What do trustees want?
Professionals from all corners of the SMSF sector discuss trustee investment patterns, and what they are looking for from practitioners in 2014
How would you describe the profile of SMSF trustees in 2014?
Andrea Slattery: We divide trustees into three distinct groups…. as controllers, coach seekers and outsources. Each of them has [different] characteristics and different needs.
Trustees are becoming more and more educated. When you look at the demographics of SMSFs, 75 per cent of them have an undergraduate degree or higher level of education. The majority of the others are either in retirement now or have some kind of TAFE or trade qualification.
You’ve got people that are more engaged and more interested in what’s happening. A lot of the financial professions or the accounting professions or the legal professions … are actually trustees as well, so the concept that SMSF trustees are not capable of making decisions and getting direct professional advice is also one of those misnomers or anecdotal pieces of information that’s not correct.
Are you seeing a change in the behaviour or profile of SMSF trustees?
Andrea Slattery: Yes – our previous research is also showing that people are more willing to pay for specialisation. We’re seeing a real trend of people that are providing specialised services. What we’ve got is an increasing trend of knowledge by the trustee, and an increasing trend [of trustees] seeking competent professional services.
A significant portion of your client base are trustees – how do you maintain that relationship?
Jonathan Reynolds: You’ve got to be proactive and remind them of their obligations. It’s just communication with trustees, not just through meetings; there’s got to be other means. Rules change all the time and you’ve got to have a communication mechanism that makes them aware of this.
And [it’s just about] being proactive – pick up the phone. If you don’t have that sort of relationship, I think you’ll just become a compliance relationship, which eventually will go to an online operator because it’ll come down to cost.
I think there is a greater need for advice – we’ve got to bury the hatchet with this divide between accountants and advisers. What’s in the past has happened, so I think it’s time to move on and give it another go. If you don’t do that, you’ll get nowhere and stand still.
Do you think there is a misconception around the level of advice trustees receive?
Andrea Slattery: We’ve got statistics that confirm [they do seek advice], and the ATO has confirmed this as well – 99 per cent of trustees seek advice from an accountant, a tax agent, an auditor, etc.
Most people imagine that people manage their own super, and [think] the concept that people do things themselves indicates that they don’t seek professional advice. But there’s no difference between a self-managed super fund trustee who seeks direct advice from a professional in a range of areas… [and the] trustee of a large fund, an APRA-regulated fund, where those trustees seek direct professional advice and use their own knowledge and skills and internal services to make their own judgements.
DIY is not the same as building your own backyard… it’s actually a series of professional services and [a] series of information and a series of interests and a series of background knowledge that actually helps somebody to make a decision about it.
So, there’s a lot of indication that SMSF trustees are interested in control, they are interested in performance, they are interested in risk and they do get professional advice.
What are trustees looking for from their accountant in 2014, in light of the impending accountants’ exemption phase-out?
Jonathan Reynolds: They’re looking for an increased level of advice from their accountant around their trustee responsibilities and I also think they’re looking for some clarifications, [including] is the strategy that they’re implementing correct, and it is right for them?
I think the biggest trouble accountants have with answering that question is they don’t know because they don’t have a deep understanding of what the client objectives are. They’re still very focused on the tax side… that’s all well and good, but why do [the trustees] have the fund? Where does it fit in the overall scheme of things? How is it going to fund their retirement?
I think [trustees are] looking for more guidance around that and also more proactivity around what they should be doing. And in order to do that, accountants need to ask different questions. [A lot of accountants] can’t see past what they’ve been trained to do for the better part of 20 years.
I think there’s an opportunity for accountants to go through a re-training period – to get away from the compliance and tax stuff because really, that is becoming automated and administrators are really taking over that role.
It’s almost like [accountants are] afraid of trying to offer other services apart from what they’ve always offered because they can see like they’re trying to sell something and for some reason accountants have an aversion to … getting extra services to help their clients; because they’re afraid that’s going to cost clients more and they’ll say no.
Which asset classes have trustees been leaning towards in recent years, and what are your thoughts on future trends?
Philip La Greca: There’s obviously still been a bit of a look for growth, but … the real question [is], where is my cash flow coming from? And that makes sense because you’re dealing with a sector where there’s a lot more now in pension phase than their used to be.
If you look at the ATO data that came out fairly recently, I think ... something near 70 per cent of the members are over 50, which is significant. You’re certainly seeing this swing towards that and obviously [there are] more and more assets supporting pensions, so the ability to generate the cash flow that can pay the pension has become quite crucial.
Trustees are notoriously risk-adverse. Has there been any change in that behaviour given the share market has stabilised since the GFC?
Philip La Greca: [SMSFs have] bought in the blue chip space quite heavily –again, that’s partly because of the recognition factor, yield, and an expectation of lower volatility. Whether that’s true or not is another question. Our data has always said those top 10 stocks represent about half of the exposure to the share market for a client base.
Probably almost 20 per cent of the international money is now in ETFs. Cash has fallen, which is again a good sign. We’re now down to probably, certainly in our history… the lowest level of cash we’ve ever seen since we started analysing, for trustees.
That’s what you would expect. [Trustees are saying], ‘cash is not giving me a return, so why should I hold more than I have to?’
What are new trustees looking for in an SMSF? Do you think factors such as fund balance are crucial to setting one up?
Olivia Long: It’s not a crucial element; it should be considered and I think cost should be part of the question that people ask, but it shouldn’t be the driving factor. ASIC engaged Rice Warner to do some comparisons on fees between SMSFs and other super entities … the stats showed that in some cases the fees were comparable from about $100,000.
There’s also an opportunity for younger SMSF trustees to consider borrowing –it is a good strategy, it is one that many people use personally to try and build their personal wealth more quickly, and it works just as effectively in SMSFs. In terms of borrowing for either property or shares, obviously they’ve got a higher risk profile and longer until retirement so they’re happy to.
Broadly, I think SMSF trustees are looking for more diverse investments. I think as the industry is maturing I think they’re looking for more investment opportunities outside of just direct shares. We’ve had a number of clients ask us or show interest in investing in silver or gold metals which is interesting.
There’s a lot of hype around property and LRBAs at the moment. Are trustees interested in this strategy?
Olivia Long: We think it can be a very good strategy. If that’s what people decide, if they’re comfortable with property and they think it’s a good investment, then they should have the right to be able to borrow and acquire with it. I think the considerations that need to be made [include] time to retirement – it may not be suitable for someone who is looking to retire and needs to live off the income from that.
Another thing I think people need to consider [is] insurance. I don’t think there’s enough focus on considering some form of life insurance to cover off on ... to be able to pay out the other member on death.
There’s a very low percentage of people who hold insurance within their SMSF. And a lot of members decide to maintain a small balance in their other superannuation fund to preserve any life insurance or insurance benefits that they might’ve obtained through that fund.
What they don’t realise is if they have a certificate of currency, they can just transfer. There are providers who will transfer the insurance cover without the need for a medical – no questions asked – and it’s likely to be for a lower premium. So insurance premiums in non-SMSF super entities have increased significantly over the past couple of years, and in some cases they’ve increased by up to 80 per cent.
The fees that people pay for their insurance in [a] non-SMSF [environment] aren’t as transparent. People don’t realise they’re paying more and potentially getting less.
What are going to be the key drivers of trustee activity in 2014?
Philip La Greca: I think the real question is going to be what are going to be the key triggers as to how things react [in 2014] ... market triggers and sentiment triggers are really the [most important] things.
There’ll be some anxious questions about the next interest rate movements – the next one might [go up]. Most people wouldn’t have thought that in . The big one that you’d expect is going to be the Budget this year, the federal Budget. What are they are going to do, what cuts, what measures are going to be made?
[Something could] happen globally. Hopefully the US doesn’t have one of those deadlocks again … where we have a game of chicken between the Democrats and the Republicans at some points.
They would be the sorts of things that would cause a reaction, and obviously depending on how the markets react, trustees will consider their responses.