Managing those who manage themselves - SMSFs

Specialist education and training seems to be the key to restoring trust in advisers among sceptical self-managed super fund members, as they look for mentors and coaches rather than investment advice, Malavika Santhebennur writes.

The self-managed superannuation fund (SMSF) sector is seeing two distinct areas of change: one is the growing number of younger people setting up SMSFs, while the other is the growing number of individuals moving into the post-retirement phase.

Close to 40 per cent of members are drawing down their pension from an SMSF, and, according to the SMSF Academy managing director, Aaron Dunn, that statistic is quite significant in terms of the revenue the Government could generate from the exempt pension environment.

He expects the Government to shine the spotlight on the growing post-retirement cohort in SMSFs, while focusing on issues like self-funding for retirement and management of longevity risk.

On the other side is the growth of the younger demographic, with Australian Taxation Office (ATO) statistics showing that while SMSF members tended to be older than members of the Australian Prudential Regulation Authority regulated funds, new SMSF members are younger compared to the general SMSF member population, with the median age dropping to under 50 years.

The reason for this could be due to technology and digital disruption, according to SuperConcepts general manager technical services and education, Peter Burgess.

"Individuals have gained access to more information than they've ever had before. We know that the younger generation are early adopters when it comes to technology so I think that's one of the drivers of why we're seeing younger individuals turning to SMSFs," he said.

The sector presents an opportunity for financial advisers to adapt their advice offerings to suit the changing demographics.

Burgess said SMSF members do not necessarily need investment advice, but rather, sought mentors and coaches who could assist them with their responsibilities as trustees, including their administration obligations.

"There are other clients that prefer to make their own investment decisions and then just seek assistance with more strategic type issues such as how they should structure their fund to get the best benefit out of the SMSF and so forth," Burgess said.

Yet, research indicated that the use of financial planners and accountants had decreased for the eighth consecutive year, with the Vanguard/Investment Trends April 2015 Self-Managed Super Fund Report showing only 36 per cent of SMSF members used a financial planner, down from 41 per cent in April 2014.

However, this did not reflect the advice needs of members, with 213,000 out of 551,000 SMSFs stating they had unmet advice needs in areas like inheritance and estate planning, pension strategies, Age Pension and other social security entitlements, and offshore investing.

What's stopping them?

While 60 per cent of members said they could manage their own affairs, 49 per cent cited lack of confidence in advisers' expertise, while 39 per cent cited previous poor experience with advisers.

Vanguard head of market strategy, Robin Bowerman, said the statistics showed that there was pent-up demand for advice within the SMSF trustee market, but trustees were struggling to connect with and find the right advisers.

"Typically, as an investor group, they're probably more sceptical, probably more sophisticated than the average investor and some of the research over the years has pointed clearly to the fact that they are very wary of advisers who are basically trying to sell them products," Bowerman said.

"They're looking for someone that will actually work with them on their strategy, their strategic allocation, make sure those sorts of things are in place, as opposed to someone recommending investment ‘A' versus investment ‘B'."

SMSFs should not be pigeonholed into packaged advice solutions so advisers needed to customise advice for SMSF members.

SMSF members valued advisers who had attained SMSF education qualifications and specialist SMSF advice training from the likes of the SMSF Association.

"That's actually where we've probably seen a significant shift in terms of the number of SMSFs using advisers but they're looking for people who've got specialist skills or the types of value proposition which is more around the strategic asset allocation than it is delegating the whole investment decision to the adviser," Bowerman said.

Education and specialisation

In its response to the Financial System Inquiry (FSI), the Federal Government recommended the raising of adviser competency and the introduction of an enhanced register of advisers.

It agreed to set out legislative amendments to raise the professional, ethical, and educational standards of advisers by requiring them to hold a degree, pass an exam, undertake continuous professional development, sign up to a code of ethics, and carry out a professional year.

While the SMSF Association largely supported the push to lift education standards, it said there were various practical problems and unintended consequences that could result from the Parliamentary Joint Committee (PJC) recommendations.

It proposed that licensees should be responsible for registering financial advisers with the Australian Securities and Investments Commission (ASIC), while professional associations could corroborate an adviser's education/CPD requirements for licensees.

It was concerned about the blurring of responsibility between licensees and professional associations for advisers' actions.

Moreover, the association emphasised the need for financial advisers to develop specialisations within the wider areas of advice and argued advisers would gravitate towards generalist requirements to provide advice under the proposed PJC model.

"Losing specialist areas of advice within the financial advice market would be detrimental to consumers," it said in its submission on the lifting of professional, ethical and education standards in the financial services industry.

There was consensus among industry experts that the key to restoring trust in advisers among SMSFs was to pursue professionalism and ensure they were educated in SMSF advice.

SMSF Association head of policy, Jordan George, said advisers have come from quite a generalised world in financial advice, and the industry was just starting to see more specialties emerge as clients and trustees were demanding specialised services.

Therefore, he said it was important for both new entrants and existing advisers to develop the knowledge and skills to service SMSF trustees.

"Even for existing advisers who may have a lot of experience in advising SMSF trustees, if they can prove that to consumers through accreditation, I think it does help their cause in ensuring people can trust them and seek them out for their advice," George said.

How do SMSFs invest?

In order to service SMSF clients, advisers and accountants need to understand how trustees like to invest their money.

CommSec's analysis of more than 100,000 SMSFs found SMSF trading patterns for the week ending 28 August last year, the biggest single day drop since the global financial crisis, included an increase in total trade volumes, with overall net buying among SMSFs.

The data also revealed SMSF investors traded twice as often and held more diverse portfolios than retail investors, defying notions that they were dormant investors.

AMP Capital's head of self-directed wealth and SMSF, Tim Keegan, said as it currently stood the asset allocation towards cash and cash-like investments like Australian equities were still substantially greater than a diversified portfolio.

"But what we have seen over the last year, two years, is this desire for diversification, globally, so moving away from truly Australian listed assets, but also into more defensive asset classes," he said.

"We've seen adoption of corporate bonds, commercial property, and even more recently, infrastructure is becoming an important part of an SMSF portfolio."

He said this was recognition of two factors: one was the need for diversification to attain strong investment returns due to challenging economic times.

The other was the desire for income from SMSF members moving into the retirement phase, and being aware of the fact that options like term deposits would not fulfil this goal in a low interest environment.

Bowerman believed advisers had a role in helping clients understand the value of diversification, especially because SMSFs fell into two buckets of investments.

"There's the Australian equity piece, which is driven by dividend imputation, tax credits, and then there's a pretty high 23-25 per cent allocation to cash," he said.

Advisers should educate trustees on the value of investing within the Australian market and international markets, fixed income rather than just bank deposits, and using the bond markets as a way of managing risk and volatility.

Weighing up pros and cons

Attracting SMSF clients was one challenge, but perhaps the bigger challenge for advisers and SMSF trustees was questioning if SMSF was the right option at all.

Perpetual Private's head of advice, Colin Lewis, said the market had largely been driven by accountants.

"Basically anybody with any sort of amount of money, their first approach to the clients is ‘oh we need an SMSF'. Well, in fact, do you?" he asked.

While many trustees cited control as their main reason for establishing an SMSF, there was little value in establishing one if they could fulfil their investment goals through a retail fund, as running an SMSF came with additional responsibilities, including compliance.

"All they do is sit in cash, maybe a few shares and managed funds and you go, well, you could've done that in the retail space, so why are you taking on that additional complexity and responsibility of running your own fund when you have the same control in a retail fund?" Lewis asked.

He said that while the retail space did not offer many investment options like direct equities in the past, and investors who wanted to manage direct equity portfolios actively had to opt for an SMSF, the retail and industry funds market had caught up in that space, and currently offered it, but people did not realise or appreciate that.

"I'm not saying it's good or bad. I think it's all too often that people just jump into it because they've been told or their mate down the golf club has got an SMSF so they need one too to have that control," he said.

Read part two of this feature here: Laying down the law – legislation in limbo
Read part three of this feature here: Decision time looms for accountants