Establishing an SMSF is not just about people wanting greater control of their investments. Damon Taylor writes that there is a growing perception that it is also linked to people’s hopes and expectations around post-retirement.
In MySuper, the super industry has a product which is clearly designed for the disengaged member. Yet for those members exercising choice in superannuation, it seems customisation is becoming increasingly important.
Indeed for Martin Heffron, managing director of SMSF Solutions, such moves towards control and personalisation are natural, with self-managed super funds (SMSFs) an equally natural by-product of the industry’s evolution.
“The way I look at why that desire for control has arisen is that we’ve gone from a situation back in the early 20th century when the age pension was initially introduced,” he said.
“The average life expectancy of an Australian male at that time was 64 so the average bloke was probably going to be dead by the time they got access to their pension.
“But that life expectancy has increased by roughly 20 years in the last 100 and the Government’s policy response to that in Australia, and in a lot of other jurisdictions, has been to try and transfer the retirement income funding risk from the State to the citizen.”
According to Heffron, it is not so strange for people to want control where they have been given responsibility.
“As people become aware that they have responsibility for retirement income funding, that it’s their gig and not anyone else’s, then I think it’s a natural human reaction to want control in order to guarantee your funding,” he said.
“And so I see that as the big driver behind the growth in SMSF – it’s a response to Government policy which, in itself, is a response to demographic change.
“I think those are the major, macro forces that are driving this – and SMSFs are just a symptom of that,” Heffron continued.
“People are simply getting more engaged with their retirement income funding and superannuation and whatever is associated with that, whether it’s understanding life insurance or investment or compliance or longevity risk, they’re becoming more engaged in that process.
“So I think that’s what’s really driving SMSFs – it’s this need for control which has come out of an understanding that, actually, ‘I need to do this myself because no one else is going to look after me.’”
Offering a similar perspective, Andrea Slattery, CEO of the SMSF Professionals’ Association of Australia (SPAA), said that irrespective of sector, there was an increasing number of Australians seeking to engage with super.
“People who have been involved in self-managed super funds have always been interested in control, flexibility, opportunity, and it not being one-size-fits-all,” she said.
“But I think all super fund members are taking more and more of an interest in making sure that the decisions they make in a financial sense actually work for them moving forward.
“After all, if you’re aware of your financial situation and interested in it, you do become engaged, and as you’re more engaged, you’re more likely to have a better understanding and, as your understanding grows, you’re more likely to want something that actually meets your needs,” Slattery explained.
“There have been a range of factors leading to SMSF growth, but whether it’s small business owners, the self-employed, primary producers or professionals, the theme is consistent.
“They manage their own decisions for the majority of their life, they’re engaged in those decisions and this is just another aspect of being engaged.”
Of course, the reality of more engaged fund members is one not lost on industry and retail super funds. But with moves to offer direct investment options becoming increasingly common, the question is whether these are a consequence of industry evolution or a desire to better compete.
For Heffron, it is without doubt the latter.
“It would seem to me that the drive to direct investment options is a competitive response to SMSFs,” he said.
“So it’s a perception that that’s what people want and that that’s why they’re leaving a large fund to setup an SMSF.
“And yes, it might be part of the reason but I don’t think it’s the crucial part and I don’t think the existence of direct investment options in industry funds will make much difference to the growth of SMSFs in the long run,” Heffron continued.
“I say that because it’s just not hitting the most important thing, which is, ‘I’d like the cheque book to be in my drawer and I’d like to be able to sign it when I want. I understand the compliance implications of that but nevertheless, I’m expected to fund my own retirement and I’m not really keen on relying on someone else to do it for me.’”
Echoing Heffron, David Hasib, director of financial planning for Chan & Naylor, said that it would be naÔve to think that industry and retail funds’ growing concerns over SMSF leakage had not been a factor.
“There’s no doubt that direct investment options are part of an evolving superannuation marketplace, but I suspect that the main reason why they’re now offering direct investments such as shares or a menu of term deposits, for example, has been as a result of the growth of the SMSF sector,” he said.
“A lot of retail funds and industry funds are aware that their top clients with bigger balances are leaving and that they’re going to an SMSF where it does become effective to have your own fund from an administrative perspective.
“And with all the other evolutions around the SMSF sector, be it the limited AFSLs (Australian Financial Services Licences) now offered to accountants where they can give strategic advice, not to mention some very good IT solutions where people can have a platform that manages administration and compliance for them, those fundamental boxes are being ticked,” Hasib continued.
“The responsibilities are still there but they’re more manageable – and so the argument becomes that much more compelling.”
Alternatively, Slattery pointed to direct investment options as being part and parcel of giving members access to the services they were looking for.
“The APRA-regulated (Australian Prudential Regulation Authority) fund sectors are interested in serving their members, in having their members engaged, and they’re interested in growing their business,” she said.
“So the offerings that they’re now making are evolutionary, but they’re also an opportunity to retain their members and continue to provide them with their services.
“However, the ability for people to be interested in self-managed super means that they are genuinely interested in control and flexibility and the opportunities of direct professional advice,” Slattery added.
“So yes, these funds are offering services where people can have that little bit more flexibility and do that little bit more themselves – but with that extra flexibility comes extra cost.
“The challenge lies in introducing these services to meet member needs while at the same time maintaining efficient offerings for the rest of the membership.”
In fact, it is those opportunities around direct professional advice that Slattery refers to that seem often to be the key ingredient for self-managed super funds.
For Heffron, the advantage of being able to talk to an adviser about one’s entire financial circumstances is enticing, and so if that person has a steadily rising account balance, the benefit of advice and the inclination, an SMSF may be the logical next step.
“The drivers for establishing a fund are many and control’s that top one, but flexibility of investments, price, the ability to respond quickly to changing external factors, particularly legislative change – these are also all factors as well,” he said.
“I think if you’ve become engaged with your super to the extent that you’re going to have an SMSF, you’re going to want advice from time to time, but you’re not necessarily going to want the holistic advice that we’ve traditionally seen the financial planning industry providing.
“So yes, there is a need, or a drive certainly, within those SMSFs that I talk to for scaled advice-type solutions,” Heffron continued.
“But they also see themselves as the controller, so whilst they may not have the expertise, the more engaged they become, the more they realise that.
“And what that means is that it’s often the best educated SMSF trustees actually seeking advice.”
Hasib said that from his perspective, there were two parts to the advice equation when it came to SMSFs.
“Obtaining a good quality financial adviser based on strategy is critical, I believe, when you’re becoming the trustee of a self-managed super fund,” he said.
“And that’s not only from a compliance perspective in terms of understanding your role as a trustee, understanding the obligations and the responsibilities; it’s also about understanding the myriad of options you have now in the investment market.
“Investments are becoming more complicated, they’re becoming more sophisticated, there is an enormous amount of choice out there and I think a good quality adviser who is competent and certainly experienced in the SMSF sector is a person who can partner with their client,” Hasib continued.
“They can distil all of that investment information, filter all of the noise and then convey it in a meaningful way so that a client can make good decisions with money that’s relevant to their risk profile, relevant to their time horizon, relevant to their understanding.”
Yet as important as advice may be for the successful running of a self-managed super fund, the reality is that not everyone who needs advice actually seeks it.
And while there may be any number of reasons for trustees holding back, Slattery said that it is vital that people realise that advice can take many forms.
“Professional advice is integral to a self-managed fund but it crosses a range of areas,” she said. “It’s not just the investment part, it’s the compliance part or the legal part or other aspects of how you manage the fund.
“Advice is really important but it can come in many forms,” Slattery continued.
“At SPAA, our research shows that about 48 per cent of trustees currently use a financial planner in their SMSF but there’s pretty close to 60 per cent plus that use a stock broker.
“There’s also around about 98 per cent that use a lawyer when they need it and about 98 per cent that use a tax agent when they need it,” Slattery added.
“So as to why there aren’t more trustees using financial planners – perhaps they have another form of investment or advice service that’s already meeting their needs.
“That’s the one thing that nobody ever talks about.”
Indeed for Slattery, in self-managed super funds more than any other sector, the onus was on financial planners and advisers to ensure they were adding value.
“Financial planners need to be specialised and understand their clients and understand how to add value for their clients in what they’re doing,” she said. “They need to be able to add value by entering into a relationship with people who are engaged.
“So all of our research is showing that if you sell a product, you will not engage your client, you will probably lose them,” Slattery continued.
“So you need to know more than what the product is that you’re selling; you need to be able to be a strategist or a specialist or to be able to add value in whatever way that will be.”
Perhaps not surprisingly, Slattery’s concern is one shared by Heffron, who said that many trustees were not availing themselves of financial advice because they understood the value chain all too well.
“I think the value chain in our industry is distorted to the extent that most of the profit and revenue pools are generated at the product end as opposed to the infrastructure/compliance piece in the middle or the advice piece which interacts with the consumer,” he said.
“And the really engaged consumers, they actually understand that.
“They’re looking at the value chain and saying ‘actually, I don’t want to pay that for that wrap or that Australian equities product because I know it’s too expensive’.
“And our adviser community is still too constrained from offering an advice-based service because either they’re vertically integrated into a product manufacturing group and they don’t have the flexibility from a charging perspective – or they will struggle to communicate the value that they add to the consumer,” Heffron continued.
“I think consumers are not well enough educated around the value of advice because they’re not engaged enough.
“Then, when they become engaged enough, they understand the weaknesses in the current revenue and margin pools in our value chain, and then struggle to find an adviser who’s competent enough and independent enough to provide them with non-conflicted advice.”
But as undesirable as that current status quo may be, Heffron said that it was one not easily changed.
“It’s going to take a generation to get over it, but I don’t think our industry can stay like this,” he said. “Everything is structured around distribution – we’re even seeing institutions wanting to get into the SMSF space by buying administration businesses or buying other businesses that touch the SMSF market.
“The whole driver behind that is to distribute product and I think the more engaged our community becomes, the less they’ll buy that because they get it,” Heffron explained.
“They understand how it works and then they can’t find an adviser to deliver value to them because it’s difficult for that sector to exist because there’s not enough volume there.
“But the bottom line at the moment is that the marketplace is failing.”
Of course, if there is one SMSF issue in which it seems advice is sorely needed, it is in mitigating the many risks now confronting trustees. Recent months have seen unscrupulous property spruikers highlighted as chief among them and for Hasib, having a trusted adviser to turn to is critical.
“Look, when there’s an environment of uncertainty as a client goes into becoming a trustee, without perhaps completely understanding their responsibilities and their role as a trustee, they’re going to be subject to being abused by those around them,” he said.
“They’re going to be subject to attack and to people eager to take advantage of their ignorance or their naivety.
“So certainly, having good quality advisers around you who have your best interests at heart - be it a financial adviser, an accountant or a competent lawyer to talk about those issues, whether it’s investment advice, compliance advice or estate planning advice – is critical.”
However the challenge, according to Heffron, was the relative lack of regulation in those areas from which property spruikers were dealing.
“In terms of responses, we probably do need a bit of help from the regulator and maybe some policy development around who can be involved in this sector,” he said. “I mean, the property spruikers are still largely unregulated and the lobby group that looks after them is strong.
“That needs to change, but the second thing is again education,” Heffron added. “It’s unlikely that the engaged and educated consumer will fall into that trap.
“It will be the disengaged, uneducated consumer who will.”
In fact for Heffron, it is government superannuation policy that makes regulatory intervention in this issue so vital.
“So consecutive governments have shifted the retirement income funding risk from the state to the citizen but have done very little in terms of policy development to help the community take responsibility for that,” he said.
“There’s been no encouragement to become financially educated; financial literacy is not a standard part of school syllabuses in any state as far as I’m aware, and these are really big issues that we’re failing to address.
“You’re becoming an adult, going through the school system and not really understanding the power of compound interest half the time and to me, that’s appalling,” Heffron continued.
“So given that various governments have done this, have deliberately shifted retirement income funding risk, I think we should be doing a lot more from a policy perspective to try and assist the community in being educated enough to be able to deal with the responsibilities that they’ve been given.
“And I think so far, we’ve done a really poor job because it hardly gets discussed.”
Taking an entirely different tack, Slattery pointed out that while the targeting of SMSF trustees by property spruikers was undoubtedly a concern, instances of it actually occurring were relatively rare.
“At the moment, the ATO (Australian Taxation Office) stats are showing that all borrowing in all properties, not just LBRAs (limited recourse borrowing arrangements), is at 0.48 of a per cent,” she said.
“It’s very low, so while we’re hearing a lot of noise in the market, there is very little actual uptake for LBRAs - and those that do take it out are, in the majority, taking it out for the right reasons.
“We know that good professional advice is being delivered around borrowing because so many are making the decision deliberately with advice and knowledge and skills,” Slattery continued.
“But what I would say from SPAA’s point of view is that you wouldn’t let a stranger into your house so why let somebody talk you into investing in something when you don’t understand what it is and when you may not be aware of the repercussions?”
For Heffron, the bottom line is that the risk exists, a regulatory response is required but, more importantly, trustees needed to ensure they were educated.
“I’d say the education piece is the single most important factor in lots of these things,” he said.
“What would make those things better? What would reduce those risks? And what would result in better outcomes in terms of retirement income funding for Australians?
“I think if you were to prioritise what we needed to do in order to answer those questions and achieve those things, education would have to be right at the top.”
Yet despite its challenges, the clear landing point seems to be that self-managed superannuation continues to go from strength to strength. And while the need for continuous improvement is a given, Hasib said that he agreed with Heffron when it came to the importance of education.
“I think education is critically important for trustees,” he said.
“And I think there needs to be a framework of education that’s available for trustees, even a stronger association for trustees – because whilst we have SPAA, which is predominantly for advisers to be part of, I don’t see that there is a very clear option for trustees to be part of an association where they can go and extract information.
“But for me, education is the key – the more education, the better informed and the better informed, the better the decision.”
Similarly, Slattery said that as an industry association, SPAA would always encourage trustees to become informed.
“We need to continue to encourage them to understand their roles and responsibilities and continue to encourage them to seek information and professional services to help them make informed decisions about their retirement,” she said.
“We need to help consumers understand that there is a profession and that if you’re seeking advice, you should have an appropriately qualified, independently accredited adviser.
“We mustn’t forget that this is about people looking after their future money for a future retiree who may be themselves,” Slattery added. “And therefore, encouraging engagement and encouraging greater thought, greater knowledge, greater understanding around the sector has to be foremost on our priority list.”