers of young investors and self-directed investors?

• Do you promote the use of specific investments, like exchange-traded products, to facilitate easy access to international markets?


26

Chart 3.6: Investment advice sought by investors, proportion of on-exchange investors

2017

2014

0%

0%

10%

10%

20%

20%

30%

30%

40%

40%

50%

50%

60%

60%

70%

70%

Ownresearch

Personalnetwork(Friends,Family,Colleague)

Financialplanneroradviser

Reading/Listeningtoexpertcommentators

Familyandfriends

None/Donotseekadviceaboutinvestments

Accountant

Financialplanners/advisers

Lawyer

Stockbrokerswhoprovideadvice

Solicitors/Lawyers

Other

Wealthmanagementadvisers

Other


Accountants

Notes:2017(n=1494)


27

3.2 The profile of the Australian investor Three-fifths(60%)ofAustralianadultsdirectlyholdinvestmentsofsomesort(includingthosenotavailableonafinancialexchange)outsideoftheirinstitutionalsuperannuationfund.Thissectionexaminesbothon-exchangeandotherinvestors, whotheyareandhowtheyinvest.

3.2.1 What investment structures do investors use? TherearefourmainstructuresthroughwhichAustraliansholdinvestments:

Figure 3.1: Investment vehicles used, proportion of adult population

Investments

ShareoftheAustralianadultpopulationholding:

Investmentsinselfmanaged

superannuationfunds*

Investmentsincompanystructures

Investmentsinfamilytrusts

Investmentsinapersonalcapacity

60% 51% 15% 10% 7%

*Figureislikelytobeoverstatedduetosamplingerror.TheATO’sSMSFstatisticalreport–December2016indicatethataround 6%ofAustralianadultsaremembersofSMSFs

Note: Optionsdonotsumto100%becausemanyinvestorsholdinvestmentsthroughmorethanonestructure;2017(n=4000)

• Investmentsheldintheirpersonalcapacity,eitheraloneorinjointnames

• Investmentsheldinacompanystructurewheretheyareadirectorofthecompany

• Investmentsheldinafamilytrust

• Investmentsheldinaself-managedsuperannuationfund(SMSF),wheretheyareatrusteeormemberofthefund.

Aroundhalf(51%)ofAustralianadultschoosetoinvestintheirpersonal capacity(Figure3.1).


28

Notes: n=4000

10%

20%

30%

40%

50%

60%

70%

Chart 3.7: Use of investment structures by age, proportion of adult population

0

18-24 25-34 35-44 45-54 55-64 65-74 75+

Company(7%)SMSF(15%) Familytrust(10%)

3.2.2 Which Australians are investing? TheproportionofAustralianswithpersonalinvestmentsincreaseswithage,whileuse ofotherstructurestypicallyreflectstheir usefortaxplanningandother purposes(Chart3.7).

Ofinvestorsholdinginvestmentspersonally,younginvestorsaretheleastprominent(Chart3.7).However,investingisbecomingmorecommonamongyoungpeople(Section3.1.2).

However,theindustrymaynotbeadaptingtothepreferencesofthisgroupquicklyenough.Younginvestorsaremoredigitallysavvy,andwhiletheadventofdigitalwealthadvice(i.e.roboadvice)offersopportunitiesforbothinvestorsandfinancialadviserstotakeadvantageofdigitalinnovation,take-upgenerallyhasbeenlimited(Section4.3.2).Thisismostlyduetoalackofknowledgeabouttheseproducts,whichsuggeststhattheinvestmentindustrymaynotbedoingenoughtoeducateinvestorsaboutthem(andraisesquestionsaboutwhethertheseinnovationstrulymeetinvestors’needs).

Atthesametime,andcontrarytoconventionalexpectations,younginvestorsalsoappearmoreriskaversethanolderinvestors–with4in5younginvestorspreferringguaranteedorstableinvestmentreturns(Section5.2).Financialproductdevelopersandfinancialadviserscouldseektobettertailortheirproductsandadvicetomeetthisneed,forexample,byconsideringcapital-protectedproducts.

Thecharacteristicsofyounginvestors arediscussedfurtherinSection3.2.3, andinBoxA.

Personal(51%)


29

Theproportionoffamilytrustinvestorsdeclineswithage:17%of25-34yearoldshaveafamilytrust,butjust4%ofthose65andabovedo.Thissuggeststhatfamilytrustsare,insomecases,beingusedasameansofachievingamoretaxeffectiveoutcomeforthefamilybyredistributingincometofamilymembersthathavelowerincomes,suchasyoungerfamilymembers.

TheuseofSMSFsisrelativelystableacrossallagegroups,althoughthismaybecapturingyoungerinvestorswhoaremembersofafamilySMSF.Chart3.8showstheATO’srecordofuseofSMSFsbyagecomparedwithwhatwasfoundinthissurvey.ThissurveyfoundahigherproportionofyoungpeoplewithSMSFsthanwhatisrecordedbytheATO.6

Source: ATO;surveyfindings

5%

10%

15%

20%

25%

30%

Chart 3.8: Use of SMSFs by age

018-24 25-34 35-44 75+45-54 55-64 65-74

ATO ASX

6ThissamplingerrorislikelythereasonSMSFuseisoverstatedinthissurvey.

Companystructuresaremostoftenusedtorunabusinessalthoughinsomecircumstancesmayalsobeusedforinvestmentpurposes.Thismaypartlyexplainthefactthatthesestructuresaremorecommonlyusedamonginvestors ofworkingage.


30

3.2.3 Next generation Theproportionof18-24yearoldindividualsinvestinghasdoubledinthepastfiveyears.AnannualsurveyofmillennialattitudesbyDeloitteshowsthatwhilein2015and2016,millennialswerepessimisticaboutthefuture,andgettingmoreso,thistrendhasflippedin2017andmillennialsarenowcautiouslyoptimisticaboutthefuture(Deloitte,2017).7Astheiroverallconfidenceintheeconomycontinuestoimprove,thismayopenthedoortomoreyoungpeoplebeingopentoinvesting.

Nonetheless,despitethisrecentgrowthinparticipationtheyremainunderrepresentedasinvestors;thisagegrouprepresentsaround12%ofthetotalpopulationbutunder9%ofallinvestors.

Againstthisbackground,itisusefultounderstandthecharacteristicsofindividualswithinthisagegroup.Thissectionidentifiessomeofthecharacteristicsofthese younginvestors.

MostyounginvestorsareatleastYear12graduates,withalargesharebeingtertiaryeducated(Chart3.9).

Chart 3.9: Highest education qualification, 18-24 year old investors

Year12/Higherschoolcertificate

Primaryschool

Tradescertificate/Diploma

Year10/Schoolcertificate

UniversityDegree

PostGraduateDegree

Don'tknow/Unsure

0% 5% 10% 15% 20% 25% 35%30% 40%

Notes:n=207

7TheDeloitteMillennialsSurveydefinesamillennialassomeoneborninorafter1982.Thiscapturesawidercohortthanthe18-24year oldsreferredtointhissectionas‘younginvestors’.


31

Chart 3.11: Top employing industries, 18-24 year old investors

Chart 3.10: Employment status, 18-24 year old investors

Otherservices

Retailtrade

Educationandtraining

Professional,scientific,andtechnicalservices

Administrativeandsupportservices

Artsandrecreationservices

Accommodationandfoodservices

Rental,hiring,andrealestateservices

Healthcareandsocialassistance

Construction

Transport,postal,andwarehousing

0% 2% 4% 6% 8% 12%10%

Notes:n=207

Notes:n=207

Inpaidemployment/self-employed Notinpaidemploymentorself-employed

Ofthoseyounginvestorsthatareinpaidemploymentorself-employed,mostworkinthetradeorprofessional servicesindustries(Chart3.11).

59%

41%

Mostinvestorsinthisagegroupareinsomekindofpaidemploymentorareself-employed(Chart3.10).


32

5%

10%

15%

20%

25%

Chart 3.12: Gross household income per year, 18-24 year olds

0 Lessthan $20,000

$20,000-$39,999

$40,000-$59,999

$60,000-$79,999

$80,000-$99,999

$100,000-$149,999

$150,000-$199,999

$200,000-$299,999

Over $300,000

Don'tknow /Unsure

Reflectingtheearlystageoftheirworkinglife,individualsinthisagegrouptypicallycompriselowerincomehouseholds. Onaverage,younginvestorshavehigherhouseholdincomescomparedtonon-investors(Chart3.12).

Notes: Totalinvestors(n=207);totalnon-investors(n=485)

Shareoftotalinvestors Shareoftotalnon-investors


33

10%

20%

30%

40%

50%

60%

Chart 3.13: Value of total household assets, 18-24 year olds*

0

Asindividualsmatureandtheirincome andwealthgrows,theywillbemorelikely toinvest.Nonetheless,thisdoesnotmeanthat18-24yearoldindividualscouldnotinvestmoreatthisstage.Professionaladviserscanplayaroleineducatingyounginvestors.However,only37%ofyounginvestorsusefinancialadvice,compared to45%ofallinvestors(seeSection4.2).

Oftheyounginvestorsthatdonotuse anyprofessionaladvice,thetoptwomost citedreasonsweretheybelievedthat:

1. Advicewastooexpensiveforthem toobtain;and

2. Theirinvestmentwastoosmallto needadvice.

AccordingtoGeorgeLucas,managingdirectorofAcornsGrow,millennialsdo notunderstandtheimportanceofengagingwithfinancialprofessionals(Lucas,2017).Theytendtopreferonlineengagement,andwhiletheyarenotcurrentlylookingforstrictfinancialguidance,theywilllookformoreadviceastheygetolder.Itisimportantforadviserstoadapttodigitalplatformsnow,sothatmillennialswillbemorecomfortableseekingadvisersovertime.

WealthEnhancersPtyLtd,afinancialadvisoryfirmwithafocusonyoungerinvestors,hasfoundthatyounginvestorsarecostconscious–manyfeelthatadviceistooexpensive,particularlythosewithsmallerportfolios.BoxAcontainsfurtherviewsfromWealthEnhancersPtyLtd.

Under $100,000

$100,000- $299,999

$300,000- $499,999

$500,000- $749,999

$750,000- $999,999

$1,000,000- $1,999,999

$2,000,000ormore

Don'tknow /Unsure

*Excludesvalueofthefamilyhome,carandinstitutionalsuperannuationbalance


Shareoftotalinvestors Shareoftotalnon-investors

Food for thought

• Does your business model cater for investors at all life stages?

• Are you developing low cost entry level products to cater for investors just starting out?

• How will you help educate young investors about the pros and cons of investing and of the value of professional financial advice?

Inlinewiththedistributionofhouseholdincomesacrossthisagegroup,younginvestorsaretypicallywealthierthan non-investors(Chart3.13).


34

Box A: Wealth Enhancers Pty Ltd

Wealth Enhancers is a financial advisory firm catering predominantly to younger investors. For their clients, getting value is front of mind and they are conscious of the cost of advice. Many feel that they may not have enough money available to invest to warrant getting advice on how to invest well.

Among those using advice, there are a wide range of financial goals. Some are saving for education, a wedding, starting a business, while others are looking for wealth accumulation or income replacement in order to start a family. However, for almost everyone, investment is about feeling more secure, having a buffer.

Wealth Enhancers considers there to be three main barriers to investing for Gen Y: a lack of confidence, negative prior experiences, and a misunderstanding as to the amount of money required to get started.

• Many young people are not confident in their ability to invest well, and for those who think advice is too expensive, this may not be easy to overcome

• Some young investors may have invested before, but were overly speculative, and subsequently lost money. This experience has been discouraging to them, and made them nervous to invest again

• Many Gen Y investors have a misconception that investment must be done with a large sum of money, and do not understand that they can start building their portfolio with small amounts

Advisers at Wealth Enhancers have also noticed that many Gen Y investors are open to the idea of borrowing to invest. At the same time, some are also using equity investments as a short term tool in order to save for a deposit and enter the housing market.

In Wealth Enhancers’ experience, robo advice has not been something that Gen Y investors have been well aware of. Wealth Enhancers have suggested robo advice as an alternative source of advice to those investors that are likely to value its cost-effectiveness.


35

3.2.4 The rise of SMSFs SMSFsallowinvestorstohavegreatercontrolovertheirsuperannuation,somethingthatmanyinvestorswant(seeChapter5).ThenumberofSMSFsinAustraliaisgrowingrapidly,andissettocontinuetodosointothefuture.InDecember2012,therewerearound491,000SMSFsinAustraliacomparedtoover585,000today(ATO,2017).MoreinvestorswilluseSMSFsinthefuture. Some30%ofinvestorsthatdonot currentlyuseanSMSFintendtoset oneupinthefuture.

Why do investors use SMSFs? SMSFinvestorshavelongtermgoals broadlyinlinewiththepurposeofsuperannuation–58%ofSMSFinvestorschoosesavingforretirementasagoal, and55%selectedwealthaccumulation.Chart3.14presentsabreakdownofthe topfivegoalsamonginvestorsthatuseSMSFs(respondentswereaskedtorank uptothreegoalsinorderofimportance).

ResearchbyAMPCapitalshowsthat 56%ofSMSFtrusteesestablishedtheirSMSFinanefforttohavemorecontrol overtheirinvestments,and32%establishedthemsothattheycouldchoosespecificsharestoinvestin(AMP,2017).

ThedesireforgreatercontrolovertheirinvestmentportfolioisacommoncharacteristicofinvestorsthatuseSMSFs.Assuch,SMSFinvestorsareengagedinvestors,andusefinancialadviceforguidanceratherthaninstruction.

ClassLimited(BoxB),whosesoftware isusedbyprofessionalstoadviseSMSFs, hasalsofoundthatSMSFinvestorsareusingtheflexibilityofthisstructureto investinalternativeproducts.Thiscouldbearesultofthelowinterestrateenvironment,whereinvestorsaresearchingforwaystoearnhighreturnsoutsideoftraditionalinvestmentoptions.

Notes: n=607

5%

10%

15%

20%

25%

30%

Chart 3.14: Top 5 goals of SMSF investors, proportion of SMSF investors

0

Rank1 Rank2 Rank3

Retirement Wealth accumulation

Supplementing income

Travel Rainyday saving


36

SMSF investors’ profile Asdiscussedearlierinthischapter,SMSFinvestorsarefairlyevenlysplitfromanageperspective,andaremorelikelytobeestablishedbypeoplewithhigherhouseholdincomeandassets.

TheriskprofileofSMSFinvestorsissimilartothatofinvestorsmorebroadly. MostSMSFinvestorsareseekingstable,reliablereturnsasopposedtovariability.

Chart3.15showsthemake-upofSMSFportfolios.Cashisthemostcommonlyheldasset(51%ofSMSFinvestorsreportholdingcashintheiraccount),followedbysharesandthenotheron-exchangeinvestments.

Box B: Class Limited

Class Limited creates innovative software used by accountants and financial advisers to service SMSFs. Its software is currently used to administer over 120,000 portfolios across Australia.

Class cites the desire for control as the number one reason that investors use SMSFs.

An SMSF opens the door to more flexible uses of an investor’s superannuation balance. For example, Class says that some SMSFs are used by clients to invest in their own business.

Class says that SMSF investors are bold and open to alternative investment opportunities. One example is a recent trend observed by Class that some SMSFs are investing in peer-to-peer (P2P) lending platforms. On average, when SMSFs invest in these platforms, they invest far more than other investors do – in many cases five times as much as a typical investor. This trend has been so strong that Class has begun to partner with P2P platforms (Rate Setter, and SocietyOne–underway) in order to make it easier for SMSFs to invest.

Class notes that SMSF clients typically look for advice rather than instruction, as these are engaged investors. At the same time they are also looking for value. In this context, Class expects that technology such as robo advice will become increasingly popular amongst SMSF investors.


37

Chart 3.15: Investment products held in SMSFs, proportion of SMSF investors

0% 10% 20% 30% 40% 50% 60%

Cash

Shares

Property

Otheron-exchangeproducts

Unlistedmanagedfunds

Notes: n=607‘Otheron-exchangeproducts’isdefinedinChapter1inthedefinitionsbox,aswellasinAppendixB.

Whilethesurveyfoundthat15%ofAustralianadultshaveanSMSF,thisislikelyanoverestimate.TheAustralianTaxationOffice estimatesthenumberofSMSFsinAustraliaataround585,000,withjustover1.1millionAustraliansmembersofanSMSF(ATO,2017).

Thisnumberislikelytocontinuetogrow.OfthoseinvestorsthatdonotuseanSMSF,whenaskedabouttheirfutureintentions, 30%ofthisgroupplantosetoneupinthefuture.

Who advises SMSF investors? Chart3.16showsthatSMSFinvestorsaremoreinclinedtouseprofessionaladvicethaninvestorsmorebroadly,andwhile doingtheirownresearchisstillthemostpopularoption,fewerSMSFsrelyonthisthaninvestorsmorebroadly.8

Notes: Respondentscouldselectuptothreeanswers,n=2391

5%

10%

15%

20%

25%

30%

35%

40%

Chart 3.16: Advice channels used by SMSF investors, proportion of SMSF investors

0

SMSF Otherinvestors


Financialplanner oradviser

Accountant Lawyer FamilyandFriends

Idomyownresearch

8Professionaladvicereferstopaidadvicefromafinancialadviser,afullservicestockbroker,alawyer,oranaccountant.


38

ThegreateruseofadvicemaybeduetothemorecomplexnatureoftheadministrativeandtaxationrequirementsofestablishingandmanaginganSMSF.InvestBluePtyLtd(afinancialadviser)foundthattheirclientsoftenrequireassistancewiththeadministrativesideofinvesting.BoxChasmoredetailonthetypesofSMSFinvestorsthatseekadviceandwhattheytypicallyinvestin.

Whenquestionedonwhytheyusefinancialadvice,SMSFinvestorsnominatedthreemainreasons:9

• 25%said–“Myadviserprovidesmewithadvicetailoredtomypersonalcircumstances”

• 23%said–“Myadviserhelpsmenavigatetheadministrativeandtaxrequirementsofinvesting”

• 22%said–“MyadvisergivesmeaccesstoinvestmentsIotherwisewouldn’tknowaboutorhaveaccessto”

9Financialadvicemeanseitherusingafullserviceoradvicestockbroker,orafinancialplanneroradviser.

Box C: Invest Blue Pty Ltd

Invest Blue is a financial advice practice with 14 offices located in rural and coastal locations across Queensland and NSW. They provide financial advice to people at all stages of life, including SMSF investors.

Among their clients, managing administrative compliance is the main advice sought. Few SMSFs are completely self-run, most use some form of advice, either for navigating compliance or to get investment choice advice.

Invest Blue advisers work with three broad types of SMSF investors: young accumulators, pre-retirees, and retirees. Each of these types of investors have different goals and therefore different investment portfolios.

Young accumulators in their late 30s or early 40s are typically high-income individuals (or couples). Given they have a fair amount of time before they need to access their super balances, they are typically advised to invest in growth assets. Because of their age they are unlikely to have large superannuation balances, so diversification is a challenge. Invest Blue uses a range of on-exchange products to help them diversify within their constraints, such as exchange-traded funds.

Pre-retirees invest more conservatively than young accumulators. This is because they have less time available before they begin to access their super balance, and as such they are advised to invest around 30% of their funds in defensive assets. A common investment among this group is commercial property, particularly among the self-employed. Some choose to purchase the premises from which their business is run.

Retirees are advised to invest for moderate growth – with around half growth assets and half defensive assets. This is to minimise the risk that their balances will drop at the stage of life where they rely, at least to some extent, on their SMSF for income. Fixed income assets such as corporate bonds are commonly used. Given the low interest rate environment, term deposits (which used to make up a large part of their portfolios) are now not recommended.

Invest Blue sees technology playing an important role in advising all three of these groups in the future. It will improve the customer experience, such as by improving real-time reporting, and allowing investors to check their balance at their convenience. At the same time it could lower the cost of advice.


39

Future SMSF users OfthoseindividualsthatdonotcurrentlyuseanSMSF(investorsandnon-investors),30%areplanningtoestablishan SMSFinthefuture,13%ofthemwithinthenextyear.Itmaybeusefultounderstandwhothesepeopleare.

Most(65%)ofthesepotentialSMSFusersalreadyinvestelsewhere,eitherinon-exchangeproductsorotherinvestmentproducts.

Theyaresplitevenlyalonggenderlines,butdovarybyage.AsChart3.17shows,potentialSMSFinvestorsaregenerallyyounger, 36%ofthemareunder30.GiventhatSMSFsareestablishedbeforeretirementitisnotsurprisingsofewofthesepotentialSMSF investorsareover60,butitisnoteworthythatthereissignificantinterestamongthoseatveryearlystagesoftheircareer.

Notes: n=1017

5%

10%

15%

20%

Chart 3.17: Age of potential SMSF investors, proportion of non-SMSF investors

0 18-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-74 75+


40

5%

10%

15%

20%

25%

Chart 3.18: Income of potential SMSF investors, proportion of total

0 Lessthan $20,000

$20,000-$39,999

$40,000-$59,999

$60,000-$79,999

$80,000-$99,999

$100,000-$149,999

$150,000-$199,999

$200,000-$299,999

Over $300,000

Don'tknow /Unsure


PotentialSMSFinvestors Allsurveyrespondents

Food for thought

• How can you help investors think through whether an SMSF is right for them, including educating them on portfolio construction, as well as administrative and regulatory requirements?

• Given the expected growth of SMSF use, can you afford not to be an SMSF expert?

3.3 Understanding potential investors Non-investorsarepotentialinvestors.Understandingthebarrierstheyfaceandtheirattitudestoinvestingwillhelptorealisethatpotential.Themajorityofnon-investors(54%)statethatalackofmoneyisthereasontheyhaveneverinvested.Thisisfollowedby33%ofnon-investorsquotingalackofconfidenceintheirability.Thisindicatesthatlackoffundsandconfidencearekeycharacteristicsoftheseinvestors.

Manynon-investorsareintheyoungeragegroups,andassuchdonotyethavetheincometoinvest.Ofthe18-34yearoldswhodonotinvest,61%haveanannualhouseholdincomeoflessthan$80,000.Onequarterofnon-investorsareundertheageof35,comparedwithjust11%over65.Itislikelythatmanyoftheseyoungpeoplewillinvestinthefuture,astheirincomesgrow,providededucationandadviceareavailabletothemwhentheyarereadytobegin.Thissectionfocusesonwhatdrivesnon-investorsandformerinvestorsin on-exchangeproducts(whowerefer toaslapsedinvestors),andhowthey differtoinvestors.

PotentialSMSFinvestorsare,onthewhole,mediumincomeearners(Chart3.18).RelativetotheAustralianaverage,potentialSMSFinvestorsareslightlylesslikelytobelowincomeearners(39%earnlessthan$80,000relativeto43%ofthepopulation)andslightlymorelikelytobemediumorhighincomeearners.


41

3.3.1 Awareness, knowledge and attitude Non-investorshavedifferentfinancialgoalstoinvestors.Whileinvestorsarefocusedonthelongterm(savingforretirement,wealthaccumulation,supplementingincome),non-investorsareinterestedintheshorterterm.Topgoalsincludetravel,payingoffdebt,andsavingforarainyday(Chart3.19).

10%

20%

30%

40%

50%

Chart 3.19: Top financial goals among non-investors, proportion of non-investors

0% Payingoffdebt RainydaysavingTravel Homedeposit Retirement

Notes: n=1609

Total Rank1 Rank2 Rank3

Theirawarenessofalternativeinvestmentproductsislowercomparedtoinvestors(Chart3.20).Almosthalfofallnon-investorswerecompletelyunawareofalltheseproducts.Ofthosenon-investorsthatweresomewhataware,theorderofawarenessissimilartothat ofinvestors.

Chart 3.20: Awareness of on-exchange investments, proportion of never invested

Government/CorporateBonds

Noneoftheseproducts

Options

Futures

InfrastructureFunds

A-REITs

HybridSecurities

LICs

InstalmentsorOrdinaryWarrants

ETFs

mFund

0% 10% 20% 30% 40% 50%

Notes: Askedonlyofthosewhohaveneverinvested,n=1203


42

Individualsthathaveneverinvestedaremoreriskaversethanthosethathave(Chart3.21).Overonethird(36%)ofthosewhohaveneverinvestedwouldseekguaranteedreturnscomparedwith18%ofinvestors.Onepossibledriverofthisisthatinvestors(andlapsedinvestors)haveabetterunderstandingofinvestingandarethereforemorecomfortable,makingthemlessriskaversethanthosewhohaveneverinvested(Kanetal.,2016).

Whenaskedaboutadvice,58%ofthosewhohaveneverinvestedsaidthattheywouldseekprofessionaladvicetohelpmanagetheirinvestmentsiftheyweretoinvest,andonly13%saidtheywouldnot.

Chart 3.21: Attitudes to risk, by investment group

Highvariabilityofreturns

Guaranteedreturns

Moderatevariabilityofreturns

Stablereturns

0% 10% 20% 30% 40% 50%

Notes: n=4000

Investors Lapsedinvestors Neverinvested


43

Manyindividualsthathaveneverinvestedsaidthattheythoughtitcosttoomuchtobegininvesting.Whenaskedhowmuchtheyactuallythoughttheywouldneedtobegininvesting,thedistributionwasfairlyeven.Around15%oftheseindividualseachsaidthattheywouldneedlessthan$2,000,between$2,000and$5,000,andbetween$5,000and$10,000.Justonequarterofnon-investorsexpectedtoneedmorethan$10,000tobegininvesting.Another25%oftheseindividualsdidnotknoworwereunsure.Youngindividualsthatneverinvestedalsoprovidedanswersinlinewiththisbroadertrend–mostthoughttheywouldneedlessthan$10,000.Thereareopportunitiesheretobotheducateandinformthesepotentialnewinvestorsofproductsthataresuitableforthosewithoutalargeamountofcapital.

Whenaskedwhylapsedinvestorsnolongerinvest,mostsaidthatitwasduetoachangeintheirpersonalcircumstances(Chart3.23). Thiscouldincludeanythingfromachangeinemploymentstatustoanincreasedneedfordisposablefundsafterhavingchildren.

Chart 3.22: Reasons for never having invested, proportion of never invested

0% 10% 20% 30% 40% 50% 60%

Ithinkitcostsalottobegininvesting

I'dneedtotakeprofessionaladviceanddon'tknowhowtofinditorhowmuch itcosts

Thevolatilityofthesharemarket andeconomyconcernsme

Idon'thaveenoughmoneytoinvest

I'mnotinterestedininvesting

I'mnotconfidentthatIknowenough aboutinvestingtomakethebestdecisions

Idon'thaveenoughtimetodoresearchormanageinvestments

Notes: n=1203

Other

Couldnotaffordadvice

Governmentpolicychanged

Lackoftime

Marketvolatilityconcerns

Investmentgoalschanged

Lostmoneyinthemarket

Personalcircumstanceschanged

Chart 3.23 Reasons for ceasing investment, proportion of lapsed investors

0% 10% 20% 30% 40% 50% 60%

Notes: n=406

3.3.2 Barriers to investing Thosewhohaveneverinvestednominatedanumberofreasonsfornotinvesting(Chart3.22).Themainreasonsareaperceivedlackoffunds,alackofconfidence,anduncertaintyastohowtogetadvice.Encouragingly,alackofinterestwasrankedverylowonthelist.


44

Around84%oflapsedinvestorssaidthattheyplantostartinvestingagainatsomepoint,with41%ofthisgroupintendingtoinvestagainwithinthenexttwoyears.Whattheyneedinordertobegininvestingagainisfewerfinancialcommitments,confidenceinfuturereturns,andmarketstability(Chart3.24).Thesurveydidnotaskwhatthesefinancialcommitmentswere,buttheycouldincludearangeofthingssuchaspayingofftheirmortgageorotherdebt,ortheirchildren’seducationexpenses.

Chart 3.24: What lapsed investors need before they will invest again, proportion of lapsed investors

0% 10% 20% 30% 40% 50% 60%

Confidenceinfuturereturns

Marketstability

Moretimetoresearch

Stablegovernmentpolicy

Fewerfinancialcommitments

Moreknowledgeaboutinvesting

Notes: n=406

Thesefindingssuggestthatthebarrierstonon-investorsbecominginvestorsaregenerallysurmountable.Formorethanhalfofnon-investorsalackoffundsiswhatpreventsthemfrominvesting,butimprovedfinancialliteracymayhelpalargeminoritytostartinvesting.Additionally,beingsureofhowtogetfinancialadvicemayalsoincreaseinterestininvestingforsome.Theinvestmentindustrycouldreviewthetypesof‘entry-level’productsandservicesthattheyareoffering,andwhethertheyaresuitablefornewinvestors.

Food for thought

• How can you engage individuals that have never previously invested or have lapsed?

• Do you offer investment products with low entry costs and appropriate risk profiles for new investors?


45


46

Investmentinon-exchangeinvestments ismorecommonthaninvestmentinanyotherproduct(includingcashsavings)– 62%ofinvestorsholdsomeformof on-exchangeinvestment.Ofthese,40%haveactivelytradedinthepastyear.Investorsareincreasinglyusingtechnologiessuchasonlineplatformstobuyandsell,howeverthereisstillasignificantportionofinvestorswhoprefertousefull-servicestockbrokersandothermoretraditionalmeansoftransacting.Thischapterlooksat whatAustralianschoosetoinvestin,and providesanoverviewofattitudestoadviceandmethodsoftradingamongstinvestors.

4.1 Australian investors’ portfolios are not very diversified On-exchangeinvestmentsareheldbymoreinvestorsinAustraliathananyotherinvestment.Almosttwothirds(62%)ofinvestorsholdsomeformofon-exchangeinvestment.Thiscouldbepartlyattributabletothelowinterestrateenvironment(Section2.1)–holdingcashisnotveryrewardinginthecurrentmarket.

Chart 4.1: Investments held by investors, proportion of investors

On-exchangeinvestments

Cash

Property


Other

0% 10% 20% 30% 40% 50% 60% 70%

Notes: n=2391

4.WhatareAustralians investinginandhow?

Sharesarebyfarthemostcommonlyheldon-exchangeinvestment;just24%ofinvestors(or14%oftheadultpopulation)ownother on-exchangeinvestments.Ofotheron-exchangeinvestments,listedinvestmentcompaniesarethemostcommonproducttoinvestin,followedbyexchangetradedproducts(Chart4.2).


47

Chart 4.2: Other on-exchange investments held by investors, proportion of investors

0% 1% 2% 3% 4% 5% 6% 7%

ListedInvestmentCompanies(LICs)

ExchangeTradedProductse.g.exchangetradedfunds(ETFs)

Other,e.g.Gold

AustralianRealEstate InvestmentTrusts(A-REITs)

InfrastructureFunds

mFund

Optionsand/orFutures

HybridSecurities,e.g.FloatingRateNotes

GovernmentbondsorCorporatebonds

Notes: Includesdomesticandinternationalholdings;n=561

Theuseoftheseproductshasincreasedfromthe2014tothe2017survey.LICsforinstancearenowheldby3.9%ofthepopulation,morethandoublethe2014figureof1.1%.Overthesameperiod,thenumberofLICsoperatingonASXhasincreased88%to96(ASX,2017d).

Notallon-exchangeinvestorsactivelybuyandsell.Themajority(60%)havenotboughtorsoldintheprevious12months.Theseinvestorsmaybeemployingpassiveinvestmentstrategies,suchasholdingontoselectedsecuritieswiththepurposeofachievingcapitalgrowthoverthelong-term.Thisbroadlyalignswiththelongtermfocusoftheirinvestmentgoals(seeSection5.1).

Chart4.3showsthatthecompositionofinvestorportfoliosarenotheavilyinfluencedbyhouseholdincome–withcash,shares,andpropertybeingthemostcommonlyheldassets.Higherincomehouseholdstendtoinvestmoreinsharesandproperty,possiblyderivingtaxbenefitsfromholdingpropertyinparticular.

Thisconcentrationofinvestors’portfoliosonlyreflectstheirholdingsoutsidetheirinstitutionalsuperannuationfund,and couldbebalancedoutdependingonhowtheyinvestintheirsuperannuationfund. Ontheotherhand,superannuationassetsareprimarilyheldinequities(ABS,2017a).


48

Notes: n=2391

10%

20%

30%

40%

50%

60%

70%

Chart 4.3 Investments held by household income, proportion of investors

0

Cash Shares Property Otheron-exchangeinvestments

Lessthan$80,000 $80,000-$150,000 Over$150,000

Unlistedmanagedfund Other


49

Notes: Respondentswereaskedtorankuptothreeconsiderationsinorderofimportance,n=2391

10%

20%

30%

40%

50%

60%

70%

Chart 4.4: Top considerations for investors, proportion of investors

0

Overall Rank1 Rank2

Return Personal circumstances

Tax effectiveness

Flexibility ofcapital

Advice received

Impact onpension

OtherDiversificationRisk

Rank3

Whenmakinginvestmentdecisions,returnandriskremainthemostimportantconsiderationsforinvestors(Chart4.4).

Chart4.4showsthatforinvestors,taxeffectivenessisnotatopconsideration. Ofthosewhoselectedittheypredominantlyrankeditthird(asaminorconsideration).Thisisinterestinggiventhepolicydebatearoundtaxationrequirementswheninvesting(forexamplediscussionaroundcapitalgainstaxdiscounts).

Thesefindingssuggestthattheappeal ofinvestmentslieintheirrisk/returnprofiles,ratherthantaxconcessions.

4.1.2 Domestic or overseas focus AsdiscussedinChapter3, internationalshareownershipisrising, buton-exchangeinvestmentsarestill largelyhelddomestically.Forinstance, 75%ofshareownersholdonlydomesticshares,whilejust11%holdonlyinternationalshares(Chart4.5).

Further,someofthis11%couldbetheresultofoverseascompaniespurchasingAustraliancompanieswhereinvestorswere

alreadyholdingshares(forinstancethe saleofOptustoSingtelin2001).Migration isanotherfactorwhichcouldaccountforthe11%internationalownership,ifpeoplehavemovedtoAustraliaalreadyholdingsharesfromothercountires.Atthesametime,somepeoplemaybereporting theirndirectownershipofinternationalsharesthroughETFs.


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Onaverage,thereturnssoughtbythoseinvestingoverseasareonlyslightlyhigherthanthoseinvestingdomestically(8.8%comparedto8.5%).Thenarrowdifferenceinexpectationsmayreflectthatwhileoverthepast30years,theannualreturntoAustralianshareshasexceededthatofglobalshares(9.1%p.a.comparedwith7.0%p.a.),thisgaphasclosedoverthepast10years:annualreturnsonAustralianshareshavebeen4.5%p.a.overthepast 10yearscomparedwith4.7%globally10 (FidelityInternational,2016).

4.1.3 Investors’ outlook Overthenext12months,alargerproportionofinvestorsareplanningtomoveoutofcashthanotherinvestments.Thisisconsistentwithpredictionsinthelowinterestrateenvironment.Lowreturnisdrivinginvestorstolookbeyondcashforinvestmentopportunities.Shares,cash,andpropertycontinuetobethemostpopulardestinationforinvestorfunds(Chart4.6).

Notes: n=4000

5%

10%

15%

20%

25%

30%

35%

Chart 4.5 Domestic and international holdings of on-exchange investment products, proportion of adult population

0

Both Domesticonly Internationalonly

Shares Other

10Calculatedlookingattheaverageannualreturnsoverthepast10and30yearsoftheS&P/ASX200,AllOrdinariesTR,andMSCIWorldIndexNR.Thecalculationassumesdividendreinvestmentovertheperiod.


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Chart 4.6: Future intentions, proportion of investors

0% 20% 40% 60% 80%

Cash

Otheron-exchangeproducts

Shares

Property


100%

Notes: n=2391

Investorbuymore Maintaincurrentholdings Investlessorreduceholdings Donotholdandnotintendingtoinvest

Investorswereaskedwhethertheyplannedtochangetheirholdingsofeachinvestmentproduct,andthosewhoanswered‘yes’wereasked,'why?'.Inresponse,mostinvestorscitedchangingpersonalcircumstancesandadesiretoalterrisklevelsintheirportfolios(Chart4.7).ThisisinlinewiththefindinginChart4.4,whichshowsthetopreasonsforchangingholdingsallrelatetoreturn,risk,andpersonalcircumstances.

Inaddition,investorswhoansweredthattheydidnotholdcertainproductswereaskedwhynot.Chart4.8showstheirresponses; lackoffundswasthemostcommonreasongiven.

Chart 4.7: Top reasons for planning to change holdings over the next 12 months, proportion of those investors who have plans to change

0% 5% 10% 15% 20% 25% 30% 35%

Personalcircumstanceschanged

Toalterriskofportfolio

Toalterliquidityofportfolio

Returnishigher/lowerelsewhere

Investmentgoalschanged

Notes: n=1470

Chart 4.8: Reasons for not investing, proportion of those investors who have no plans to invest

0% 5% 10% 15% 20% 25% 35%30% 45%40%

Lackoffunds

Unsureofrisk/return

Notfamiliarwithhowitworks

Doesnotmatchinvestmentgoals

Notimetoresearch

Notes:n=1460

23%

20%

18%

9%

6%

39%

30% 53%

43%10%

11%

52%

46% 30%6%

13%

51% 8% 18%

14%


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Thesefindingssuggestthatmoreeducationisneededamongstinvestors,andthataccesstoadviceneedstobeeasiertofindanduse.Beingunsureoftherisk/returnofaninvestment,orunfamiliaritywithhowitworkssuggestsalackofunderstanding.

10%

20%

30%

40%

50%

70%

60%

Chart 4.9: Source of investment advice by household income, proportion of investors

0%

Notes:Respondentscouldselectmorethanoneoption,n=2391

Lessthan$80,000 $80,000-$150,000 Over$150,000

Ownresearch Financialplanneroradviser

Family andfriends

Accountant Fullserviceoradvicestockbroker

Lawyer

4.2 Use of advisory services Some61%ofinvestorsusesomeformofprofessionaladvicewheninvesting(Chart4.9).Thisincludesadvicefromafinancialplanneroradviser,astockbroker,anaccountant,oralawyer.Only45%ofinvestorsusefinancialadvice(thatis,afinancialplannerorfullservicebroker).

Higherincomehouseholds(incomeover$150,000)areslightlylesslikelytorelyonfamilyandfriends,andslightlymorelikelytouseafinancialplanner.Onepotentialfactorbehindthisisthathigherincomehouseholdsbelieveitisworthspending themoneyonafinancialplanner, andhavethemeanstodoso.

Food for thought

• How can you help investors think about diversification?

• How can you educate and engage investors to improve their awareness of and confidence with different financial products?

Ontheotherhand,lowerincomehouseholdsarelesslikelytorelyonfinancialplanners,accountants,andstockbrokers,perhapsduetoaloweramountofinvestmentanddiversification.

Amongthosewhodoseekfinancialadvice,49%saidtheygotoaprofessionaladvisertogetinvestmentadvicetailoredtotheirpersonalcircumstances(Chart4.10).Othercommonareaswhereadvicewassoughtincludeddiversifyingandminimisingrisk(40%),andassistancewithnavigatingtheadministrativeandtaxationrequirements ofinvesting(37%).


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Chart 4.10: Top reasons for seeking professional advice, proportion of those investors who use financial advice

Providestailoredadvice

Helpsmediversifyandminimiserisk

Navigatingtheadminandtaxrequirements

Accesstonewinvestments

GivesmeideaswhichIthenusetodo

myownresearch

0% 10% 20% 30% 40% 50%

Notes: n=1077

Oftheinvestorsthatdonotuseprofessionaladvice,themostcommonlycitedreasonisthattheyprefertobeincontroloftheirinvestments(seeChart4.11).Ofconcernfortheadviceindustryaretheperceptionsofalackofvalue(overhalf56%),highcosts(39%)andinvestmentsbeingtoosmalltoneedadvice(32%).

Notes:n=948

Prefertobe incontrol

Notconvinced adviceaddsvalue

Investmentistoosmalltoneedadvice

Notsurehow togetadvice

Tooexpensive

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart 4.11: Reasons for not seeking professional advice, proportion of those investors who do not use advice

0


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4.3 Use of transaction services Buyingandsellingthroughanon-advicebrokeroronlinetradingplatformwasthemostcommonmethodoftransactionoverthelast 12months.AsChart4.12shows,justover40%ofon-exchangeinvestorshaveactivelyboughtorsoldinthelastyear,andofthose, 65%usedanon-advicebroker/onlinetradingplatform.11

Chart 4.12 Number of trades in the past 12 months, proportion of those on-exchange investors who have traded in the past 12 months

Notes: n=1494

10%

20%

30%

40%

50%

60%

0 0 1-2 3-4 5-9 10-49 50-99 100+

11Investorscouldselectmorethanonemethodoftrading.


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Chart4.13showshowtradingmethodsvariedbyagegroup.Ineverycaseanon-advicebrokeroronlinetradingplatformwasthedominanttransactionmethod.Younginvestorsaremorelikelytouseafull-servicebrokerorfinancialadvisertobuyandsellthanolderinvestors,perhapsreflectinginexperienceoralackofconfidencedoingitthemselves.

Brochure / report title goes here | Section title goes here

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Chart 4.13 shows how trading methods varied by age group. In every case a non-advice broker or online trading platform was the dominant transaction method. Young investors are more likely to use a full-service broker or adviser to buy and sell than older investors, perhaps inexperience or a lack of doing it themselves.

10%

20%

30%

40%

50%

70%

80%

60%

Chart 4.13: Method of trading used by actively trading investors, by age, proportion of those on-exchange investors who have traded in the last 12 months

0%35-44 75+45-54 55-6425-3418-24 65-74 Overall

Non-advice broker or online trading platform

Advice or full-service broker

Financial planner/adviser

Directly through prospectus of a listed company

Employee share scheme

Notes: n=604

Chart 4.13: Method of trading by age of investor, proportion of those on-exchange investors who have traded in the last 12 months

4.3.2 Attitudes to robo advice Digitalandautomatedadvisoryservicesarestillintheirearlystagesofadoption.Platformsthatutiliseclientinformationandalgorithmstodevelopautomatedportfolioallocationandinvestmentrecommendationstailoredtoindividualclientpreferencesareknownasroboadvice(Deloitte,2015b).

Roboadvice,alsoknownasdigitalwealthmanagement,candrawonclientinformationtodeterminecertainvariablessuchasriskappetiteorliquidity,toproposeappropriateinvestmentopportunities

(Deloitte,2016).Itwillprovidegreateropportunitiestounderstandinvestorsusinginformationsuchasincome,maritalstatusandtotalsuperandnon-superassets(Ashe,2016).Theevolutionoftheplatformisheadingtowardstheuseofself-learningartificialintelligenceinvestmentalgorithms,whichleveragesophisticatedriskmanagementandprofilingquestionnairestodeterminedirectinvestments.

Theroboadviceplatformhasanumber ofbenefits,includingsignificantlylower feesandcreatingfurthervalueforinvestorsbyappealingtocurrent-generationpreferences(i.e.morecontroloverfinancesanywhereandanytime)(Deloitte,2015b).OwnersAdvisory,thedigitaladvicedivisionofMacquarieGroup,seesthemainadvantagesofroboadvicecomefrom itsincreasedrigour,unbiasedadvice, andincreasedconvenienceforinvestors(seeBoxD).


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Box D: Owners Advisory

Owners Advisory is the digital advice division of Macquarie Group. It focuses on providing digital wealth management – known colloquially as ‘robo advice’.

Owners Advisory's direct online advice tool is able to provide customised advice quickly and cheaply. Advice can be high level, or very granular (down to recommending the sale of individual shares). It can also take legacy assets into account, so it recommends investments to fit in with an existing portfolio.

Users of their tool typically have a ‘do it yourself’ attitude, and see the tool as a second opinion before making their own investment decisions. A large portion of users are SMSF investors, and the average age of users is just over 50, which contrasts with the view that older investors are less open to the idea of using robo advice.

Owners Advisory sees a number of advantages to investors of robo advice. Firstly, it can be more rigorous in its investment selection process. Their system can sort through 30,000 investment opportunities and find the investment best suited to each client.

Secondly, it is non-biased in its recommendations. Using digital advice means that the marketing aspect of selecting an investment is removed – a computer will look beyond the well-known and find new opportunities which may fit an investor’s portfolio better.

Thirdly, it is more convenient for a lot of people. Robo advice can be used whenever and wherever is convenient for each individual, whereas often professional advice must be sought within business hours, or at the office of the adviser.

These advantages combine to make robo advice more efficient and convenient than traditional advice channels. The automation process has made providing advice faster, and more easily customised, meaning better value for investors.

However,someinvestorsmaystillpreferobtainingadviceinperson,andOwnersAdvisoryexpectthatinthefuturehybridmodelswherein-personfinancialadvisersuseroboadviserstoimprovethequalityofadviceavailabletoinvestors.

Theuptakeofroboadviceisstillinitsearlystages.Thisispartlyduetoaknowledgegap,thatis,manyinvestorsdonotknowoforunderstandroboadvice.Chart4.14highlightsthatatleast50%ofinvestorsacrossallagegroupsdonotknowenoughaboutroboadvicetoconsiderusingit.


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60

Chart 4.14: Attitudes to robo advice, proportion of investors, by age

0% 10% 20% 30% 40% 50% 60% 100%70% 80% 90%

25-34

18-24

35-44

45-54

55-64

65-74

75+

Notes: n=2391

Would use Don't know enough Would not ( but do know) Would not (prefer a person)

Food for thought

• Are you thinking about how you can engage DIY investors?

• How can you demonstrate the value of advice to counter the perceptions of a lack of value and high cost?

• Are you considering the development of your own technology or partnering with other organisations (white labelling) to increase the range of lower cost investment options for investors?

Thislackofknowledgemeansthereareopportunitiesforsignificanttakeupwithimprovedfinancialliteracy.Particularly,theyoungercohortsappeartobemoreopentousingroboadvice-15%ofinvestorsaged18-24and24%ofinvestorsaged25-34woulduseit.Thishasimplicationsfortheadviceindustryinthecomingdecadesastheseinvestors’portfoliosgrowandtheybecomeusedtoseekingautomated advicewithlimitedin-personadvice.

Ontheotherhand,theproportionoftheremainingcohortsthatwoulduseroboadvicedecreasesasageincreases.Onereasonforthisisthatolderinvestorsaremorelikelytopreferapersontoprovidethemwithadvice.Around40%ofinvestorsaged75andoldersitinthiscategory,comparedwithonly18%inthe18-24 agegroup.

Providersoffinancialadviceneedtobetterconnectwithinvestors.Theinvestmentindustryhasbeensubjecttosignificantchangeoverthepastdecade.Inparticular,developmentsintheindustryhavesoughttoincreasetheuseoffinancialadvicebyimprovingthequalityandaffordabilityofadvice(Chapter2.2).

Nonetheless,manyAustralianinvestorsremainlargelyself-directed,preferring todotheirownresearch.Thesinglemostcommonlycitedreasonforthisisthatinvestorsdesiretobecontroloftheirfinancialaffairs.Manyinvestors donotseethevalueofusing financialadvice.

Convincinginvestorsofthevalueof financialadvicehasbeenanongoingchallengefortheindustry.Newdevelopmentsintechnologyprovideopportunitiesforfinancialadviserstodeliveradviceevenmoreefficiently,suchasbyusingroboadviceenginestosupporttheirportfolioconstructionactivities.Theycanthenpasstheseefficiencygainsonto theirclients.

Chart 4.14: Attitudes to robo advice by age of investor, proportion of investors

15%

24%

10%

8%

6%

3%

2%

60%

61%

54%

54%

52% 39%

34%

37%

5%

5%

7%

26%5%

22%8%

50% 12% 14%

57% 18%9%


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5.WhydoAustraliansinvest?Australianstypicallyinvestforthelongterm.Retirementandwealthaccumulationarefrontofmindforallages,andindividuals areinvestinginproductsthatreflectthat. AlsoreflectedinproductchoiceistherelativelyhighriskaversenatureofAustralianinvestors.Morethantwothirds(67%)ofAustralianinvestorsareseekingguaranteedorstablereturnsfrom theirinvestments.

Thisproportionishigherforyounginvestors,challengingthewidespreadbeliefthatolderinvestorsaremoreriskaverse.Thischapterexaminesinvestorgoals,knowledge,andriskattitudes.

5.1 Awareness, knowledge and attitudes Investorsreportedthattheirtopthreegoalswheninvestingareplanningforretirement,accumulatingwealth,andsupplementingcurrentorfutureincome(Chart5.1).

Whilethespecificgoalsvarybyinvestorage,theyremainfocusedonthelongterm(Chart5.2).Theyoungeragegroups(18-24and25-34)arefocusedmoreheavilyonsavingforhomedeposits,especiallyinatimewherehousepriceshavebeenontheincrease forsometime.

Wealthaccumulationappearstobearelativelyconsistentgoalacrossallages,consideringthatinvestorsarelikelytobealwaysthinkingaboutbeingfinanciallypreparedforthenextstagesoftheir livesandhavingenoughmoney.


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Australians typically invest for the long term. Retirement and wealth accumulation are front of mind for all ages, and individuals are investing in products that that. Also

in product choice is the relatively high risk averse nature of Australian investors. (67%) of Australian investors are seeking stable, reliable returns from their investments. This proportion is higher for young investors, challenging the widespread belief that older investors are more risk averse. This chapter examines investor goals, knowledge, and risk attitudes

5.1 Awareness, knowledge and attitudes Investors reported that their top three goals when investing are planning for retirement, accumulating wealth, and supplementing current or future income (Chart 5.1).

While the goals vary by investor age, they remain focused on the long term (Chart 5.2). The younger age groups (18-24 and 25-34) are focused more heavily on saving for home deposits, especially in a time where house prices have been on the increase for some time.

Wealth accumulation appears to be a relatively consistent goal across all ages, considering that investors are likely to be always thinking about being prepared for the next stages of their lives and having enough money.

10%

20%

30%

40%

50%

60%

Chart 5.1: Top investment goals, investors

0% Planning for retirement

Accumulating wealth

Supplementing current or future income

Saving for a 'rainy day'

Saving for a deposit on a home

Travel

Notes: n=2391

Total Rank 1 Rank 2 Rank 3

Two third

Chart 5.1: Top investment goals, all investors


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Investorsaged18-34arelikelytoplanfortravelmorethanthoseinthe35-44agegroup.Thiscouldbeexplainedbyindividualsinthe35-44agegroupbeingmorelikelytohavedependantsandpotentiallyshiftingtheirgoalstowardssavingforeducation.

Thegoalofplanningmoreforretirementislikelytobemorecommonasinvestorsbecomeolderandbegintoplacemoreimportanceonhavingenoughmoneyatthattime.

Forexample,the18-24agegroupplantheleastforretirementbecauseofotherimpendingpurchasessuchashouses.Ontheotherhand,Chart5.2showsthatasinvestorsbecomeolder,theybegintosavemoreforretirement,untiltheyreachretirementage(sincetheyarealready livinginretirement).

Atthesametime,supplementingincomeappearstobemoreimportantforinvestorsaged65+comparedwiththeyoungerages.

Inretirement,investorsneedtosupplementtheincometheyreceivefrompensionsandsuperannuation,whileinvestorsaged18-34donotrequireasmuch.

However,theimportanceofsupplementingincomeishigherforinvestorsaged35-44,potentiallyduetofamiliesneedingtopayforchildren’seducationandtheincreasedcostoflivingaschildrenbecomeolder.


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Investors aged 18-34 are likely to plan for travel more than those in the 35-44 age group. This could be explained by individuals in the 35-44 age group more likely to have dependants and potentially having shifted their goals towards saving for education.

The goal of planning more for retirement is likely to be more common as investors become older and begin to place more importance on having enough money at that time. For example, the 18-24 age group plan the least for retirement because of other impending purchases such as houses. On the other hand, Chart 5.2 shows that as investors become older, they begin to save more for retirement, until they reach retirement age (since they are already living in retirement).

At the same time, supplementing income appears to be more important for investors aged 65+ compared with the younger ages. In retirement, investors need to supplement the income they receive from pensions and superannuation, while investors aged 18-34 do not require as much. However, the importance of supplementing income is higher for investors aged 35-44, potentially due to families needing to pay for children’s education and the increased cost of living as children become older.

While most Australian investors are generally long-term focused, investing can be a path to achieving other life outcomes.

For example, as in the survey results and in consultation with Wealth Enhancers Pty Ltd, younger investors may be increasingly considering investing as a way to build their home deposit. The

advice industry is already shifting away from business and product-led operating models to customer-led ones. By focusing on building long-term client relationships, advisers can help their clients invest to achieve a broader range of outcomes throughout life stages. This will require advisers to have a better understanding of their clients. Being willing to review business models to ensure they align with emerging customer needs, and making better use of customer data will be important components of this.

5%

10%

15%

20%

25%

40%

35%

30%

Chart 5.2 Top investor goals by age, proportion of investors

0%

Notes: Other, less common, goals were included in the survey but are not presented here, n=2391

Home deposit Travel Wealth accumulation Retirement Supplementing income

35-44 75+45-54 55-6425-3418-24 65-74

Chart 5.2: Top investment goals by age of investor, all investors


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WhilemostAustralianinvestorsaregenerallylong-termfocused,investingcanbeapathtoachievingotherlifeoutcomes.Forexample,asreflectedinthesurveyresultsandinconsultationwithWealthEnhancersPtyLtd,youngerinvestorsareconsideringinvestingasawaytobuildtheirhomedeposit.Thefinancialadvice industryisalreadyshiftingawayfrombusinessandproduct-ledoperatingmodelstocustomer-ledones.Byfocusingonbuildinglong-termclientrelationships,financialadviserscanhelptheirclientsinvesttoachieveabroaderrangeofoutcomesthroughoutdifferentlifestages.

Thiswillrequirefinancialadviserstohaveabetterunderstandingoftheirclients.Beingwillingtoreviewbusinessmodelstoensuretheyalignwithemergingcustomerneeds,andmakingbetteruseofcustomerdatawillbeimportantcomponentsofthis.

Investors’confidencevariesacrossinvestmentproducts(Chart5.3).Investorsgenerallyfeelconfidentinvestingincash,property,andshares,andprogressivelylesssowithmorealternativeproducts.Lessthan20%ofinvestorsfeelconfidentinvestingin

unlistedmanagedfunds,derivatives,andotheron-exchangeinvestments(suchasbonds,hybridsecurities,andexchangetradedfunds).Thereisanopportunityhereforfinancialadvisers:ifinvestorswerebettereducatedabouttheseproductstheymaybegintoengagewiththemandinvest morebroadly.

Thiscouldbedrivenbyanumberofthings(forinstance,lingeringinvestorscepticismfromtheGFC),butlackofawarenessislikelyasignificantfactor.Chart5.4showsinvestorawarenessofselected‘Otheron-exchangeinvestments’.Whilebondsarethemostwell-known,withnearlytwo-thirdsofinvestorsawareofthem,thisawarenessquicklydeclinesforotherfinancialproducts.Whileawarenessfor productssuchasA-REITsisnotveryhigh,theyperformquitewellwithanaverageannualreturnofjustunder17%overfiveyearsto March2017(Collett,2017).


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Investors’ varies across investment products (Chart 5.3). Investors generally feel investing in cash, property, and shares, and progressively less so with more alternative products. Less than 20% of investors feel investing in unlisted managed funds, derivatives, and other on-exchange investments (such as bonds, hybrid securities, and exchange traded funds). There is an opportunity here for advisers: if investors were better educated about these products they may begin to engage with them and invest more broadly.

This could be driven by a number of things (for instance lingering investor scepticism from the GFC), but lack of awareness is likely a factor. Chart 5.4 shows investor awareness of selected ‘Other on-exchange investments’. While bonds are the most well-known, with nearly two-thirds of investors aware of them, this awareness quickly declines for other products. While awareness for products such as A-REITS is not extremely high, they perform quite well with an average annual return of just under 17% over years to March 2017 (Collett, 2017). If awareness for these products was higher, then it is likely that there would have been a greater take up of A-REITS.

5.1.2 Financial literacy While investors are investing in cash, property and shares, there are a range of other more complex or alternative products with which investors are not (Chart 5.3). At the same time, investors are not as aware of those products that are seen as complex (i.e. hybrid securities), when compared to products such as government/corporate bonds (Chart 5.4). The lack of awareness about more complex products and the corresponding lower

highlights a knowledge gap.

5%

10%

15%

20%

25%

40%

45%

35%

30%

0%

Notes: n=2391

Very Somewhat Not

Cash Property Shares Other on -exchange investments

Unlisted managed funds

Derivatives

Chart 5.3: Investor confidence level with investing by investment product, all investors


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5.1.2 Financial literacy Whileinvestorsareconfidentinvestingincash,property,andshares,therearearangeofothermorecomplexoralternativeproductswithwhichinvestorsarenot (Chart5.3).Atthesametime,investorsarenotasawareofthoseproductsthatareseenascomplex(i.e.hybridsecurities),whencomparedtoproductssuchasgovernment/corporatebonds(Chart5.4).Thelackofawarenessaboutmorecomplexfinancialproductsandthecorrespondinglowerconfidence,highlightsa knowledgegap.

Financialliteracyisdefinedasa combinationoffinancialknowledge, skills,attitudes,andbehavioursnecessary tomakesoundfinancialdecisions,based onpersonalcircumstances,inordertoimprovefinancialwellbeing(ASIC,2017b).AustraliahasthehighestfinancialliteracyrateintheAsia-Pacificregion,andisranked ninthglobally(Klapperetal.,2015).

ThereisstillroomforAustralia’sliteracytoimprove.ThemostrecentAustralianFinancialAttitudesandBehaviourTrackershowsthatunderstandingkeyfinancialconceptssuchasthe‘risk/returntrade-off’and‘diversification’isachallenge forAustralians.

Chart 5.4: Awareness of specific financial products, proportion of investors

0% 10% 20% 30% 40% 50% 70%60%

Government/corporatebonds

ETFs

Futures

Infrastructurefunds

LICs

Hybridsecurities

Options

InstalmentsorOrdinaryWarrants

A-REITs

mFund

Notes: Notes: n=2391

OnlyoneinthreeAustraliansreportunderstandingtherisk/returntrade-off, andevenfewerunderstanddiversification (ASIC,2016b).Thisisindicatedbytherelativelyhigherconfidenceofinvesting inmorewell-knownproducts,as discussedabove.

Itisimportantforindividualstounderstandhowtomanagetheirmoneyandfinancialriskseffectively,inordertoprotectagainstvariouspitfalls.Inregardstoinvestments,financialknowledgeisvitalatatimewherecomplexfinancialproductsarefreelyavailabletothebroaderpopulation.

Thispresentsanopportunity.Withmostinvestorsbeingself-directedratherthanseekingfinancialadvice(Chapter4),onewaytoboostawarenessandconfidenceisthroughpromotinggreateruseoffinancialadvice.Anotherwouldbetocommitmoreresourcestoeducatinginvestorsabouttheseproducts.


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5.2 Australians’ attitudes to risk Australiansarerelativelyriskaverse.AccordingtoaglobalinvestmentstudyconductedbyLeggMason(2015),only 29%ofAustralianinvestorsareprepared toincreasetheirriskprofilefortheopportunitytoearnmoreincome,comparedto66%ofinvestorsglobally,and77%ofAustralianinvestorsdescribethemselvesasconservativecompared to59%globally.

Inthisstudy,48%ofinvestorsreportthattheypreferstable,reliablereturns.Some34%ofinvestorswouldacceptmoderate orhighervariabilityinreturns.

Contrarytoperceivedwisdom,younginvestorsaremoreriskaversethanolderinvestors(Chart5.5).About31%of18-24yearoldsseekguaranteedreturnsontheirinvestments,andonly19%wouldacceptvariabilityinreturns.

Incontrast,just8%ofthoseaged75andoverlookforguaranteedreturns,and35%wouldacceptvariability.Thismaypartlyreflectalevelofriskaversionattributedtolimitedinvestmentexperience,ornothavingexperiencedbuoyantpre-GFCconditions.

Notes: n=2391

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart 5.5: Investors' attitudes to risk by age of investor, proportion of investors

035-44 75+45-54 55-6425-3418-24 65-74






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Notes: n=2391

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart 5.6: Investors' attitudes to risk by gender of investor, proportion of investors

0





Male Female Overall

Femaleinvestorsaremoreriskaversethanmaleinvestors,withjust26%offemaleinvestorswillingtoacceptvariabilityinreturnscomparedwith40%ofmaleinvestors(Chart5.6).


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10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart 5.7: Investors' reaction to investment balance dropping 20% overnight, proportion of investors

0

I'dinvestmorefundstotakeadvantageofthelowerunit/sharepricesexpectingfuturegrowth

ThiswasariskIunderstood–I'dleavemyinvestmentsinplaceexpectingperformancetoimprove

I'dbeconcerned,butwouldwaittoseeiftheinvestmentsimprove

I'dcutmylossesandtransfermyfundstomoresecureinvestmentsectors

Losesleep–SecurityofmycapitaliscriticalandIdon'tintendtotakerisks

Overall 35-44 75+45-54 55-6425-3418-24 65-74

Notes: n=2391

Chart5.7reportswhattheinvestors’reactionswouldbetofindingtheirportfoliobalancehasdropped20%overnight.Thesamepatternisobserved,withyounginvestorsbeingmoreriskaversethanolderinvestors.Investorsinthe18-24and25-34agebracketsaremorelikelytorespondtosuchaneventbytransferringtheirfundsintomoresecureinvestments,whileinvestorsagedover55mostlyreportedthatwhiletheywouldbeconcerned,theywouldwaittoseeiftheinvestmentsimprove.


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2%

4%

6%

8%

8.4% 8.5%

9.0%9.2%

10.3%

10%

12%

Chart 5.8 Average expected portfolio returns by reaction to loss, all investors

0% Losesleep-Security ofcapitaliscritical

Cutlossesandtransferfundstomoresecureinvestmentsectors

Concerned,butwaittoseeiftheinvestments

improve

Leaveinvestmentsinplaceexpectingperformanceto

improve

Investmoretotakeadvantageofthelower

unit/sharepricesexpectingfuturegrowth

Notes: n=2391

Whilethisdoesfollowtheexpectedtrendofriskaverseinvestorsexpectinglowerreturns,thefactthatoneinfiveriskaverseinvestorsstillseekdoubledigitreturnsissurprising.Thecurrentinvestmentenvironmentisoneoflowreturns,soto getdoubledigitreturnsinvestorswouldneedtochoosehigherriskproducts.

Itcouldbethatfinancialliteracyamongtheseinvestorsislow,andthattheydonotfullyunderstandtherisk/returntrade-offandthecurrentfinancialclimate.

AnalternativeexplanationisthattherapidappreciationofhousepricesinAustralia(particularlyinSydneyandMelbourne)hasgiveninvestorsawarpedideaastowhatisreasonabletoexpectwheninvesting.HousingpricesinSydneyhaveappreciatedanaverageof11.3%perannumoverthelastfiveyears,andacrossallcapitalcitiestheaveragehasbeen7.7%overthesameperiod(ABS,2017c).

Mediacoverageofthehousingmarketandthespeedwithwhichitisgrowingmaybegivinginvestorstheincorrectideathatdoubledigitreturnsare‘normal’inthislowinterestrateenvironment.

Chart5.8showsthatonaverage,themostriskaverseinvestorsseeklowerportfolioreturnscomparedtolessriskaverseinvestors. Itshowstheaveragereturnsthatpeoplereportingeachlevelofriskareexpectingfromtheirportfolios.Ofthosethatarethe mostriskaverse,18%seekbetween0%and5%returnsontheirportfolio,comparedwithjust2%oftheleastriskaverseinvestors. Inlinewiththis,21%ofthemostriskaverseinvestorsseekdoubledigitreturns,comparedto34%oftheleastriskaverseinvestors.


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Notes: n=2391

10%

20%

30%

40%

50%

60%

Chart 5.9 Proportion of investors comfortable borrowing to invest, by age and gender

018-24 25-34 35-44 75+45-54 55-64 65-74

Male Female

Whileyounginvestorsaremostriskaverse,theyarealsomostwillingtoborrowinordertoinvest(Chart5.9).Nonetheless, whilesomemaybecomfortableborrowingtoinvest,onlyasmallproportionofinvestorsactuallydoso(lessthan5%ofinvestors).


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5.3 Diversification Nearlyhalf(46%)ofinvestorsconsideredtheirportfoliostobediversified(Chart5.10).However,15%ofinvestorswereunsure iftheyhaddiversifiedportfolios,while40%consideredthattheydidnot.

40%

15%

46%

Chart 5.10: Diversified portfolios, proportion of investors

Notes: n=2391

DiversifiedNotdiversifiedUnsure

Theseanswersalignwithwhatinvestorsreportedhavingintheirportfolios.Thosewhosaidthattheywerediversifiedhadanaverageof2.7assetclassesintheirportfolioswhilethosewhowerenotdiversifiedhad1.6.12Theinvestorsthatdonotdiversifymaybedoingsobychoiceormaybefacingbarrierstodiversification,suchaslackofaccessortheyperceivethebuy-inpricetobeprohibitive.

PatersonsSecuritiesLimited,astockbrokingfirm,hasseenashiftinunderstandingofdiversificationamonginvestorsoverthepastdecade(seeBoxE).Ithasnotedthatanindustry-widepushhasledtoimprovementsininvestors’understandingoftheconcept,butsomestilldonotseethebenefitsofdiversification.NationalAustraliaBankLtd(NAB)alsoconsidersthatthereisagapbetweenunderstandingofdiversificationandimplementation(BoxF).Thesesuggestthattheremaystillbeworktodotoimproveinvestors’useofdiversification.

12Assetclassesrefertodifferentproducts:shares,property,cash,derivatives, otheron-exchangeinvestmentproducts,unlistedmanagedfunds,otherinvestments.

Box E: Patersons Securities Limited

Patersons Securities Limited is a full-service stockbroking firm operating nationally.

They noted that risk attitudes have changed over the past decade, and that since the GFC and the end of the resources boom investors have become more conservative.

This has also been accompanied by a shift in responsibility relating to their expectation of advice – during the boom investors would come to advisers with a plan of what they wanted to do, and seek advice as to how to achieve it. Today, investors come for advice about what to invest in, and advisers take more of a driving role, explaining what is possible and realistic for them.

Investors’ understanding of diversification has also changed. As a result of an industry-wide push, investors have a better understanding of diversification, but there are a number of reasons why people do not diversify.

While some people may understand the concept, they do not see the benefits for their portfolios. For others, they have specific investment interests and do not want to diversify beyond them. Some investors have insufficient capital to enable efficient diversification.


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Box F: National Australia Bank – Self-Directed Investors

Investors generally acknowledge the importance of diversification, however implementation of the concept is varied at times. When this is the case, investors may wrongfully believe they have a diversified portfolio when in reality this may not be the case.

The types of investments selected also depend on an investor’s objectives and risk tolerance. An investor with a higher risk tolerance may have a larger allocation to more volatile assets (in search of higher returns). However the diversification premise remains consistent; seeking to achieve your objectives consistent with your risk tolerance.

The greatest diversification benefits are achieved when portfolio assets move in opposite directions when a market event occurs (they are negatively correlated). In a practical sense, this is generally achieved by investing across several sectors rather than just one. As an example, a four stock portfolio invested in four different sectors will have different diversification characteristics than a four stock portfolio invested in four companies within the same sector. NAB often sees a disconnect between investors’ understanding and implementation of diversification. A big part of this is access. Investors do not always have easy access to certain asset classes making diversification more challenging. Therefore, one of NAB’s priorities is assisting investors in accessing other assets (for instance, international equities and fixed income).

NAB sees technology such as robo-advice playing an important role in helping investors build diversified portfolios to meet their investment objectives. Offered at a lower cost than personal advice, it is an attractive option with great potential as investors begin to place more trust in robo-advice.


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Whileaccesstodifferentassetclassesandtheavailabilityofinvestmentproductshasimprovedovertime,shares,cash,andpropertyarethemostcommonlyheldinvestments(Section4.1).Thisassetmixdoesnotchangesignificantlyforinvestors indifferentlifestages.

Againstthisbackground,investorsmaynotbeholdingtheoptimalportfoliofortheircircumstances.Partly,thismaybebecauseinvestorsarenotactivelyengagedintheirinvestmentactivities;almosthalf(45%)ofinvestorsreviewedtheirportfoliosonlyafewtimesinthelastyear,orlessfrequently.Thismaysuggestthatfinancialeducationisstilllacking.Itcouldalsomeanthatfinancialadvisersarestrugglingtoconnectwithinvestors.Thefinancialadviceindustryneedstoconsidernewapproachestohelpinvestorsbetterunderstandandnavigatetheirinvestmentjourney.

Diversificationhelpstospreadinvestmentrisk.Adiversifiedportfoliomeansthaninvestorsarelessexposedtoasingleeconomicevent,andthusarelesslikely tosufferfinancialloss(ASIC,2017a).Investorswhoconsideredtheirportfoliosdiversifiedwereonaveragelessriskaversethanthosewhoconsideredtheirportfoliosundiversified(Chart5.11).Theyalsohadslightlyhigherreturnexpectations-thosewithadiversifiedportfoliosaidtheyexpect9.1%returns,whilethosewhoareundiversifiedareexpecting8.8%returns.

Mostoftheundiversifiedinvestorsseeking‘stable,reliablereturns’areinvestedincash.Sharesandpropertyaretheotherproductsusedbythisgroup,butfarlessfrequently.

Theinvestmentindustryhastakenstepstoimprovepublicunderstandingofthebenefitsofdiversification,butmanyAustralianinvestorsarenotdiversified.

Chart 5.11 Relationship between diversification and risk attitudes among investors

50%

60%

40%

30%

20%

0Guaranteedreturns Stable,reliablereturns Moderatevariability Highervariability

10%

Diversifiedportfolio Undiversifiedportfolio

Notes: n=2391

Food for thought

• How can you help investors understand what returns are reasonable for different asset classes in the current environment?

• How are you helping investors think through the risk and return trade-off?

• How can you help investors to understand the benefits of diversification?


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6.SeekingamorediversifiedfutureInvestingisimportantforAustraliansanditisgoingtobeevenmoreimportantovertime.Asthepopulationages,andpeoplespendmoretimeinretirement,wealthaccumulationisbecomingmoreandmoreimportant.Compulsorysuperannuationwillnotalwaysbeenoughtomaintainindividuals’lifestyleexpectations inretirement.

In2013/14,themeansuperannuationbalanceforanindividualatretirementwasaround$214,000(ASFA,2015).Theaveragetotalsuperannuationbalanceforahouseholdatretirementwas$355,000(ASFA,2015).

Asinglepersonseekinga‘modest’lifestyle inretirementrequiresalumpsumofatleast$370,000(withouttheagepension)investedandreturning7%p.a.(SuperGuide,2017).Forcouples,thislumpsumneedstobeatleast$400,000.Inordertohavea‘comfortable’retirement,householdsrequirebetween1.8and2.3timestheselumpsumamounts(making$665,000and$910,000thenewlumpsumsneeded forsinglesandcouplesrespectively) (SuperGuide,2017,andASFA,2016).

Investingearlytoaccumulatewealthwillmakethedifferencebetweenamodestandacomfortableretirementinthefuture–andwhetherornotindividualswillneedtorelyontheagepension.

Most(60%)Australianadultsnowengageinsomeformofinvesting(inadditiontotheirinstitutionalsuperannuationfund),butthereisstillasignificantminoritywhodonotinvest.Thereisabigopportunitythere–engagingnon-investorswouldsignificantlyincreasethepoolofinvestedfunds,aswellasassistingthosepeopletofurthertheirfinancialgoals.

Mostinvestorsfeelcomfortablewithshares,cash,andproperty,butlittleelse.Thisispartlydrivenbyalackofawarenessandunderstandingofcertaininvestmentproducts,whichmaybeconstraininginvestors’abilitytobestmatchtheirinvestmentbehaviourstotheir financialgoals.

Atthesametime,itmeansthatinvestorshavelessdiversifiedportfoliosthantheyotherwisecouldhave.Thatis,investorsmaynotbeoptimisingtheirreturnforthelevelofrisktheyaretakingon.Whiletheunderstandingofdiversificationamonginvestorshasimproved,thereseemstobefurtherworktodo.Around40%ofretailinvestorsreportnothavingadiversifiedinvestmentportfolio.

Thiscouldbedrivenlargelybychoice,howeverthecasestudiessuggestthattheremaybebarriershamperinginvestors’effortstodiversify.Inadditiontoalackofreadyaccesstocertainassetclasses,eitherbecauseoflimitedavailabilityorpricingbeingoutofreachforsome,thelackofunderstandingofthebenefitsorcontributionthatmoresophisticatedfinancialproductscanhaveinaportfolio isalsoabarrier.

Currently,mostinvestorsinAustraliaareself-directed,choosingtoconducttheirownresearch.Moreknowledgeableinvestorsmaymakemoreuseofawiderrangeofinvestmentsproducts.However,manyinvestorswanttobeincontrolanddonotseethevalueinseekingprofessionalfinancialadvice.

Thissuggeststhattheinvestmentindustryneedstoreviewthewayinwhichitinteractswithinvestors.Partly,thiswillbethroughadoptingbusinessmodelsthatarecustomer-ledandfocusingonhowitcanhelpinvestorsachievetheirdesiredoutcomesthroughoutdifferentlifestages.

Atthesametime,adoptingdevelopmentsintechnologyandtheimpactsofongoingpolicychangesalsohavethepotentialtoimprovethevalueandreducethecostoffinancialadvice.Thesethingscanchangethevaluepropositionofprofessionalfinancialadviceforinvestors.

Thereisalsoanopportunitytosupportparticipationofnon-investorsbyraisingfinancialliteracy,throughfinancialeducationinitiativesandthroughgreateraccesstofinancialadvice.

Australiahasover11millioninvestors.Butthiscouldbehigher.Thebarrierstoachievingthisarenotinsurmountable.


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AppendixA–MethodologyApproach Therewerethreemajorcomponentstothedatacollectionprocessforthisreport.Thefirstwastoundertakesecondaryresearchtounderstandthecurrenteconomic,environmental,andmarketforcesdrivinginvestmentbehaviourinAustralia.

Thisanalysisofmegatrendsandtheinvestmentlandscapeinformedthedesignofacomprehensivequestionnairefocusingoninvestors’propensitytoseekadviceandtypeofadvicesought,thewaythattheytrade,andthetypesofinvestmentstheychoosetohold.

ResearchNowwascommissionedtofieldthesurveyandcollectdatawhichwasthenanalysedbyDeloitteAccessEconomics.Datawascollectedviaanonlineportalandtookrespondentsapproximately10-15minutestocomplete.ThesurveywasinfieldoverFebruaryandMarch2017,with4,000responsescollectedintotal.

Surveydatahasbeensupplementedbycasestudies.Sixconsultationswereheldwithfinancialprofessionalstotesttheconclusionsfromthedata,andadddetail totheinsightsthesurveyrevealed.

Sample population Thesurveysamplewasnationallyrepresentative,usingage,gender,andlocationquotastoensurethatresultsalignedwithABSestimatesofthenation.Thismeansthatresultsdidnotneedtobere-weightedtoalignwiththepopulation,ashasbeendoneinpreviousstudies.

Thesampleincluded2,391investorsand1,609non-investors.Thetablebelowprovidesafurtherbreakdown.

Number of responses Percentage of sample

Investors 2,391 60%

On-ExchangeInvestors 1,494 37%

OtherInvestors 897 22%

Non-Investors 1,609 40%

LapsedInvestors 406 10%

NeverInvested 1,203 30%

Total 4000 100%


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Margin of error Themarginoferrorforanysurveybasedonarandomsampledependsonboththesizeofthesampleandtheobservedproportion.Thetablebelowcontainsthemarginoferror(ata95%confidenceinterval)fordifferentsamplesizesandforobservedproportionsthatrangefrom10%to90%.Forexample,themarginoferrorforasurveyof4,000,wheretheobservedproportionis50%is±1.6%.Thismeansthetrueproportionisbetween48.4%and51.6%.

Age brackets Theagebreakdownfortheinvestorpersonasisasfollows:

• Nextgeneration–18-24yearoldinvestors(207respondents)

• Wealthaccumulators–25-59yearoldinvestors(1,622respondents)

• Retirees–60yearoldandolderinvestors(562respondents)

• Non-investors(1,609respondents).

Observed population

Sample size 10% or 90% 20% or 80% 30% or 70% 40% or 60% 50%

100 ± 5.9% 7.8% 9.0% 9.6% 9.8%

200 ± 4.2% 5.6% 6.4% 6.8% 6.9%

300 ± 3.4% 4.6% 5.2% 5.6% 5.7%

400 ± 2.9% 3.9% 4.5% 4.8% 4.9%

500 ± 2.6% 3.5% 4.0% 4.3% 4.4%

700 ± 2.2% 3.0% 3.4% 3.6% 3.7%

1000 ± 1.9% 2.5% 2.8% 3.0% 3.1%

1500 ± 1.5% 2.0% 2.3% 2.5% 2.5%

2000 ± 1.3% 1.8% 2.0% 2.2% 2.2%

2500 ± 1.2% 1.6% 1.8% 2.0% 2.0%

3000 ± 1.1% 1.4% 1.6% 1.8% 1.8%

3500 ± 1.0% 1.3% 1.5% 1.6% 1.7%

4000 ± 0.9% 1.2% 1.4% 1.5% 1.6%


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AppendixB–DefinitionsAdult populationreferstoallAustraliansaged18yearsandolder.

Bondsareatypeofdebtsecurity.TheyareeffectivelyanIOUbetweenaborrowerortheissuerofthebond,usuallyagovernmentorcompany,andtheinvestor.Investorsreceiveinterestpaymentsatcertainintervalsandalsohavetheirprincipalreturnedonastatedfuturedate.

Exchange Traded Funds (ETFs)areatypeofmanagedfundwhichcanbetradedonASX.Theyholdaportfolioofsecurities,whichmayincludeAustralianorinternationalshares,fixedincome,commodities,propertytrusts,oracombinationofassetclasses.

Financial adviceisadviceprovidedbyafinancialadviser/plannerorfull-service/advicestockbroker.ThisisasubsetofProfessionalAdvice.

Futuresarecontractstobuyorsellaparticularasset(orcashequivalent)onaspecifiedfuturedate.ThemostpopularinAustraliaistheS&P/ASX200orASXSPI200®IndexFuturescontract.

Hybrid securitiesblendsomeofthefeaturesofdebt(fixedinterest)andequity(shares).Theymakeinterestpaymentsuntilacertaindate.Somehybridsconvertintosharesafteraperiodoftime.

Infrastructure fundsprovidetheopportunitytoinvestinessentialpublicassets,suchastollroads,airportsandrailfacilities.Theyaremanagedbyspecialistfundmanagersandtheirreturnsusuallycombinecapitalgrowthanddividendincomeinvaryingproportions.

Instalments warrantsletyoubuyaninvestmentoveraperiodoftime.Instalmentsallowyoumakeapartpaymentonthesharesandpaythebalanceinoneormorepaymentsovertime.Yougetallthebenefitsofowningthesharesfromdayone,suchasreceivingfulldividends.

Lapsed investorsarepeoplewhohave heldinvestmentsinthepast,butdonotcurrentlydoso.

Listed Investment Companies(LICs)provideexposuretoadiversifiedportfolioofinvestmentsonbehalfoftheirinvestors.TheseinvestmentsmayincludeAustralianshares,internationalshares,privateequityandspecialistsectors,suchasresources.

mFundsareunlistedmanagedfundsavailabletoinvestorsthroughthemFundSettlementServicewhichallowsinvestorstobuyandselltheunlistedfundsviatheirbrokerinasimilarwaytoshares.

Never investedarepeoplewhohaveneverownedinvestments.

Non-investorscomprisebothLapsedInvestorsandpeoplethathaveNeverInvested.

On-exchange investmentsisatermusedinthisreporttorefertolistedinvestmentsandotherfinancialproductsavailableonafinancialexchangeorheldthroughunlistedmanagedfunds.Thisincludesshares,derivatives,andotherproductssuchasbondsandETFs.

On-exchange investorsarepeople whoownsomeformofon-exchangeinvestmentproduct.

Options arecontractsbetweentwoparties,givingthebuyertheright–butnotanobligation–tobuyorsellanunderlyingsecurityatapredeterminedpriceataparticulartimeinthefuture.Theunderlyingsecuritiesmaybecompaniesorindices.

Ordinary warrantsareissuedbyabankorotherfinancialinstitutionandaretradedonASX.Itissimilartoanoption.Itgivesyoutherighttobuyanassetsuchasashareatasetpriceuntiladateinthefuture.Usedforspeculation.Underlyingsecuritiesmaybeshares,indices,ETFs,commodities,currencies.

Other investorsarepeoplewhoinvest,butnotinon-exchangeinvestments.Insteadtheyatleastoneofthefollowing:commercialorresidentialinvestmentproperty,cashortermdeposits,orotherinvestmentsthatarenoton-exchangeinvestments.

Professional adviceisadviceprovidedbyafinancialadviser/planner,afull-service/advicestockbroker,alawyer,oranaccountant.

Real Estate Investment Trusts (REITs)usethepooledcapitalofmanyinvestorstopurchaseandmanagepropertyassets.Theycanspecialiseinparticulartypesofpropertylikeoffices,industrialbuildings,hotels,retailshoppingcentres,orincludeacombinationofpropertytypes.

Share ownersareinvestorswhoholdshares,eitherdomesticallyorinternationally.


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AppendixC– Internationalcomparisons

• HongKong–NielsenrevealsHongKongfirstquarterconsumerconfidence,Nielsenmediarelease,31May2016

• Germany–AktionärszahlendesDeutschenAktieninstituts2016,DeutschesAktieninstitute.V.

• NewZealand–Offshoreownershiphitsafiveyearhigh,JBWere,5December2016

• Sweden–ShareholderStatistics,OwnershipofsharesincompaniesquotedonSwedishexchanges,StatisticsSweden,December2016,Table5b

ASXhascompletedaninternationalcomparisonofshareownershipaspartoftheAustralianInvestorStudy2017.

Thebestavailablefigureshavebeenused.However,itshouldbenotedthatthe2017studydoesnotprovideanabsolute comparisonduetodifferencesinmethodology,sampling,timing,anddefinitionswiththeavailableinternationalstudies.

Theincidenceofownershipofon-exchangeinvestmentproductsinAustraliaremainshighbyinternationalstandards.

% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Australia – on-exchange investments

46 41 43 38 36 37

New Zealand 26 28 22 22 23 23 26 26 23

Hong Kong – shares 36 35 36 36 41

Germany – shares 7 6 6 6 6 6 7 7 6 7

Germany – shares/funds 16 16 14 14 13 13 15 14 13 14

Sweden – shares 20 19 18 17 17 16 15 14 14 14

UK – stocks/funds 20 20 18 18 17 17 15 18

USA – shares 18 15 14

Notes: Studiesarenotdirectlycomparable.USandUKdataarebasedonhouseholds,notindividuals.

• UK–FamilyResourcesSurvey2015/16,UKDepartmentforWorkandPensions,Savingsandinvestmentsdatatables, 16March2017

• USA–SurveyofConsumerFinance,2013SCFChartbook,FederalReserve,p291.September2014.


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Limitationofourwork

General use restrictionThisreportispreparedsolelyfortheuseofASXLimited.ThisreportanditscontentsarenotintendedtoandshouldnotbeusedorrelieduponbyanyoneelseandnoneofDeloitteToucheTohmatsuLimited,itsmemberfirms,ortheirrelatedentities(collectivelythe“DeloitteNetwork”),oranyotherentitiesorpersonsmentionedinthereportorcontributingcontenttothereport(the“Contributors”),acceptanydutyofcaretoanyotherpersonorentity.ThereporthasbeenpreparedtoanalyseAustralianinvestorbehaviourandmegatrendsaffectingtheinvestmentlandscape.Thisreportcontainsgeneralinformationonly,[hasbeenpreparedwithouttakingintoaccountyourobjectives,financialsituationorneeds]andnoneoftheDeloitteNetworkortheContributorsis,bymeansofthisreport,renderingprofessionaladviceorservices.Beforemakinganydecisionortakinganyactionthatmayaffectyourfinancesoryourbusinessoractingonanyinformationinthisreport,youshouldconsultaqualifiedprofessionaladviserandconsiderwhethertheinformationisappropriateforyourcircumstances.NoentityintheDeloitteNetworkandnoneoftheContributorsshallberesponsibleforanylosswhatsoeversustainedbyanypersonwhoreliesonthisreport.


80

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