The topic of self-managed superannuation funds (SMSF) seems to be replacing investment property conversation at more and more baby boomers’ weekend barbecues.
And financial planners and accountants are increasingly moving into this area of advice to maintain their existing high-net-worth clients and find new ones.
With combined assets of around $165 billion, a combined membership approaching 600,000 and some 1,800 new SMSFs being created every month, there’s no doubt this is the fastest growing segment of the superannuation market.
But these funds are no cakewalk to manage or advise upon, and anyone eyeing off this rapidly growing market simply as a source of extra fee income should think again.
The financial planning industry has changed substantially — from a cottage industry with general practitioners providing advice on everything to a profession with multi-planner practices with increasingly specialised principals.
It is a change driven as much by changing client demands and expectations as it is by increased compliance, higher education standards and the growing complexity of financial planning strategies.
The area of self-managed superannuation, with all of its additional complexities, is a classic example of this need for specialisation.
So what does the financial planning advice model need to look like to work in the SMSF advice space? What do planners need to offer to this sophisticated segment of the market?
I believe there are four main elements common to most good SMSF advice practices.
The first element is education: advisers must at least have detailed knowledge of the Superannuation Industry Supervision, Tax and Corporations Acts to provide advice to SMSF trustees.
And they must embrace ongoing education. SMSF trustees want their advisers to have expert knowledge, and they are willing to pay for it.
Good advisers will also join a specialist SMSF association, such as the SMSF Professionals Association of Australia, to complement their Financial PlanningAssociation membership.
The second element is a good fee-for-advice model.
There is a place in financial services for commissions, but it is rare in the area of SMSF advice. This is because SMSF clients will often include direct property or direct shares in their funds, and it is therefore very difficult for them to agree and pay an assets-based advice charge. I believe a fixed yearly fee (not based on time only) agreed at the commencement of the year and deducted monthly from the SMSF regardless of the size and asset type of the fund is the only way to charge for advice.
The third element is experienced and qualified support staff. SMSF clients are demanding. A myriad of studies have shown that clients establish SMSFs because they want control; they want to be in the driver’s seat and they need and demand coaching from their adviser on what they can and can’t do with their SMSF. If they have questions, they will not wait for you to answer them when you return from a conference or annual leave. Advisers dealing with this segment of the market need to make sure they have a client service manager available who has SMSF knowledge. I don’t believe it is possible anymore for a one-adviser practice to succeed in the SMSF advice space.
The final element is solid, collaborative relationships with other professionals, such as accountants, lawyers and auditors.
SMSF trustees require much more complex advice than simply how to manage the investments in their portfolios.
Good SMSF advisers will work closely with their fellow professionals to ensure the fund provides the best tax outcome without breaking the law or breaching the trust deed. They will also rely on their extensive knowledge to protect the trustee and fellow professionals.
A client recently asked me if he could invest $200,000 from his SMSF into his wife’s coffee shop to expand the business.
Remember, SMSF clients like control, so a simple ‘no’ is never enough. I needed to cite the relevant sections of the law to demonstrate why this investment could not be made. Had he made the investment, it could have been very costly both for the trustee and the accountant, who might not have found out about it until preparing the annual return up to 18 months after the investment was made.
SMSF clients need their financial planner, accountant, lawyer and auditor to work in harmony so they meet their fund objectives and to ensure breaches do not occur.
In summary, the SMSF practitioner needs to be a highly educated, well-resourced adviser who enjoys constantly learning and is motivated by the challenge of working with self-confident and often single-minded clients. The SMSF adviser needs good relationships with fellow professionals and needs to understand how to work as part of a team of professionals. And they need to be specialists, because performing this type of work properly can be complex and time-consuming.
With average account balances in excess of $275,000, SMSF clients are very particular about how their funds are managed, and the potential costs for getting the advice wrong can be pretty high. Advising SMSFs is a discipline that needs full-time attention.
Craig Banning is a principal of Banning Financial Services and an authorised representative of AMP Financial Planning.
