The fourth SPAA/Russell SMSF report reveals strong interest and demand for SMSFs is coming from younger generations compared to the traditional profile of SMSF trustees. Krystine Lumanta takes a deeper look into the current needs of SMSF investors and the areas to leverage for those providing advice in the sector.
The major finding of recent SMSF research was that while people aged over 50 still made up the largest number of SMSFs, the 41-to-50 age group represented the largest source of demand, as cited by 75 per cent of financial planners.
This was followed closely by the 31-to-40 age group, with two out of three advisers indicating they were expecting greater demand from this demographic, signalling a golden opportunity for early movers.
The findings emerged from research based on CoreData’s survey carried out in partnership with the SMSF Professionals’ Association of Australia (SPAA) and Russell Investments. The February 2014 “Intimate with Self-Managed Superannuation” report studied 1267 Australia consumers, of which 385 were SMSF trustees.
SPAA technical and policy senior manager Jordan George believes in the past 18 months, the industry realised SMSF demand was spreading to a much younger demographic than previously seen.
“In the past we’ve seen it come more from the 55-to-60 group, where they have a decent lump sum in their super and want to manage it in an SMSF,” George tells selfmanagedsuper.
“What we’re looking at now are more investors who are looking at a longer-term plan.
“From their early 40s they are starting to identify with an SMSF as the best way to manage their retirement savings, so they’re engaging earlier and we’re even seeing interest from below that age group. For those in their early 30s we’re not necessarily seeing a pick-up in the establishment of an SMSF, but intention is forming.”
The opportunity for advisers, therefore, is to use their services over a client’s entire life cycle, he says.
“Anecdotally, advisers are starting to see that there’s a different market where it’s about setting longer-term goals and objectives. We’ve seen off our conference and sessions that advisers are targeting younger trustees through social media, so the industry is definitely starting to respond to that changing demand,” he says.
“It’s important for advice businesses to look to this younger demographic, who may not have established an SMSF but have an interest, as your next cohort of clients coming through. It’s also a mix of advisers who are looking to these new sectors of demand.”
Touch points
Considering the importance of regular client contact with SMSF trustees, the report found, on average, advisers had increased the number of touch points over the year.
Advisers made contact with their clients either by phone or face to face 9.4 times per year, compared to 8.2 times in 2012.
George says advisers are starting to acknowledge the frequency of contact with trustees is vital to the advice relationship.
“It’s not just a static approach such as planning the contributions or planning the strategy,” he says.
“As trustees become better engaged and financially literate, they want more information, more guidance and more advice. Trustees want to continually re-evaluate their strategy, what their goals are and whether they are achieving them.
“As a consequence, trustees are demanding more contact points and contact times to service those needs, which I’ve had SPAA members telling me.”
Commenting on whether the average contact points will increase in the following years’ surveys, he says nine times in a year is a strong benchmark.
“Advisers are getting better at utilising technology as well to keep in contact with trustees. They provide white-label documents, newsletters and information sources to keep in touch with trustees as another way they’re servicing clients, not just through sit-down meetings,” he says.
Barriers to advice
The report identified that barriers to seeking advice remain: trust, proof of tangible value added and affordability of fees.
In order to improve the industry’s perception, George believes a high level of competency and specialisation will help generate more trust.
“People trust advisers that they believe are competent and have a good knowledge base – being aware of the changes that are affecting SMSFs, the different tax and regulatory changes as well as the investment environment,” he says.
“High-quality advice is one of the best ways to ensure the integrity of the SMSF sector.”
Investment expertise
Focusing on adviser qualities, the report reveals investment expertise is the top characteristic most valued by both trustees and non-trustees when it comes to looking at their main professional adviser.
In addition, while 51.9 per cent of trustees preferred to drive their investment process, 12.7 per cent valued investment strategy information above all other information services.
Given the lack of diversification or longer-term asset allocation and overall investment strategy, financial planners have a key role to play in offering strategic investment advice that is not product-related, the report found.
Advisers must leverage investment expertise as one of the ways to demonstrate tangible value, however, it is important to recognise that SMSF trustees hold higher standards compared to mum-and-dad investors, George says.
“SMSF trustees are demanding more and more expert advice, so they’re looking for top-quality investment advice and top-quality compliance advice,” he says.
“An outcome of the research was that trustees put a very high value on investment advice, so there’s an opportunity there in terms of value-add.
“SMSF trustees tend to be more financially literate and more engaged, so they are seeking a higher level of advice in that they often have certain outcomes to achieve and have an understanding of financial markets and the super system, so the advice they want needs to be met. There is a much higher standard that they hold.”
He says transparency of fees was highlighted by trustees as an area where they determined whether they were getting value for money by seeing what they were being charged.
“Over half of trustees were getting fee-for-service billings even before the Future of Financial Advice reforms, so there’s been a strong move toward professionalism of charging that way,” he says.
The report states, despite the barriers to advice, scaled advice is a conduit for initiating conversations, demonstrating value and developing trusted full-advice relationships.
“If the client is happy to receive scaled advice on, for example, superannuation, there’s an opportunity to expand that into full advice and it’s definitely a gateway for how advisers can grow full service relationships,” George says.
According to Russell Investments client investment strategies director Scott Fletcher, the industry is aware of the opportunity to provide more specialised or sophisticated investment advice for SMSF trustees.
“But the question becomes how many advisers can realistically meet the demand?” Fletcher says.
“There will be a certain segment of the advice industry that can leverage these opportunities better than others.”
Regardless, advisers looking to move into this space will need to make a hard, realistic assessment of their core competencies and gaps, and progress from there, he says, adding some will do it very well while others will fail.
“The main thing is for advisers to play to their strengths in providing true value add for clients, whether it’s investment advice or elsewhere,” he says.
Investments and portfolio allocations
The report revealed that, despite the strong rise in equities over 2013, the significant shift by SMSF investors out of cash and into higher-risk asset classes did not materialise.
SMSF allocations overall, however, did experience a small move away from cash, with only 31 per cent allocated to cash and term deposits compared to 33.9 per cent in 2012.
But this did not flow into Australian equities, which experienced a slight drop to 36.1 per cent in 2013 from 37.1 per cent in 2012, and instead benefited residential property, which climbed to 9.9 per cent from 5.6 per cent in 2012.
Furthermore, trustees revealed the number one reason they retained an allocation to cash greater than 10 per cent was because they were waiting for a better investment option.
The report found 90.9 per cent of trustees reviewed their asset allocation at least on an annual basis, with 55.8 per cent reviewing their asset allocation at least quarterly.
“Given that share market, and hence SMSF performance, is more likely to moderate in a relatively lower return and higher-volatility environment we are unlikely to see SMSF portfolios undertake mass re-weightings out of cash into other assets this year,” Fletcher says.
“As with 2013, we are more likely to see marginal rotations into assets like residential property. This sort of ‘what’s hot right now’ rotation is typical of previous cycles and speaks more to the influence of familiarity and trend following in the decision-making of SMSFs and retail investors more generally, not to mention many advisers.”
That said, while Australian shares and residential property will receive the lion’s share of any cash movements, international shares are also starting to come onto the radar of SMSFs, particularly with a gradually improving global economic picture, he says.
“SMSFs are also showing signs of increased acceptance of non-direct vehicles like managed funds to gain overseas exposures,” he says.
“Alternative assets like infrastructure may also get on the radar as the search continues for assets with growth-like returns and bond-like income streams. Scale and access issues demand that any such exposure would be primarily via managed funds.”
In reference to SMSFs remaining overweight in Australian equities and cash, he says constructing portfolios with an eye on after-tax outcomes will always mean allocating more into Australian direct shares than otherwise.
“That said, there is still too little diversification in most SMSF portfolios, but to get it, they have to become more comfortable with non-direct methods used to get these diversifying exposures, especially the relatively lower degree of transparency vehicles like managed funds provide,” he says.
“This raises another question though; that being even if an investor had more ‘look through’ into all individual holdings of a managed fund portfolio, are they really going to do anything with this information anyway?
“Or is it just about the perception rather than the actual degree of control? The degree of ‘look through’ in a smaller part of the portfolio that can most cost-effectively be accessed via a managed fund should not be a reason to shun diversification and maintain an overly concentrated, dare I say China-heavy, risk profile.”
He believes advisers need to spend more time talking to clients about the benefits of diversification.
“Aside from any gaps in investment understanding, even if an adviser has the required understanding to offer more than a basic view on the benefits of diversification, the temptation is sometimes there for advisers to take the least line of resistance with a client who has a lot of assets, some strong opinions and a large slice of practice revenue,” he says.
