Meeting the diverse needs of SMSFs will present the financial services industry with both challenges and opportunities, writes Tim Keegan.
Self-managed super funds (SMSFs) present the financial services industry with both challenges and opportunities.
Desire for control coupled with higher average balances means SMSFs take a diverse approach to how they manage their wealth.
This represents a major untapped opportunity for advisers and fund managers; however as a sector it is one of the most difficult to categorise or capture.
We all know the stats – growth in SMSFs has outstripped all other superannuation sectors and, with more than $500 billion in assets, is now the leading segment. They represent just 7 per cent of all superannuation fund members but account for 31 per cent of the $1.4 trillion assets under management.
And the growth is expected to continue. According to research by Deloitte, SMSF assets are forecast to grow to $3 trillion by 2035.
What motivates SMSF investors?
Understanding what SMSF investors want is not easy. We know that investors who choose to put their super into a self-managed fund are typically affluent, educated, mature and capable.
Beyond that they are difficult to characterise or to capture in the traditional financial services market, largely because they don't choose to be.
Key to understanding the SMSF investor is accepting that they can't be pigeon-holed. They are varied, along with their requirements, and the sector is extremely fragmented.
What is clear is that all SMSF investors want a high level of transparency about how their investments are managed, as well as value for money.
With an increasing number of SMSF investors entering the retirement phase, they also want access to their assets and are looking for a solid income stream for retirement.
To do this, many have looked to the stock market, investing directly or through their advisers.
According to the latest Investment Trends SMSF Report, between May 2007 and April 2013 the proportion of SMSF portfolios invested in direct equities increased from 35 per cent to 45 per cent.
Historically, SMSFs have also had a strong asset allocation to cash and term deposits.
Further research from Investment Trends' shows that SMSF trustees also invest in managed funds, and do this to diversify and gain access to different sectors and specialist investment strategies they can't otherwise access.
Key areas of interest for SMSF investors include boutique funds, specialist managers, sector-specific and international funds. For instance, when SMSFs invest in international markets, it's predominately done through managed funds.
Looking for income generation
Given that half of the funds currently under management in SMSFs are in the pension phase and this number is rising as the population ages, investors are increasingly looking for the best options for generating income.
Research company DEXX&R predicts retirement phase assets in SMSFs will reach $562 billion by 2023, accounting for 61.5 per cent of a total $914 billion in Australian retirement income assets.
Currently the SMSF sector could be said to be overweight in term deposits and cash, which in an ongoing low interest environment is unlikely to provide adequate income over the medium to long term.
A key issue for many SMSF trustees is that they can't easily access the types of investments that are available through managed funds, such as infrastructure, corporate bonds and commercial property.
The Australian Securities Exchange has recognised the demand from SMSF investors to have easier access to investment alternatives through managed funds with its recent launch of the ASX mFund Settlement Service.
The mFund Settlement Service allows investors to buy and sell units in selected unlisted managed funds directly with the mFund issuer via a stockbroker, adviser or accountant.
In promoting the service, the ASX cites advantages such as access to a broad range of managed funds through a central hub and the potential to enhance returns through exposure to a wider range of asset classes and by accessing the services of professional fund managers.
SMSF trustees demanding access
Fund managers have recognised that SMSFs want better access to managed funds, including ease of access at a competitive price. As a result, product offerings are on the rise with a focus on providing SMSF trustees with clear communication, streamlined transactions and a transparent fee structure.
The offerings vary – some are focused on equity investment, others on direct property, cash management and online stock brokerage.
Whatever specialist service they are packaging, the common feature is that they allow SMSF investors to invest in sectors and assets previously unavailable to them.
We can expect more specialist product offerings as fund managers seek to meet the needs of the SMSF investor.
Traditional fixed income investments, high yielding direct property, infrastructure and other income-focused investments are likely to be top of the list.
The trend will only continue. With an increasing proportion of SMSF investors moving into retirement phase, more may also choose to rely more on professional financial management.
It won't be an easy ride. SMSF investors are some of the most exacting clients out there. In addition to wanting a high level of control they expect the best in everything – advice, reporting, compliance, communication, value for money and, of course, investment returns. But then why shouldn't they?
There are sure signs the industry will rise to meet the challenge of the SMSF sector with increasing standards of professionalism, greater transparency of both fees and investments as well as the use of technology delivering investors better access to products and insights. SMSFs are a future worth embracing.
Tim Keegan is head of SMSF at AMP Capital.
Originally published by SMSF Essentials.
