Wealth Partners financial planner Andrew Heaven is expecting the superannuation landscape to become polarised in the future, with SMSFs ending up at one end of the scale. But he explains to Darin Tyson-Chan his current concerns are about the use of gearing in SMSFs.
How were you introduced to the SMSF sector?
It came about via osmosis really in that Wealth Partners is a broad-based financial planning practice structured around our clients’ needs. The consequences of that are the natural processes of advice mean servicing SMSF clients is a part of what we do. But specifically it came about due to enquiries from clients, the need for quality advice in the SMSF space beyond the operational transactional issues that we face, and clients coming to us looking for the strategy piece for SMSFs as opposed to just the implementation and operation of the fund, which you tend to find accounting practices that are very compliance driven offer.
What sort of advisory services do you offer your clients?
The advice for our clients in the SMSF space varies from establishment to monitoring, but broadly speaking the work we do is around strategy because that’s our core offering. In the context of establishment, we’ll work together with the accountants or establish the fund under a public offer service. With the ongoing monitoring, predominantly our focus is on strategic and investment advice and making sure funds are structured in the appropriate manner. We don’t have in-house administration; we use third-party providers or work in with other centres of influence or work with existing accounting relationships there.
How were you introduced to the SMSF sector?
I think the industry is going to polarise, and when I refer to the industry I mean superannuation in general. Subject to what happens at the next election, I think what we’ll see is people moving down the track of either specialist SMSF services or move down the other end, which will effectively be almost industry-based superannuation. The struggle is going to be the bit in the middle, which is the broad hub of middle Australia. A lot of people want the functionality of an SMSF, but I don’t necessarily think they are aware of the costs associated with it nor the compliance as a trustee.
What’s the most sought after strategic advice?
Estate planning is the area of most need. There are a couple of reasons for this. There’s intergenerational wealth transfer and the efficacy around that and there is a growing appetite for it. There’s also an opportunity there around succession planning, within businesses and families in terms of transitioning of SMSFs from one generation to the next and the holding of the assets and the timing of the disposal of assets. So there is a growing appetite for that. A lot of people see it as a necessary evil in that they know it’s a conversation they should be having and it’s a question of knowing how to do it. We see huge opportunities there. Where we’re starting to see traction is in the past we’d do the advice and the execution of the estate planning piece was always part of the advice process, and we’d ask clients how are you going with that and they wouldn’t have done anything on it. So now we’re starting to see, through strategic alliances and the like, we can actually implement a lot of the estate planning work and it’s now actually seen as part of the core offering. We don’t, however, do estate planning in-house. We outsource it, but to a network of solicitors who share the same values we have around estate planning, the importance of advice and the importance of getting it right.
How well is the issue of estate planning understood?
As far as the mechanics of it goes, it is not well understood. What I see a lot of issues with is how people deal with their estate under various entities, whether it be as a natural person, whether it be as an incorporated entity, a family trust, or an SMSF. So they don’t necessarily understand the assets of the super fund are dealt with differently to the family trust or the company or the individual. They just assume upon death they nominate who gets what, but they don’t understand if they haven’t got the estate planning pieces resolved, there will be a world of hurt. A growing trend also around estate planning is provision and management of blended families or complex estate planning needs. There’s a growing trend away from trying to rule from the grave and I think there is a growing recognition that the courts are very unsympathetic to that concept, so if you’re going to do things that are a little bit ‘unique’, you need to make sure you’re very clear in your instructions as to why things are to occur.
Are there other issues that are becoming more popular as well?
I call it morbidity planning; morbidity in the context of what happens if the person running an SMSF can no longer function. It could be the early adopters are losing a bit of interest in the compliance requirements and how they approach this development. It could mean seeking advice around intergenerational change or whether they look to outsource some of those duties around trustee responsibility. For me, that’s one of the next steps for SMSFs and the advice process.
You and a lot of people regard SMSFs as a family super fund. Is the four-member limit in this context too restrictive?
This is becoming more challenging with intergenerational wealth transfers from early SMSF adopters. Is it something that needs revising? Possibly, but the situation is already complicated enough with the maximum of four members. I’m not sure I have an answer as to how many members SMSFs should be allowed to have.
Are there any practices in the SMSF sector that concern you?
I’m very concerned about the marginal end of the market which involves leveraging around property. I get a little bit tired when you see a lot of this rubbish and you try to put a credible argument as to why it’s not for everybody, and you get pushback that you’re either keeping people out of SMSFs or you’re keeping people out of property. I find that a little bit tiresome and I think ASIC (Australian Investments and Securities Commission) does too.
Is your concern about the assets people choose or how they look to service the debt?
I’m worried about both of those aspects as well as the ongoing compliance and management of the asset, and changes in the legislation. That’s because if yield or growth profiles of the asset don’t align to what the trustee’s obligations are, either via the investment process or the trust deed itself, it rings alarm bells. In terms of ongoing compliance, we’ve seen in the past with trust structures involving leveraging how complicated that can be and how continual tweaking of the deed to comply with changes to the legislation is necessary. Also, you have to service the debt in one of two ways. It will either be from the income within the fund, hence the importance of having recurring income streams beyond the asset, like fixed-interest assets, other than from the property, or from cash flow from new contributions coming into the fund. If you can’t pass these tests, there will be trouble. Getting the asset out of the fund if necessary can also be a problem. Legislative risk is another concern.
What’s the biggest change you’ve witnessed in the SMSF space?
Allowing the use of gearing in SMSFs. My personal view is it should have had a limited application and I’m very concerned about it. Leveraging into any asset is not for everyone. It’s not a high-risk strategy, but a measured-risk strategy where you need to understand the consequences and need to have the appropriate levels of cash flow and capital in order to be doing it. To be out there in the market leveraging into SMSFs worries me a lot, especially when you look at the origins in the endowment warrant system, so I think the outcome we have now is not what was envisaged.
If there was one thing you could change in the SMSF sector what would it be?
I’d like to see the ability for trustees to be seen as sophisticated investors. Also, I’d like trustees to sign off and know and understand the consequences of taking on the role of trustee, and as a consequence of taking on those responsibilities they bear the full consequences for the fund’s activities. If you deal with these two aspects, then a lot of the concerns around leveraging will be addressed as a natural conclusion.
Over the next year, what’s the biggest challenge for the SMSF space?
I’ll be interested to see how FOFA (Future of Financial Advice) plays out with the best interest duty. Those practices whose value proposition is around SMSFs, providing they’re acting in the best interest needs of the client, should be fine. I think some of the larger advice firms operating in the SMSF sector will need to be very careful in understanding what it is that they’re offering their client and making sure it is tailored to the clients’ needs.
