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Rising from the ashes

By James Mitchell
01 May 2014 — 8 minute read

With the SMSF sector now boasting around one million trustees, James Mitchell reports on its evolution from niche savings vehicle to competitive – and often feared – force in superannuation

Some view the SMSF sector as the phoenix that rose from the ashes of the GFC, promising investors a new direction through the autonomy of a self-managed retirement solution. To others, the SMSF sector is not new; it’s simply in vogue.

To put it into perspective, a majority of the APRA-regulated fund sector got underway officially in 1992, whereas the SMSF sector has been around since the 1940s, albeit under a different name. In 1992, there were 100,000 of them; now there are half a million.

Quantum Financial principal Tim Mackay told SMSF Adviser that his clients all either have one, want one, or aspire to have one if it’s not right for them now.

“It’s about 75 per cent,” Mr Mackay says. “Some of the 25 per cent are heading towards SMSFs while for others, an SMSF will never be appropriate.

“They are clearly the retirement vehicle of choice for wealthy Australians.”

Back in 1999, when Claire Mackay – Mr Mackay’s sister and Quantum Financial co-principal – was at university, one of her jobs was creating SMSFs.

“In those days they were not well known,” Ms Mackay says. “Now, you hear about them at a barbeque.”

Australia’s superannuation savings pool now sits at around $1.7 trillion, surpassing the nation’s GDP and making it one of the largest savings pools in the world. It’s well known that SMSFs now account for approximately one third of Australia’s superannuation assets.

But how have SMSFs evolved over time, and how do they fit into the broader superannuation landscape?

SMSFs: how do they rate?
Statistics show that SMSF trustees are far more satisfied with the financial performance of their own self-managed funds than those with an industry or retail fund, despite an across-the-board lift in positive sentiment toward retirement savings.

According to Roy Morgan Research’s January 2014 superannuation satisfaction report, satisfaction with the financial performance of super funds in the six months to January 2014 was 53.5 per cent, up by 6.9 per cent on the January 2013 figure.

SMSFs were the leader of the pack in the satisfaction stakes (73.1 per cent satisfaction), followed by industry funds (54.4 per cent) and retail funds (52.0 per cent).

Retail funds made up ground on their industry rivals with regard to satisfaction with financial performance, increasing by 10.1 per cent between January 2013 and January 2014, from 41.9 per cent to 52.0 per cent.

Satisfaction with the financial performance of industry funds increased from 48.7 per cent to 54.4 per cent, a 5.7 per cent improvement, the report also stated.

SMSFs, however, while still well ahead, only increased by 0.9 per cent over the same period.

This raises the question: are SMSFs falling out of fashion?

Rice Warner’s Future Predictions reports suggest that following strong growth over the past decade, there will likely be a plateau in SMSF market share over the coming 10 years.

Some APRA-regulated funds like to think the same.

Construction and building industry super fund Cbus is well aware of the flow of assets to SMSFs, as reported by APRA.

“Recent statistics may be revealing a ‘plateau’ trend,” Cbus chief executive David Atkin says.

“For Cbus specifically, we have a small but stable flow of assets to SMSFs; there has been no spike in movement and nor is it of concern to the fund’s overall assets.”

While Cbus has not surveyed its own members regarding their attitudes towards SMSFs, the fund is aware of industry panel research, public research and recent findings that reveal the main reason for going self-managed.

“[It’s] for greater choice and control,” Mr Atkin says, adding that there is also a cohort seeking leverage options.

Preventing an exodus
Some APRA-regulated funds are more outspoken than Mr Atkin about the apparent exodus or migration from traditional funds to SMSFs.

“We’ve seen a proliferation of SMSFs being created,” says CareSuper chief executive Julie Lander, “but for many people, they just do not need the added complexity and expense of that sort of structure when they can get the control elsewhere.

“Often it’s really just not viable,” she says.

“I’m not saying there is no place for SMSFs, but I think before people go into them they should look at the other alternatives out there.”

To stem the flow of SMSF leakage, traditional super funds – APRA-regulated funds, that is – have had to become increasingly innovative to compete with the ‘DIY’ desires of their members. APRA-regulated funds are increasingly offering a self-managed experience.

“Recognising that some fund members may desire greater control and choice over their super investment, we are currently in the process of introducing a new investment option – Cbus Self-Managed,” Mr Atkin says.

“Cbus Self-Managed will allow eligible members to invest directly in Australian and international shares, term deposits and property and infrastructure.”

The fund has also launched a new default investment option in its income stream which reflects research into investment behaviours, risks facing retired members and asset allocation.

“The Cbus Conservative Growth option reflects a desire from income stream members for a middle ground alternative between growth and conservative investments,” Mr Atkin says.

Meanwhile, HostPlus explains that the fund’s response to the growth of the SMSF sector has been to develop products that achieve the best possible retirement savings outcome for its members.

“We make it our priority to understand what our members want and develop products and services that suit them,” says HostPlus chief executive David Elia.

“We have cohorts of engaged members with high account balances and, at the other end of the scale, members who are starting their first job in the workforce with lower account balances.

“For this reason, our fund needs to understand its members and adapt and respond to their varying and changing needs as they go through various life stages,” he says.

ChoicePlus, a new direct investment option offered by HostPlus, allows members to invest their super in the ASX300, selected exchange-traded funds and term deposits.

“For many of our members seeking more control over these investment types, ChoicePlus will be the perfect vehicle to provide them with greater investment control and expert support, without the administrative and legal burden or cost of an SMSF,” Mr Elia says.

More than 600 members have selected this option since its soft launch in September last year, investing a combined $16 million via the platform.

“HostPlus is also planning to change its structure to allow the launch of a pooled superannuation trust (PST) market, which will allow SMSF investors to invest with HostPlus and benefit from our performance just as one million of our members do,” Mr Elia says.

Prior to the launch of its direct investment option, HostPlus carried out research with baby boomers with higher account balances to determine likely demand, key drivers and their advice needs.

The findings indicated their interest in investing super directly in shares, term deposits and other similar investments.

This, together with the Rice Warner Future Predictions reports, suggests that SMSF growth is levelling out, and so it’s not surprising to see HostPlus taking this kind of innovative step.

“We have strategies in place to cater to the SMSF market,” Mr Elia says.

“Our financial advice strategy will play an increasingly important role in ensuring we don’t lose members that might be considering setting up an SMSF.”

The evolving role of intermediaries
As the SMSF sector continues to evolve, high level intermediaries are, ironically, becoming the staple of the DIY option.

“They range from the auditor and the actuary, the accountant and the tax adviser, the financial planner and the asset allocator to the lawyer – and the list goes on,” SMSF Professionals’ Association of Australia’s chief executive Andrea Slattery says.

“What we need in the SMSF sector are people that have competent knowledge, who are competently and professionally able to provide their knowledge and information on all assets of the SMSF to the SMSF trustee,” Ms Slattery says.

“The knowledge and information they impart on that trustee is very important.”

Speaking at the ASIC Annual Forum in Sydney on March 24, AustralianSuper chief executive Ian Silk summarised the function of intermediaries in the superannuation sector as a reaction to market imbalances, such as insights, knowledge, a lack of skill and lack of scale.

“Intermediaries play a very valuable role,” Mr Silk said. “Good superannuation trustees play a very valuable role,” he said. “Good mortgage brokers play a very valuable role and good financial advisers play a very valuable role.”

There is also value in these intermediaries offering SMSF advice. According to AMP SMSF’s head of technical and policy, Peter Burgess, advisers who are not providing SMSF advice are potentially at risk of losing clients.

Speaking at last year’s AFA conference, Mr Burgess told delegates that practitioners need to identify and understand what phase their clients are at in their SMSF decision making.

“If they’re intending investors, they’re more likely to want information about an SMSF. If they’re recent, they’re more likely to want help in the day-to-day admin. Established investors are more likely to want help with the implementation of their strategy,” he said.

Mr Burgess added that practitioners who are not providing SMSF advice to those who are close to retirement or moving into retirement could potentially lose some of their client base.

“If you’re not talking about SMSFs, someone else is,” Mr Burgess said. “I’m not suggesting pushing all of your clients who are getting close to retirement into SMSFs, but the point is you have to have enough knowledge and information about SMSFs to have an informed discussion with your clients because … they want to have that discussion.

“The conclusions are if you want to attract more clients in SMSFs, if you want to retain more clients in SMSFs, then you need to … take some time to identify what phase of their superannuation they’re in and then tailor your advice accordingly.”

Has SMSF growth gone too far?
In 2013, chairman of retirement income at Challenger Jeremy Cooper said that while SMSFs play an important role in the Australian retirement system, they also risk becoming too popular to effectively manage.

Mr Cooper – who led the federal government’s Cooper Review of the superannuation sector – said the SMSF segment needs to ensure the elements that have made it a success are maintained.

“The reason the self-managed sector works is self-selection,” he said. “SMSFs appeal to people who are generally better off and are used to making money decisions, and they are suitable for those people.

“But as you grow the SMSF sector, it will become indistinguishable from the general population – and the minute you have the general population taking control of their own retirement savings, there is a risk that politicians and policymakers will clamp down on the sector.

“So the fear is that too many people want to be in it, and it loses the characteristics that have made it work so far,” he says.

Others, like Bravura Solutions principal consultant David Barrett, said those who suggest SMSFs are “growing out of control” risk their being perceived inaccurately.

“Talking about SMSFs as if the number of people starting them has suddenly and unexpectedly exploded runs the risk of creating the misleading impression that they are simply the latest flavour-of-the-month and will soon fade into obscurity,” Mr Barrett tells SMSF Adviser.

“This allows participants in the traditional managed fund-driven super sector to be critical of SMSFs, dismissing them as a short-term fad being promoted by self-interested parties.

“However, rather than a sudden and dramatic shake-up… data suggest that the Australian superannuation sector is going through a steady and fundamental shift. Australians are challenging the traditional model of fund manager-driven super funds and seeking an investor-driven investment structure.”

Rising from the ashes
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