What are some of the things advisers are struggling with in the SMSF advice space at the moment?
I don’t think advisers are struggling with much at all, but from an industry point of view, too many people are being shoehorned into SMSFs when they aren’t suitable for them. I have some issues around people spruiking gearing and property and setting up SMSFs solely for that purpose.
SMSFs are a very nice vehicle for a lot of clients, but they aren’t for everybody; they’re complicated and the client needs to recognise they are accountable as trustees, so getting the client to understand their responsibilities and what they’re accountable for is one of the challenges.
What are some of the tax changes you expect to see happening with SMSFs in 2015?
Well it’s a bit early to say [until the tax white paper] is handed down. The first thing they’ve said is that they’re looking at the relative rate of tax between the pension phase and the accumulation phase. They’ve been quite clear they want to even that up, so I interpret that as taxes on pensions, whereas at the moment a super fund in pension mode is tax exempt. So, I see that changing and [it] is likely to be policy.
They’ve also signalled that the franking credit regime is very generous and may be past its use-by date, particularly where the investor has a lower tax rate than the company tax rate, which is essentially super funds.
Do you expect to see any radical changes in SMSF asset allocation in 2015?
If they change the tax rules around franking credits there will be. There has been a lot of heat and light around property as an asset class, especially around residential property, and if the FSI recommendation to ban limited recourse borrowing arrangements in SMSFs goes ahead, then property investment in SMSFs will slow down.
I don’t see Australians suddenly rushing into, for example international shares at the moment, even if they should increase their exposure. Australians, especially SMSF investors, love bank shares, Telstra, franking credits and hybrids and I don’t see a big change. I think the strong trends of 2014 will continue because interest rates are heading even lower.
I understand you specialise in alternative assets, is that a growing asset class for SMSFs?
It’s a long way lower than it was pre-GFC but I think as rates go lower people will be looking for alternatives given that the reward investors receive for taking on risk is now so low. I see that coming off a pretty low base but SMSF trustees are going to have to accept more risk in order to get the rewards in 2015.
With more accountants entering the advice space, do you perceive any threats to advisers in the SMSF sector?
I don’t see it so much as a threat but an opportunity. Certainly in my own practice, we work closely with accountants. Sometimes we have the primacy of the relationship and sometimes the accountant does, but you need both. I’ve welcomed accountants becoming licensed, I think that’s overdue. I know they are a bit slow on the uptake but the end consumer will be better off for everyone having the right education levels and the right ticket from the government if you like.
Do you believe there are any untapped areas of SMSF advice?
I think there are still a lot of people in retail wrap accounts that are paying way too many fees. We see them every year; we’ll get a client who has previously been with another adviser and is sitting in a super-based wrap account. When we walk them through their statement, we discover half their income is being chewed up by layers upon layers of fees. We believe there are a large number of clients with more than half a million dollars sitting in wrap accounts and paying [excessive] fees. We see that as an enormous opportunity for advisers who are steering clients into SMSFs and away from retail wraps.
Are there any other challenges you’re experiencing in practice?
The rules are getting tougher. The penalty for getting it wrong has always been the fund gets made non-compliant, and half your benefits could be taken away for tax. The tax office has never really imposed that, but with the new penalty regime, I think the tax office is going to become a lot tougher on non-compliance. It’s the air of compliance that I think is the most challenging for an adviser and a client in terms of ensuring they know what they’re doing – that they have their eyes wide open.