SMSFs: Challenge and opportunity

Vanguard | 23 July 2015


Vanguard and Investment Trends released the 2015 Self Managed Super Fund Report (SMSF) today, providing comprehensive insights into the trustees responsible for almost $600 billion in superannuation assets.

This year's report is based on a survey of almost 4,000 SMSF trustees and 501 financial advisers conducted between March and April 2015. The findings establish the state of SMSF portfolios, the factors informing trustee decision making, their future intentions and, relationships with planners and accountants.

The number of SMSFs reached 551,000 in March 2015, although growth in the number of SMSFs has been subdued over the last two years with 25,000 SMSFs being established (net) annually, down 8,000 from 2012-13 levels. This is the lowest annualised growth rate since the introduction of Simpler Super reforms in 2008.

The slowdown in SMSF establishment is mainly attributed to fewer people leaving traditional superannuation funds as a result of perceived negative performance. In 2013-2015 an estimated 12,000 people noted 'Poor super fund performance' as the reason for establishing an SMSF, down from 28,000 in 2011-2012.

Despite a 7 per cent increase in the All Ordinaries Index in the 12 months to April 2015, SMSF share market return expectations mostly fell over the same period and the level of concern in relation to investments increased.

Commenting on the report, Vanguard Head of Market Strategy & Communications, Robin Bowerman, said:

"SMSF trustees have a bearish outlook at the moment, not surprising given recent market valuation but this is having a distinct impact on the investment decisions trustees are making, and in turn their funds' asset allocation."

Asset allocation

Poor market outlook drove more SMSFs to adopt defensive investment strategies when making asset allocation changes over the past year. In line with this trend, SMSFs stockpiled excess cash in their portfolios. Total cash is estimated to have increased from $146 billion to $160 billion, with excess cash - funds that would have been invested but were not because of market uncertainty - growing from 30% to 35% within the total cash pool.

SMSF allocations to listed and unlisted managed funds continued to increase, growing to 18 per cent of total assets, up from 15 per cent in the last year. While the allocation to direct shares drifted down from 44 per cent to 41 per cent of total assets, direct shares maintained their position as the dominant asset class among self-managed funds.

Closer examination by Investment Trends revealed the average number of shares making up this large component remained steady at 18. Within this allocation, SMSFs have significant concentration in their portfolios as more than 50 per cent on average is represented by either resources or financial stocks.

"The large portion of assets that SMSFs continue to hold in direct shares, and the increasing levels of excess cash, present a range of issues for SMSF portfolios. They may be building in more concentration risk at a time when trustees are increasingly concerned about financial markets," Mr Bowerman said.

"However, it is positive to see investors, both advised and unadvised, increasing their diversification through vehicles like managed funds and ETFs ."

Managed funds and ETFs

The proportion of SMSFs using managed funds has continued to grow, reaching 43 per cent in 2015, a level not seen since 2011.

ETFs proved increasingly popular, the number of SMSFs holding ETFs grew 53 per cent in the 12 months to April 2015, with growth also reported in the number of SMSFs who intend to invest in ETFs in the coming year, up 20 per cent.

The way planners directed their SMSF clients' assets also reflected growth in managed funds and ETFs, however in the coming year, planners reported they intend to place more into listed investments, but less into unlisted managed funds.

SMSF investors cited diversification and access to international markets as the key reasons they used both ETFs and managed funds. These same drivers were also evident amongst SMSF investors who intended to invest in either ETFs or managed funds in the coming year.

SMSFs and advice

The proportion of SMSFs using a financial planner declined for the eighth successive year, with only 36 per cent using a planner in the past 12 months.

The number of SMSFs using a planner (or adviser) does not reflect the need for advice that exists, with 39 per cent of SMSFs reporting areas where they have unmet advice needs. Commonly identified gaps in advice include pension strategies, building an income stream, and wealth preservation.

When asked about barriers to seeking this advice for their SMSF, aside from noting that they can manage their own financial affairs, the biggest barrier was a lack of confidence in adviser expertise.

Commenting on SMSF advice relationships, Vanguard Head of Distribution, Michael Lovett said:

"As has been shown throughout the history of this research, there is a clear opportunity for planners and advisers to service SMSF investors.

"SMSF investors have clearly articulated unmet advice needs, and we have strong insights into what is driving their decision making.

"It is incumbent on planners and advisers to demonstrate value above and beyond investment selection, and work towards developing mutually beneficial partnerships."

Planners remain the number one source SMSFs intend to approach to address their unmet advice needs. Meanwhile, a similar number of SMSFs (52 per cent) were open to turning to accountants for advice.

Investment Trends research reinforces this point by examining the areas of unmet advice, and overlaying statistics about the capability of both SMSF planners and SMSF accountants to provide advice in each of the specific areas. In all categories except tax planning SMSF planners are, in aggregate, perceived to be better positioned to meet the unmet advice need of SMSF investors, highlighting an opportunity for accountants to work closer with planners.

Planner perspectives

Financial planners' revenue from SMSF clients remained steady at 21 per cent of their overall practice revenue this year, well short of the 30 per cent they expected. Consistent with previous years' research, planners remained optimistic about revenue from SMSF clients in three years' time, targeting 30 per cent.

A new question in the 2015 research asked planners to identify areas where product providers could help them better service SMSFs. The top response related to cost, with 30 per cent asking product issuers to ‘provide lower cost products'. Education was also a common response, with planners asking for training to help them advise SMSF clients, in addition to more education targeted at SMSF investors demonstrating the benefits of seeking financial advice.