SMSFs hold their nerve amid market, regulatory uncertainty

Vanguard | 10 August 2017


Self-managed super fund (SMSF) trustees and their professional advisers have remained calm but cautious during a period of uncertainty both in the regulatory environment and investment markets, according to the most comprehensive survey of Australia's SMSF sector, the 2017 Vanguard/Investment Trends SMSF Reports.

Shifting regulatory goalposts and volatile investment returns are keeping trustees and the financial planners and accountants who serve them on their toes as they navigate the new regulatory landscape. Conducted during this time of change, this SMSF research draws on surveys of more than: 3000 SMSF trustees, 470 financial planners and 900 accountants.

A significant milestone for the SMSF sector, and superannuation at large, was a raft of regulatory changes effective from 1 July 2017. The changes included annual concessional contributions capped at $25,000, annual non-concessional contributions capped at $100,000 and a transfer cap of $1.6 million for Australians moving their super balance into the retirement phase. These changes came 12 months after new rules were introduced requiring accountants offering specialist financial advice to SMSFs to hold a full or limited Australian Financial Services Licence.

Overall, 31 per cent of trustees had no concerns about the recent rule changes to super contributions, 30 per cent had some concerns, 24 per cent were somewhat concerned and 13 per cent were very concerned, with the remainder of respondents having not realised the changes were coming into effect. Comparatively, trustees with more than $2.5 million in their SMSF were among the most concerned, with only 18 per cent having no concerns and 27 per cent being very concerned.

Despite considerable public debate about the impending changes to rules around contributions and the superannuation pension cap, the sector has continued to grow, with SMSF assets rising 8 per cent to $645 billion, which is the largest annual increase in three years, while the number of SMSF accounts grew 4 per cent to 585,000.

"Self-managed super continues to be an appealing option for many Australians, but trustees have expressed concerns about the changing regulatory environment," Investment Trends Research Director, Recep III Peker, said.

"Although the number of SMSFs continues to grow each year, the rate of growth has slowed over the last four years. This could have partly been in response to uncertainty around changes to superannuation contribution and pension caps, which would be of particular concern to many trustees, given their typically higher than average balances.

"While there was some concern among SMSF trustees about these changes, they seem to have largely remained informed about the implications, and the large increase in SMSF assets could in part be attributed to SMSFs taking advantage of higher caps prior to 1 July this year."

SMSFs looking for solutions to lower investment returns

The survey of trustees projects that a far higher number of SMSFs are making changes to their asset allocation, in part due to their own bearish market return expectations.

While 114,000 trustees shifted their asset allocation to a more defensive position, up from 107,000 in 2016, the number of trustees who adopted a more aggressive stance this year also grew strongly, 57,000 up from 37,000.

In 2017, SMSFs are becoming more focused on growing their nest eggs. Amid this shift in focus, investor appetite for exchange-traded funds (ETFs), and residential property continued to increase, while blue chip and high-yielding Australian shares were still high on the agenda for many trustees.

"We've seen a gradual improvement in the diversification of SMSF portfolios over several years," Vanguard Australia Head of Market Strategy and Communications, Robin Bowerman, said, "but a clear bias toward the local sharemarket and property persist.

"This is understandable, given Australian's long-held affinity with direct property investment and with the flow of franking credits from Australian shares. But by excluding less familiar asset classes like international shares and bonds, SMSFs are depriving themselves of some highly valuable opportunities for diversification."

Fifty-five per cent of SMSF trustees said more than half of their portfolio was invested in one investment type, down from 60 per cent in 2016, with 35 per cent concentrated in Australian shares, 7 per cent in residential property and 9 per cent in cash or cash products.

Growing advice opportunity as trustees search for solutions

While control and independence are some of the primary reasons for SMSF establishment, in the 12-year span of this SMSF research, trustees have consistently identified their need for professional advice across a range of specialist areas.

The percentage of trustees who currently use a financial planner has marginally increased this year, up to 38 per cent from 37 per cent, continuing the slow reversal of a downward trend that reached its low point of 36 per cent in 2015. Conversely, the number of SMSFs using an accountant for investment advice has reached 86,000, up from 73,000 last year, while the number of SMSFs using accountants for tax advice only was slightly down to 214,000.

Notably, the number of SMSF trustees reporting that they had unmet financial advice needs continued to grow in 2017, with 277,000 projected to have needs for professional advice, up from 255,000 in 2016.

Planning for tax and contributions strategies and retirement planning continue to be areas of high demand for advice, with 52 per cent of trustees likely to turn to a financial planner for advice, and 48 per cent more likely to use an accountant.

With new licencing requirements for accountants providing establishment and financial advice services to SMSF clients having been in place for a little more than 12 months, debate continues around the integration of SMSF advice into traditional accounting businesses.

Only a third of SMSF trustees said it was important that they access all their financial needs through a single adviser, while 40 per cent of accountants servicing SMSF clients said restrictions around their ability to give financial advice was an issue.

Vanguard Australia Head of Distribution, Matthew Lumsden, said there were clear opportunities for accountants to provide more value to SMSF clients, but the current model of financial planners and accountants forming formal or informal partnerships was serving SMSFs well.

"When we look at how the SMSF sector is evolving, it's positive to see that both accountants and financial planners have a growing number of opportunities with SMSF clients," Mr Lumsden said.

"This research shows that a projected 129,000 trustees who are using accountants for tax advice would be willing to also receive investment advice from their accountant, which is a tremendous vote of confidence and trust. We expect more accountants to respond to this demand in future, however we also expect that the concept of partnerships and referral arrangements between financial planners and accountants will continue to be the norm for the SMSF sector.

"The research also validates the success of planner and accountant partnerships that Vanguard has been hearing about from our clients' advisers, particularly with trustees saying they are comfortable with a team of separate professionals who can provide highly specialised services for their SMSF, be it accounting, investment advice or legal services. We hear plenty of stories of success from professional advisers, particularly from planners, who often tell us this model has been a great benefit to their clients and to their businesses."

Vanguard has partnered with Investment Trends to release the SMSF Trustee and SMSF Planner reports for the past seven years. The 2017 release incorporates the SMSF Accountants report, offering the most comprehensive analysis of this growing sector of the Australian superannuation system.