SMSFs grow amid adversity

The rise and rise of self-managed superannuation funds in Australia has often been fuelled by periods of market adversity and, as Damon Taylor reports, there is no sign of that trend changing any time soon.

Whether you’re a participant in the self-managed super fund (SMSF) sector of superannuation or merely an observer, it has become abundantly clear that this is a segment of the superannuation industry to be reckoned with.

The growth of SMSFs both in terms of funds under management and total number of funds has been beyond impressive and for Andrea Slattery, Chief Executive Officer of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA), it has been for three reasons.

“One — and every survey has supported this — is that people who have control over other aspects of their lives want to have control over their savings and retirement plans as well,” she said. “And this is true no matter what age you are.

“The second aspect is investment flexibility,” Slattery continued. “So the ability for SMSFs to be able to tailor to your needs, your interests, your ability to get information and advice and make your own decisions is all a very important part of what an SMSF is all about.”

And the final reason, according to Slattery, requires a bit of a history lesson.

“So when SMSFs first started, they were really for people who had small businesses or for primary producers so that they could have the capacity to save for their own retirement as well,” she said. “But 10 years ago, there were half a million small businesses in Australia whereas now there’s nearly 1.8 million.

“That’s a lot of growth in people who are servicing the financial services industry and who are familiar and cognisant with what an SMSF is all about,” Slattery added.

“So I think SMSF growth has been a result of an increase in understanding, an increase in education and an increase in specialised advice to the point where people fully understand that this is a viable and attractive option.”

Adding her own perspective to the superannuation industry developments which have placed self-managed super funds in the position they now find themselves in, Pauline Vamos, CEO of the Association of Superannuation Funds of Australia (ASFA), said that the role of accountants could not be underestimated.

“The ability of a person’s accountant to setup a self-managed fund for them when they’re delivering tax advice has been something that’s allowed self-managed funds to be set up both easily and quickly,” she said. “Then with an ageing population and growing account balances, that again has meant that people have wanted more control.

“And unfortunately, I think it’s also become a trendy thing to have.”

But trendy or not, one of the biggest indications of the growing weight and momentum of the SMSF sector is the fact that a number of large financial services institutions are showing an interest in getting their own piece of the SMSF pie.

And for Slattery, it is evidence that the SMSF record is slowly being set straight.

“In the past, I think there was a lot of anecdotal information about the SMSF sector which simply wasn’t correct,” she said. “But through the Cooper Review, this sector is now acknowledged as being well functioning and well performing.

“So I think what’s happened is that with the advent of people like SPAA, [and with] specialists in the market and increased education, more and more people are aware that this is a sector of the superannuation industry which invests back into the market.”

According to Slattery, institutions have also started to realise that SMSF trustees, whether across the board or in specific aspects of their service offering, represent a significant portion of their existing client base.

“But beyond that, Australia’s superannuation market is growing exponentially,” she said. “The superannuation industry’s funds under management are at $1.3 trillion or thereabouts at the moment and they’ve grown to that point from about $350 billion eight to 10 years ago.

“At that time, SMSFs represented a 14 to 15 per cent market share whereas they’re now 32 per cent,” Slattery continued. “Industry super funds were around about 7 or 8 per cent and now they’re 18 per cent. Retail funds were at about 48 per cent where they’re now approximately 28 per cent.”

But for Slattery, the pertinent point is that even where market share has dropped, 28 per cent of $1.3 trillion is still a great deal more than 48 per cent of $350 billion.

“All sectors have experienced growth and yet nobody really looks at it that way,” she said. “They look at who’s got their piece of the pie when, in actual fact, we should be all working together because thanks to compulsion, everybody’s going to benefit.”

Providing a counterpoint to Slattery’s position, Graeme Colley, superannuation strategy manager for OnePath, said that while he agreed that self-managed super funds had undoubtedly become an integral part of the superannuation market, he was less convinced that the sector would or could be seen as anything but a threat to industry or retail funds.

“The reason I say that is that we continue to see products come up which are in straight competition with self-managed funds,” he said.

“I know, for instance, that at one of the recent master funds conferences, Aussie Super was talking about the fact that they were building a fairly cheap platform in which clients would get access to a whole range of managed funds and direct share investment and cash.

“And you have to see that as being in direct competition with self-managed funds,” Colley continued. “So how that gets promoted and how people accept that as an alternative to self-managed funds will be interesting, but I can’t see the bigger funds seeing self-managed funds as anything but a threat for some time yet.”

Of course, despite the strong position the SMSF sector finds itself in, the Super System Review has indicated that there is yet a bit of tweaking at the edges to take place.

First on the list is service provider professionalism and competency and, according to Vamos, such initiatives are a timely and significant step forward.

“The ASFA position has always been that this is an important sector, we recognise that,” she said. “But the governance around it must reflect the new scale of that sector and so we support the measures that have been suggested in the Government’s response to the Cooper Review.

“We think the standards of auditors should be raised, that the accountants’ exemption should go, that transactions involving related parties should be on-market and that valuations should be real-time market valuations.”

Also indicating her approval of the Super System Review’s recommendations, Slattery said that SPAA fully supported raising SMSF service provider competency, accrediting people to at least an undergraduate level of experience and having specialists in the market that consumers could seek out to get the right kind of advice.

“It’s vital that people conducting business in this sector understand it, and have the knowledge and competency to provide that advice,” she said.

“And I believe that those same people should endeavour to get their own personal recognition in their knowledge in this area and should seek accreditation.

“It’s as simple as becoming more competent, getting recognition and providing clients with a very professional service.”

Yet while Slattery and Vamos were largely in agreement as to the improvements that could be derived from increased service provider professionalism, those opinions divided when it came to such an initiative’s flow-on effects to SMSF trustees.

This was, after all, a hope expressed within the Super System Review’s findings and also one Slattery believed would eventuate.

“I do believe it [increased service provider professionalism and competency] will increase the education and competency of trustees,” she said.

“If you’ve got people who work in this area, have challenged themselves in this area and pass on to you that knowledge and skill to help you to make a decision about your future options, then I think everybody’s going to be better educated.”

However, according to Vamos, that link, that transfer of knowledge, is not one that the industry can rely on being made.

“The issue for me is always the relationship and that holds true for any relationship,” she said.

“Certainly, there should be better regulation of anybody advising on whatever financial product it is and so the standards for self-managed funds should be the same as for any other advisor on financial products.

“But you always have to remember that you have information and experience asymmetry,” Vamos continued.

“You’ll have the advisor who is always in the privileged position of knowledge and though many, many self-managed fund trustees do know what they’re doing, many do not and, realistically, an adviser’s role may not necessarily be to educate their clients.”

Vamos said that ASFA had been strong advocates of putting into place minimum levels of education for self-managed super fund trustees for this very reason.

“A lot of people understand they’re in a self-managed fund because they are able to manage their tax, which is great, but do they know the risks?” asked Vamos.

“Have they, for instance, taken into account what happens in divorce?

“We’ve seen many women now who have been disenfranchised because there’s no consumer protection there, no free dispute resolution procedures and that’s just one issue,” Vamos continued.

“There’s also been a lot of discussion around what happens when trustees age and the fact that gains and losses are crystallised when they move back into the pool sectors.

“There are a lot of discussions that have to be had; it doesn’t mean the sector isn’t good but just like the APRA-regulated sector, you’ve got to be on a path of continuous improvement because we’re talking about peoples’ money here.”

Yet irrespective of what discussions must yet be had and what improvements must yet be made, the undeniable reality is that the self-managed super fund sector is maturing. And with the weight of growth and momentum behind it, the question is what precisely will take it to the next level.

For Colley, however, the answer to that question is already clear.

“I think improvement in the competency of all professionals that are associated with this sector is the first step,” he said.

“And I think that will certainly come out of the reform agenda because you’re already seeing that financial planners will have to know a little bit more about taxation and that accountants are going to be required to have more detailed SMSF knowledge if they’re going to be competent to meet this sector’s challenges.

“Over and above that, you’ve got the registration of auditors which may mean there’s a change in that market where you’ll have SMSF auditors who are absolutely competent in the undertaking of audits,” Colley continued.

“So I don’t think there’s any doubt that the combination of those things is going to move self-managed super funds to the next step where they’ll be considered as an objective alternative to the bigger superannuation funds.”

Adding weight to Colley’s sentiments, Slattery said that the implementation of the Super System Review’s proposals would allow for increased efficiency and certainly increased benefits for the consumer.

“For the SMSF sector, opportunities for growth are likely to continue simply because to be able to tailor and to be able to flexibly manage your retirement savings to fit your circumstances, that’s something that will always be very attractive,” she said.

“And you can add to that increases in compliance, increases in regulatory surveillance and guidance, increases in competency, the introduction of codes of conduct and the ability for people to be able to access new products and new advice pieces.

“So with the weight of all of that improvement in the pipeline, I think that the future for SMSFs looks very, very bright.”