The challenges ahead for the SMSF sector
Smithink 2020 director David Smith tells Miranda Brownlee that while advances in technology and efficiency have increased pricing pressures, the SMSF industry is set to continue as a cottage industry for a few years yet.
Is the SMSF industry evolving beyond being a ‘cottage industry’?
Well, people have been saying that for years, and yet it really hasn’t happened. I get a sense that smaller accounting firms are reluctant to give up that work. Smaller accounting firms look at their client holistically so their SMSF clients are also business clients of the firm. They tend to view the SMSF services they provide as one part of the overall work they do for a client so the vast majority of these firms are reluctant to give up the SMSF part of their work, even if they’re only servicing a small number of funds. They’re still earning money from it and by giving up that work they could potentially feel threatened that there’s now another adviser working for their business client, which could threaten that work.
I think the bigger potential challenge is the ongoing price pressure being brought about by businesses using admin platforms to provide highly efficient service and in some sense provide better service. A number of the SMSF admin businesses are now providing daily updates for super funds which most of the smaller accounting firms don’t do, so there’s a price intact and a better service intact. I think this will start to challenge some of the smaller firms, as their clients might put pressure on them with pricing within the self-managed super audit space. You’ve got some of the dedicated audit firms now providing aggressively priced audits which again tend to be lower than what the individual accounting firms are providing. So I think those are the two things which are potentially going to have a bigger impact.
Auditor numbers are reducing but I think that’s partly because some of them weren’t doing the audits in the first place; they just let it go. But perhaps over time what we will see is the audit space perhaps being taken over more by the dedicated audit firms with their lower prices, and that’s a possibility. I think it’s a while away yet before we see a wholesale move on the admin work, however. That would be my view at the moment and that’s driven by the fact that clients don’t know they can get it cheaper from other places, and also the accounting firms not wanting to give it up.
You believe this will be a slow progression?
Yes, a lot of these things are slow trends. We’ve got a situation where the accounting firms themselves are very conservative so they don’t necessarily take on change all that quickly, and I’m talking generally here, obviously there are some who do.
Small business people themselves tend to be a little bit conservative about these things too and if they’re with an accountant and the relationship’s working for them, even if they’re paying them a bit more than what they’re able to get somewhere else, they’ll tend to stick. Whilst some accounting firms I think are starting to feel the price pressure, I don’t think there’s a big push for a substantial change to happen quickly. I do think if you then look out five years, however, then you’d have to argue that the accounting firms with a small number of funds will struggle to match the efficiencies and quality of service of the bigger admin providers.
How would you then explain the ATO figures that indicate the number of funds per tax agent has grown from 21 to 31 funds, and a 10 per cent reduction in the number of tax agents undertaking fewer than 10 funds?
I’d actually put that trend down more to the fact that the whole industry is growing and there’s more SMSFs out there, rather than the idea that smaller funds are exiting. I’m not seeing many signs of that at all. Mind you, I don’t really work a lot with really small firms, so maybe I’m just not seeing it at that really low end, but I’m just not seeing that trend at the moment.
So firms will eventually need to increase the number of funds they service due to pricing pressures?
Well, I think it’ll force them to adopt technology, absolutely, but to do a greater number of funds, that’s a more problematic thing because as I say, the funds that firms do are ancillary to the overall compliance work they do for a client. So if they’re going to do more funds, that would mean they would need to create more funds for their existing clients. There is some of that happening as there’s a greater interest in super funds generally, but the other thing to consider in that proposition that you put is that the accounting firms themselves would have to grow their overall fee base in order to grow their SMSF fee base. To a certain extent that’s a challenge because the overall accounting industry’s growth rate is relatively low.
So to grow your firm substantially you have to be actually taking clients from other firms or undertaking mergers. Now there is a growing trend of firms merging together, so two smaller firms creating a bigger firm, that could also be part of the reason why those ATO statistics are there. When a bigger firm buys a smaller firm, the smaller firm ceases to exist as their fees are rolled into the bigger firm. That’s been a general trend in the accounting industry for a few years now, these bigger firms buying smaller firms which creates economies of scale for the larger firm.