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Rate of growth in SMSFs at 10 year low; 47% of trustees have unmet advice needs

Vanguard | 05 June 2018


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The establishment rate of self-managed superannuation funds (SMSFs) has hit a ten year low, dropping to 4.8 per cent from a high in 2010 of 9.3 per cent, according to the most comprehensive survey of Australia's SMSF sector - the 2018 Vanguard/Investment Trends SMSF Report.

While SMSF assets have grown over the year to March 2018, market uncertainty and a lack of perceived investment opportunities appears to be keeping $50 billion, or 6 per cent of overall SMSF monies, waiting in the wings in 'excess' cash.

The average balance of self-managed super funds increased slightly over the year to $1.24 million, with retirees representing over half of the total SMSF assets.

While investment in managed funds and ETFs shows a slightly higher uptake, the report continues to highlight a persistent potential lack of diversification in SMSF portfolios, with half of trustees saying that more than 50 per cent of their portfolio is invested in a single investment type – commonly direct Australian shares.

In contrast, the report showed 82 per cent of trustees agree that diversification is important, but only 54 per cent believe their portfolio is already diversified enough.

Commenting on this Robin Bowerman, Head of Corporate Affairs at Vanguard, said "the definition of diversification is concerning, with 84 per cent of respondents considering an investment across 30 Australian shares represents a well-diversified portfolio, when instead it is harbouring high equity concentration risk and home country bias, in addition to very low levels of exposure to international shares and bonds."

"We believe while there is a growing understanding of diversification, SMSFs seem to be bearing significant risk, largely relying on continued success of the Australian sharemarket, which represents just 3 per cent of the global investable equity market".

Regulatory uncertainty has overtaken investment selection as the main challenge in managing an SMSF, while the top three investment goals cited by trustees include building a sustainable income stream, maximising capital growth and managing risk.

One consequence of reform in super regulations has been a growth in assets held outside of SMSFs, with a third of trustees making, or intending to make, investments outside of super.

"Because of this it will be important for investors to ensure their entire portfolio (both inside and outside their SMSF) is aligned to their investment goals, in addition to keeping an eye on the tax efficiency of any investments made outside of super given they sit outside of the concessional tax structure," said Mr Bowerman.

The opportunity for advice

Satisfaction amongst SMSFs who currently have a planner has grown to a three year high, with trustees saying the biggest improvements over the year were the ability of planners to explain investment concepts and the frequency of their planner's contact with them.

Revealing the opportunity that lies in this segment for advisers, half of SMSFs (or 276,000) citing a wide range of unmet advice needs. The report shows inheritance and estate planning remains the biggest area of unmet advice for SMSFs, with tax planning and investment selection closely following. Further to this, one in eight SMSFs say they are likely to look for a new adviser within the next year, with the top considerations when selecting a new adviser being SMSF expertise, integrity and low fees.

Costs, trust and ethical behaviour are the top barriers to SMSFs seeking advice on their unmet needs.

Commenting on this, Rebecca Pope, Vanguard's Australian Head of Intermediary, said "There is a great opportunity here for advisers to deliver on these unmet advice needs, and we believe that through some key changes to their practices, advisers can leverage this information and better demonstrate their value, as well as tackling some of the perceived issues around expertise and trust with clients."

"Our research shows that the advisers who spend less time on investment selection and administrative tasks that can be automated, and more time broadening out their service offering, deepening client relationships and embracing new technologies, are those that are more likely to gain the long-term trust of their clients", she said.

Over the past four years, the proportion of advisers operating in the SMSF space has remained steady, however similar to the concerns cited by trustees, regulatory change and compliance burdens continue to hamper their practices' further growth in the sector.

Wrapping up, Robin Bowerman said "Vanguard has partnered with Investment Trends on this substantial SMSF report for more than 10 years, with an ongoing objective of growing the industry's understanding of this important segment of Australia's superannuation industry."

'In 2018, with the backdrop of the Royal Commission and the Productivity Commission's review, the only real certainty is uncertainty for SMSFs and their advisers, with the prospect of further regulatory change seemingly inevitable. As Vanguard always cautions, the need to stay informed while maintaining a longer term perspective has never been more important for investors.

"The debate about the viability of smaller balance SMSF is likely to be ongoing because the decision is so dependent on individual circumstances. What is critical is that those considering setting up self-managed funds should get professional advice to make sure a SMSF is the right structure for their long-term financial needs."

The Vanguard / Investment Trends SMSF Trustee, Planner and Accountant Reports are compiled through online surveys conducted during February and March each year. Total responses received in 2018 after cleaning and validation were 2315, 273 and 871 respectively.