It is unlikely that retail and industry funds will ever really drive innovation in the superannuation industry – they are just too large and too slow to do it. It is much more likely that self-managed superannuation and other investment platforms will continue to drive innovation and retail and industry superannuation funds will continue to play catch-up.
However, over the past few months there have been a number of articles in the trade press declaring the end of significant growth in self-managed superannuation and the emergence of new, more competitive retail and industry funds. The authors suggest that retail and industry funds will use innovation to become more competitive. More competitive retail and industry funds will mean that SMSFs will be less attractive and growth in the sector will stall. It all sounds quite logical but, based on track record, not really believable.
Psychological imperatives
Of course, many of the suggestions that growth in self-managed superannuation will stall come from those with the most to gain from that happening. After all, retail and industry funds have been predicting – and hoping – that self-managed superannuation growth would stall for years. Unfortunately, these predictions haven’t proven to be correct and there are a number of reasons why they probably won’t prove correct this time either.
First and foremost, the decision that over one million Australians have made to take responsibility for their own retirement savings is far more complex than just the lack of some product features available to them from retail and industry funds. There is a deeply psychological aspect to the decision. It is about responsibility and autonomy as well as the often quoted desire for control and flexibility. These psychological factors can’t be substituted by a retail or industry fund offering some additional product features.
When you boil it all down, an SMSF is owned by the couple of people, generally family members, who start it. How do you compete with the real sense of ownership offered by an SMSF by adding another investment option to a retail or industry superannuation fund? Retail and industry superannuation funds and those that advise them are in danger, again, of ignoring the psychological factors that influence decisions made by customers.
SMSF demographics
Unfortunately for retail and industry funds, it doesn’t look like these psychological factors are going to become any less important in the future. In fact, it seems like they will become more important as the demographic profile of superannuants changes.
Today, the bulk of superannuation assets are owned by baby boomers. However, in analysis undertaken by Deloitte Actuaries and Consultants and published in the firm’s biennial Dynamics of the Australian Superannuation System report, they suggest that by 2023 over half of superannuation assets will be owned by Generation X members. By 2033 the share of superannuation assets owned by baby boomers will have dwindled to just 11 per cent while Generation X members will own 53 per cent and Generation Y members will own a massive 30 per cent of superannuation assets.
We know from other aspects of their lives that Generation X tend to be individualistic and Generation Y tend to be technology-savvy, motivated by autonomy and wanting to take responsibility for important aspects of their lives.
Self-managed superannuation should appeal even more to Generation X and Generation Y than it did to baby boomers.
In fact, there is already evidence of growing interest in SMSFs among Gen X and Gen Y. The ATO’s SMSF statistics clearly demonstrate that the majority of new SMSFs are being started by Gen X and Gen Y members rather than by baby boomers, who have traditionally been the owners of SMSFs.
Technology, the enabler
It is also well established that as balances grow, people become more interested and more engaged in managing and making decisions about their superannuation. Higher superannuation balances and more engaged members is just a matter of time. Every day there are new members who receive contributions from the first day of their working lives. Superannuation is a major investment for many Australians today; in the future it is easy to imagine that superannuation will become many Australians’ largest single investment.
As the importance of superannuation grows, so will the engagement members want to have in superannuation investment and management decisions. This is also likely to increase the number of people using self-managed superannuation.
Technology will play an important role in making self-managed superannuation an attractive superannuation solution for Generation X and Generation Y. Two undeniable benefits delivered by technology over recent years have been the ease with which complex financial products can be managed and the dramatic reduction in the advantages of scale economics.
Today, using technology that is barely 20 years’ old – internet banking was only introduced in Australia in the late 1990s – and mobile devices that have been available for less than 10 years, it is easy for a customer to manage a portfolio of investments any time and from virtually anywhere on the planet. Customers can now quite easily build a completely individualised portfolio of investments accessing assets from virtually anywhere in the world. For an example of the kind of thing that is possible, have a look at www.motifinvesting.com in the US. There are similar businesses here in Australia.
Technology will continue to make it easier to set up SMSFs, manage them and implement and execute investment strategies. In fact, the first generation of technology solutions to do this is already available. Today it is possible to establish an SMSF online and have the trust established, deed issued, bank and broking accounts opened and have the fund registered in less than a day. Not too long ago this could quite easily have taken weeks to complete.
While technology will help industry and retail funds deliver their services to members more efficiently in the future, and help them tailor their generic offers to make them more appealing to discerning members – think, for example, of the direct investment options of industry funds – it seems that the most exciting technology developments are starting at the personal level and helping individuals achieve things never before achievable in an efficient manner by an individual. Technology is becoming increasingly personal
Counting the cost
If all this isn’t enough to continue to drive growth in the SMSF sector there will also be continued improvement in the cost-effectiveness of SMSFs as a superannuation solution. Evidence clearly indicates that the cost of setting up an SMSF and administering an SMSF has fallen significantly over the past decade. As SMSF service providers become larger and the industry continues to consolidate costs will fall or members of SMSFs will get more for their money. This will help make SMSFs an even more attractive superannuation solution.
Ultimately, as Generation X and Generation Y members become the major players in superannuation, member balances grow, member engagement increases and technology makes previously complex and time consuming tasks easier there is every reason to believe that SMSFs will continue to prosper.
Peter Lalor, general manager and chief financial officer, SuperIQ
Ramani
At what age do SMSF members become senile? Most SMSF members I look after in their 70’s and 80’s are quite capable people. ATO hardly ever makes SMSF’s non-compliant and takes half their assets. Inheritors are generally not trustees, and even if they became trustees/directors, they are bound by the trust deed to act properly or they will be punished. Default position is to become a small APRA regulated fund as last resort with independant trustees. At what age do you think this will happen for most members? I suggest for most this would be 90 or older. A 65yo has 25 years to capably manage their affairs. Of course they need good advisers to assist but so does everybody in the SMSF sector.
SMSFs are a fact of life and that genie can never be pushed back into the bottle. That said, while those who seek control and are repelled by the shenanigans of retail & industry funds will continue to build the SMSF sectors, I dispute Peter Lalor’s imputation that the growth of SMSF sector is necessarily in the interest of members themselves or the hidden equity-provider for all super (the tax payer, through concessions relative to personal rates).
Why? Consider these:
Physiological decay, when trustees can no longer remember their dentures will they remember BAS?
Dominant trustees where one determines the fate of what happens in a SMSF.
Relationship breakdown
Inheritors pushing their agenda over aged members’ interests
ATO making SMSFs non-compliant, depriving half the assets. The culpability protection is not available in SMSFs.
As we age, more will (and should) move to other sectors where control is not important.