Why SMSFs now set the superannuation benchmark

Both industry and retail superannuation funds are trying to emulate SMSFs by providing more choice and flexibility for their members. But as Damon Taylor writes, many claim SMSFs will always be a breed apart.

If the best measure of success is the attention and focus of one’s competitors, then self-managed super funds (SMSFs) have well and truly arrived.

Indeed, it seems that as SMSFs have matured, so too have Australian consumers.

Where before superannuation was set and forget, they are now chasing a degree of choice, control and flexibility within their retirement savings, and for Robin Bowerman, head of market strategy and communications for Vanguard, industry and retail funds have been forced to respond accordingly.

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“Certainly, some of the industry funds are now looking to provide what you would call more SMSF-like offerings,” he said.

“Now, the retail funds have always given people a good range of choice around investment options but I think the inexorable rise of SMSFs is definitely prompting all funds to provide their members with more tailored offerings.”

Bowerman said that such efforts were clearly an attempt to stop people setting up their own SMSF. 

“The ambition is to say ‘well, you don’t need an SMSF if you can do X, Y, Z within your existing super fund’,” he added.

“But I think if you look at the Cooper Review, it was always going to be MySuper at one end of the spectrum and SMSFs at the other.

“And with increasing choice up the spectrum, this was probably always going to happen,” Bowerman continued.

“It was inevitable, but there’s no doubt that the rise of SMSFs, particularly on the industry funds side, has prompted them to look to enhance their offering, be competitive, and ultimately make it less advantageous to setup an SMSF.”

However, for Pauline Vamos, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), the provision of a more tailored and customised approach to superannuation was part of a broader financial services evolution.

“The landscape is changing very quickly and it’s largely because funds are listening to their customers, listening to their advisers,” she said.

“The industry is starting to understand that they can actually provide people who want to manage their own assets with access to wholesale-type investments.

“Now, SMSFs may have provided the initial impetus for that but I think it would have happened anyway because that’s the way the whole of services is starting to go and it’s the nature of the way society is going,” Vamos continued.

“I think when you look at the global financial crisis and you look at the way society views big providers, there’s been a move for people to take more control.”

Interestingly, Philip La Greca, technical services director at Multiport, said that while leakage had undoubtedly driven mainstream super funds to offer their members more, it would be interesting to see how far investment flexibility could be pushed with respect to disclosure.

“If you look at the figure for 2011-12, there was $6 billion that flowed out of the APRA-regulated (Australian Prudential Regulation Authority) funds to the SMSF space,” he said.

“So there’s no question that it’s something that is being done, but I think what will be interesting is exactly how it rolls out post MySuper in terms of disclosure.

“Because if you’re going to offer all these choices, how much information should you be providing to a person about these choices?” La Greca asked.

“For managed funds, it’s a little bit easier, but when you start going down to anything in the ASX200, do you have a fiduciary duty as trustee to ensure that a client doesn’t put all of his super into share number 199 on the ASX200?

“And what sort of rules do you start to build around those things to say, ‘well, maybe that’s not appropriate’?”

The fundamental problem, according to La Greca, was that investment choice could only go so far, simply because there was a limit as to how well APRA-regulated funds could understand and connect with an individual member.

“They don’t know whether or not it really is appropriate for the person to say, ‘I’m putting all my super into equities because I’ve got three investment properties and $1 million in cash outside of super, so overall, I’m balanced,’” he said.

“So, given their fiduciary duty to safeguard members’ money, it’s going to be a very difficult balancing act for them.

“Of course, this isn’t an issue in SMSFs because the trustees know either their own or their members’ circumstances very well,” La Greca continued.

“You can do that holistic element which, even with intra-fund advice, won’t be possible for the large super funds because it will be about the fund and not about what else the person has.”

Yet the limitations outlined by La Greca are only the tip of the iceberg, according to Andrea Slattery, chief executive officer of the SMSF Professionals’ Association of Australia (SPAA), who said that SMSFs would always remain a breed apart.

“SMSFs are quite different, in the first instance because they have a different clientele, but they are also a fundamentally different opportunity as well,” she said.

“There is much more than investment flexibility involved here because the reality is that the retail sector has been offering significant investment flexibility for a long time now.

“What I actually see is the industry funds opening up opportunities that are making them more and more like the retail sector,” Slattery continued.

“And they’re competing on that basis but they are still a far cry from being SMSF-like.

“So it’s not that the APRA [Australian Prudential Regulation Authority]-regulated funds are closing the gaps between the industry’s various sectors, they’re only really closing the gap within the APRA-regulated fund sector.”

A tight bond

In fact, the differences inherent in SMSFs have even given rise to a more tailored approach to financial planning as well.

The services and advice relationships being sought by DIY-fund trustees are significantly different to those required by the traditional retail investor and for Bowerman, this was also necessitating a progressive change.

“The relationship between an SMSF client and their financial adviser is different to the traditional financial planning relationship, which tends to be one where the client delegates a lot of the decisions and expertise to the planner,” he said.

“In the SMSF world, what they’re looking for is a financial coach or validator, someone to work with them, not to make all the decisions for them, not to do it all.

“After all, the reason you want to have an SMSF is because you want to have a bit more hands-on control.”

According to La Greca, it was almost as though the advice industry was being divided into two parts now.

“We’re talking about, for want of better terms, the investment advice and the strategy advice now,” he said. “It’s really the fact that in the SMSF space, you actually need to deliver both.”

However, Bowerman reiterated that many within the financial planning industry were only now starting to understand the altered service proposition that SMSFs represent.

“I think some financial planning groups get it, but I think others are still grappling with it in terms of what’s the right service to offer an SMSF from an advice/value proposition,” he said.

“It’s much more around strategic asset allocation, lower costs and so on.

“It’s not about ‘pick this fund or that fund’, and that’s almost a behavioural influence between people who are in the SMSF world versus people who are in what has been the traditional retail advisor space.”

La Greca predicted that there would ultimately be ‘pseudo-demarcations’ within financial advice.

“There will be some advisers who will want to deliver the full suite of both strategy and investment advice, there will be others who will offer only investment advice and others still who will do strategy,” he said.

“So you won’t exactly have demarcations but you will have differing types of services that will be out there.

“Now, whether they will also target people in particular funds or using particular services or particular career paths or whatever, that is a question still to be answered,” La Greca added.

“But I do think the segmentation of advice is going to change.

“I don’t think we’re necessarily going to have the same outlook as we currently have, where for an adviser to make some of this stuff work, they’ve got to have a model that gets the efficiencies but also does customisation.”

So while progressive change may be occurring within the advice space as a result of SMSFs, it is also very evident in the sector’s various institutional acquisitions.

To many, it seems a line is being drawn in the sand with the large institutional approach on one side and the more traditional boutique approach to SMSFs on the other. 

And according to Bowerman, institutional interest in self-managed super funds is hardly surprising.

“The SMSF sector has always been about the high net wealth, boutique financial planner business end because the more technical, accountancy-based financial planning practices have clearly been heavily involved,” he said.

“But it has certainly been something of a cottage industry in the sense that there’s been lots of players with small numbers of funds that they’ve administered.

“But what you’re seeing now is the SMSF space as the largest part of the super market, and so it’s becoming more institutionalised because its got such scale that big organisations like AMP, Colonial and other big retail players, they clearly don’t want to leave the largest part of the market so fragmented,” Bowerman continued.

“Bottom line, they’re looking to actually gain market share in there.”

Similarly, La Greca said that institutional acquisitions were recognition of that the fact that SMSFs wouldn’t be going away anytime soon.

“So we’ve got a third of the money in there now and yes, as more and more people become more financially literate, yes there’s probably some upper ceiling for how many funds there ever will be,” he said.

“So there will be come a natural cap, but it’s fundamentally a commercial business decision for the larger institutions.

“You either try to find a way to participate or you’re basically going to lose access to a third of the money that’s in the pool,” La Greca continued. “That’s the simple answer here.”

However, for Slattery, service provider backing, or lack thereof, is irrelevant.

“What’s actually happening in Australia at the moment is that a lot of people are seeing the opportunities of future value that they can add to their SMSF clients,” she said.

“So we need to be very careful about two things here; those who are competent advisers need to be able to get into this business and need to be able to add value to their clients, whether or not they’re retail or wholesale, whether they’re accountants or financial planners, or whether they’re lawyers or auditors.

“Whoever they are, they need to become competent, they need to become SMSF specialists and there is only one and that’s the SPAA SMSF specialist,” Slattery added.

“But if they’re not competent, there are a lot of people that want to come into this world and get an easy win.

“We would encourage people to become competent, to add value, to build the integrity of the industry so that it can grow – that’s one side of the coin.”

The other, according to Slattery, is efficiency.

“No matter who you ask, recent years have seen a seriously big increase in efficiency in the SMSF world,” she said.

“The SMSF world has been able to, according to the ATO stats, bring average fees down to 0.6 per cent and to do that, efficiency gains across fund administration and operation have been extraordinary.

“But that opportunity has come via both the small and the large and the in-between,” Slattery continued.

“So what we’re seeing is efficient niche market services that are being produced both at the lower levels and at the upper level; they’re services that are allowing people to broaden what they’re delivering and to provide those services at a more engaged level.

“And where they are able to actually become competent at the same time, they are genuinely adding value and the consumer is undoubtedly better off.”

Offering a similar perspective, Vamos said that in self-managed super funds, in industry funds and in retail master trusts, the source of the service, whether institutional or boutique, was not nearly as relevant as its quality.

“What we’re seeing is the transformation of the industry to servicing individual members,” she said.

“This is the transformational change where even superannuation funds are saying, ‘how do I, even in a default environment, deliver to the individual’s hopes and dreams in terms of retirement outcomes?’

“So we’re seeing a huge change in the industry, in that what self-managed funds have done is provide a real catalyst for innovation,” Vamos continued.

“When I look at the innovation that has happened around self-managed funds, both in terms of administration platforms and in terms of the ways they’re investing their assets, I think we’re seeing an enormous transformation.

“They’ve driven enormous innovation and I think that’s where we can learn a lot – we can learn a lot from the way self-managed funds are managed and the way self-managed funds invest.”

Are SMSFs protected enough?

Yet despite what innovation and impetus may have been provided by self-managed super funds, the sector continues to be the subject of perennial debates around compliance.

Indeed, Slattery’s concern about SMSF service providers coming into the sector for an ‘easy win’ is one shared by others within the super industry when it comes to trustees, but for Bowerman such concerns are likely unfounded. 

“I think some of the compliance debate actually comes from the idea that perhaps there are people doing exotic things within their SMSF,” he said.

“But the Cooper Review did a great job of collecting a lot of data around SMSFs and you saw from that that the number of funds actually doing things with collectibles or exotic-type stuff was actually less than 1 per cent of the assets.

“It just so happens that that 1 per cent got 70 per cent of the publicity,” Bowerman added.

“So I do think that stuff’s a bit overblown.”

Yet Bowerman did admit that certain SMSF trustees did have a tendency to push the envelope.

“You do get people at the aggressive end on the strategy side and we’re probably seeing a bit of that at the moment with some of these low or zero interest property financing arrangements,” he said.

“So I think the thing with the SMSF sector is that at times, people do push the envelope and it tends to generate compliance debate.

“Because the sector is fragmented and about a huge number of individuals, you get this fear that there’ll be some big compliance issue,” Bowerman continued.

“But people should remember that the overwhelming majority of accountants, auditors, financial planners working in the SMSF space are doing things absolutely within the proper regulations and the right approach.”

For La Greca, there will always be room for improvement when it comes to compliance.

“Every system needs revision and fine tuning because, at the end of the day, it’s driven by peoples’ nature,” he said.

“You could argue that it’s the same thing as the tax system; if the tax system was simple and only five pages, how did it get to whatever it is, four volumes and several thousand pages? 

“It’s because someone said, ‘hang on, I can do that and there doesn’t seem to be a problem,’” La Greca explained.

“So the ATO (Australian Taxation Office) has to change the law to account for it and that’s how you get these sorts of problems.”

The reality, according to La Greca, was that a regulator could close one loophole but it was inevitable that there would be another one.

“You try to solve one thing and then somebody thinks they’d rather not pay that tax or rather not follow that rule so they look for a way to skirt around it,” he said.

“And unfortunately, that’s human nature; as long as we’ve got trustees who are human, we’re going to have this issue.

“But that doesn’t mean it’s endemic in the SMSF space,” La Greca added.

“The ATO numbers clearly show that the number of trustees who do cross those lines or who do go very close to those edges is relatively minor in the greater scheme of things.

“It happens, but you can’t legislate out greed.”

Of course, the issue attracting the vast majority of attention for SMSFs in recent months goes well beyond compliance. 

Instead, the spotlight has been drawn by the collapse of organisations such as Trio Capital, consequent compensation levies and where self-managed super funds are ultimately placed with respect to fraud.

But for Vamos, the situation simply reinforces the differences between SMSFs and APRA-regulated funds.

“I think, at the minimum, people need to understand that the way self-managed funds are regulated – because you’re doing it yourself – it is very different to the pooled area,” she said.

“And therefore some of the protections are not available.

“You need to understand that when you’re going into a self-managed fund, there is a risk, an increased risk, particularly if you put all your eggs in one basket,” Vamos added.

“And clearly, Trio is a good example of that.”

Alternatively, Slattery said that the Trio compensation levy had not highlighted differences in regulation so much as the limitations on recourse for all members.

“At the moment, there is simply no compensation scheme for anybody that is a guaranteed compensation scheme in super,” she said.

“What there is is a range of options that are available to SMSFs and APRA-regulated funds.

“So you can go to the AAT (Administrative Appeals Tribunal), you can go to the Supreme, Federal and District Courts, you can got to the SCT (Superannuation Complaints Tribunal), you can be legally represented and finally, everybody has access to compensation through PI (professional indemnity) insurance, either through the product itself or through the adviser,” Slattery outlined.

“The only difference between the two sectors is that in industry and retail funds, there’s what we call a Part 23 compensation arrangement.”

Describing Part 23 of the Superannuation Industry Supervision (SiS) Act in greater detail, Slattery said that where a fraud claim was made by a fund on behalf of a member, it had to be deemed ‘in the public interest’ for it to be approved.

“The public interest test is then approved by the minister, who has the discretion across the top of that, and the only two major discretions that have ever been given by the minister for these large cases have both involved large public interest matters,” she said.

“And under Part 23a, there’s no guarantee that the claim, even if it’s gone through those two real tests, will be paid at 100 per cent.

“So Part 23 has a lot of holes in it,” Slattery continued.

“Everybody says that if you’re in an APRA-regulated fund, you will be compensated and you will be compensated to 100 per cent – but that’s the anecdotal information that is not correct.

“In the Trio matter, only four funds have been approved; they were corporate funds and Government funds and in the majority of those funds, they had Government employees in them but there were still a significant number of funds who weren’t approved.”

However, the major point of contention within the events following Trio’s collapse is whether self-managed super funds should have been required to pay a portion of the compensation levy raised.

And for Fiona Reynolds, chief executive officer of the Australian Institute of Superannuation Trustees (AIST), the matter comes down quite simply to how well SMSF members expect to be protected.

“At the end of the day, SMSFs can’t have their cake and eat it too,” she said.

“If they don’t want to pay a levy to APRA to insure themselves against collapses, and they certainly complained about that when it was suggested, then they can’t expect to be covered against collapses.

“You can’t have it both ways,” Reynolds added. 

According to Reynolds, a compensation scheme to be levied in the event of fraud and loss could be equated to any other form of insurance.

“Quite frankly, with the APRA levy from Trio, not all the super funds were involved in Trio and yet we still had to contribute,” she said. “And that’s why members in APRA-regulated funds got some money back.

“But if SMSFs aren’t going to pay into some similar scheme then they can’t expect to get their money back,” Reynolds reiterated.

“And frankly, I can’t think why you wouldn’t pay a levy to be covered.

“It’s like taking out an insurance scheme; why wouldn’t you have some insurance against what is arguably your biggest asset?”

Yet on the topic of ‘fairness’ with respect to compensation levies, Slattery was quick to point out that all fund members, whether SMSF, industry funds or retail master trust, had reason to take issue with a levy raised on the back of others’ mistakes.

“What you’ve got here is innocent members of the APRA-regulated sector, innocent members of SMSFs and innocent individual investors out there in the market,” she said.

“But from the SMSF perspective, if you were a trustee and it was you and your wife in the fund, would you be willing to pay, say, $1,000 out of your hard-earned to make sure that somebody like me and my husband, who haven’t made the right decisions, can now be recompensed?

“So why would we want to have a levy imposed when we’ve done nothing wrong in your fund?” asked Slattery rhetorically.

“And, to be perfectly honest, why do all the other members of the APRA-regulated sector have to fund other peoples’ mistakes?

“Why shouldn’t it actually be caught at the trustee level of that fund or at the asset allocator who’s provided the guidance or at the research house or at the product development area or at the advice level? If there’s to be compensation at all, that’s where it should be.”

The bottom line, according to Slattery, is that the members of self-managed super funds have other avenues to pursue when it comes to recouping losses resulting from fraud.

“If you’re going to go into an SMSF, there are a range of opportunities for you to access compensation through your insurances and the courts and a number of other areas,” she said.

“And there have been PI covers that have allowed 100 per cent payout and court payouts that have allowed 100 per cent payouts and AAT payouts that have allowed 100 per cent payouts for fraud and theft.

“These avenues are working and they are working well,” Slattery reinforced.

“That doesn’t mean that it’s easy and it doesn’t mean that it’s simple.

“But it means that if you’re in an SMSF, there are a range of options already; there is simply no reason for a levy.”

Yet while the SMSF sector continues to face new challenges, it seems the sector’s issues, or more particularly their significance, are diminishing. 

For Vamos, the sector has experienced a definite change, one that may indicate its coming of age.

“I think we’re seeing a change in self-managed funds, and as more and more of the larger providers get involved we’re starting to see a framework develop that is more robust,” she said.

“And clearly that’s a good thing.

“The emergence of self-managed funds is, in many respects, the emergence of individually-managed accounts,” Vamos continued.

“And so what will be interesting to look at is the concept of individually managed accounts and how achievable it is in the pooled area because of technology.

“But the bottom line is that self-managed funds, like pools, are a vehicle and that vehicle is changing for all sectors.”

For Slattery, the strength of self-managed super funds lies in the fact that they are a life decision.

“It’s not like going into a bank and opening up an account,” she said.

“You’re looking something that’s a small fund where the trustees are the members and the members are the trustees.

“You actually get control over how you accumulate, why you accumulate, what you do, and how it fits into all the other aspects of your life,” Slattery continued.

“But what we forget in this industry’s bickering is the fact that we have such a broad and diverse range of super options that actually complement each other.

“We forget that through this industry and its options, all Australians have an opportunity to benefit themselves, to become engaged at their own level of experience and, ultimately, to fulfil their retirement savings goals – that’s just a wonderful, wonderful thing.”