What younger trustees want

With a shift toward a younger demographic occurring among SMSF trustees, Nathan Ide takes a look at what their attitudes to financial advice are.

The times they are a-changin’. As generations X and Y begin to increase their earning capacity and seek further control over their investment future, SMSFs are increasingly becoming a tool savvy investors with technical nous are embracing. With improved technology and lower costs, and as demonstrated by Australian Prudential Regulation Authority (APRA) data, growth over the past 12 months has seen SMSFs exceed 600,000 and $653.8 billion in assets.

Encouragingly, further increasing the democratisation and empowerment of investing, it has been recently reported the number of gen Y women now establishing an SMSF is greater than any other demographic.

To better understand the growing gen X and Y segment, Private Capital Management interviewed 20 professionals and business owners, all with different backgrounds, though with a commonality to have their financial needs met either through self-directed activity or mentored support through an adviser.

Four core themes relevant to SMSFs were drawn from the research: Passive is Massive, Uncertainty Breeds Inaction, Time is Trumping Desire and Demonstrable Value. We analysed the research and published “The Modern Investor Advantage”, which provides insights on how the advised and non-advised alike can better manage their retirement investments.

It is important to note here that all strategies and information provided in this article are general advice only.

Passive is Massive

“Although clients expect a well-diversified portfolio of investments, passive is increasingly a larger component.”

Passive management, especially the use of exchange-traded funds (ETF), has redefined the investment management industry globally, including SMSF trustees who year-on-year are increasing their exposure to these instruments. In fact, according to the Australian Securities Exchange (ASX), 61 per cent of ETFs on the Australian market are held by SMSFs, with listed property and global equity ETFs recording the highest holdings. This mirrors the “S&P Dow Jones Global ETF Outlook”, which states the global ETF market has grown to over US$3 trillion and continues its dizzying annual growth figures.

What are SMSF trustees doing in the passive space?
Through our research we discovered, on average, the expectation for clients and SMSF trustees is that investment portfolios should include a large core of passive investments, with satellites of single stocks and active funds for diversification. Cost was a critical consideration, with clients seeking to reduce the overall cost of management fees and subsequently increase their overall returns. Indeed, the impetus for trustees to establish SMSFs has been driven by flexibility, cost and control, which is very complementary to the ETF narrative.

What about do-it-yourself SMSF trustees?

DIY investors should monitor their investments frequently to achieve optimal outcomes and be mindful of fees and expenses and understand listed products. Non-advised clients should consider constructing portfolios with a core passive exposure, such as a broad-market ASX 200 or ASX 300 ETF, such as STW, IOZ or VAS, with additional investment sleeves of yield-based ETFs to boost income, appropriate global exposure (passive and active) and fixed income exposure. Education on the increased use of fixed income and how this may impact on investment decisions was relevant to both advised and non-advised trustees.

Critically, trustees should move away from the heavy allocation to cash and property and consider increasing diversification and liquidity with investments. Improved diversification of investments was an action point for 60 per cent of the non-advised interviewees. Advised clients were beginning to develop SMSFs that are more mindful and appropriately diversified.

Uncertainty Breeds Inaction

“Most clients explained that uncertainty around investment markets contributed to malaise and inaction.”Transiting from an APRA-regulated fund, with generic investment profiles and options, to an SMSF with no structure, there are many challenges to navigate. Interviewing clients we discovered that analysis paralysis and limited investment experiences compounded the lack of decision-making for investment decisions. Eighty per cent struggled to make investment allocations.

Key themes within the research included:

•  Quickly moving investment markets with ‘shock and awe’ outcomes.
•  What risk mitigants should be in place to ensure wealth doesn’t decline.
•  The importance of accountability, coaching and support to guide outcomes.

To overcome uncertainly and malaise, we believe advised and non-advised trustees should set clear goals for their investment decisions (for example, a dividend yield of 6 per cent within the portfolio) and limit investment sequencing risk (that is, the risk of receiving lower or negative returns early in a period when withdrawals are made from a trustee’s underlying investments). Trustees should therefore hold off on selling their investments in market downturns. Discipline is critical.

What about DIY SMSF trustees?

Our research concluded that limiting their exposure to unhelpful market noise, such as social media, while ensuring your investments are well diversified and current is essential. Diversified and thoughtful asset allocation decisions are important. Interviewees who performed their own asset allocation used complementary tools such as research house information to build robust investment portfolios, and considered Australian and global equities as well as fixed income.

Trustees should focus on their investment needs, such as income, rather than chasing returns. Unadvised clients should seek counsel through impartial independent research, and avoid ‘BBQ talk investments’ and seeking counsel from family and friends.

What should SMSF trustees expect from their adviser?

Advised clients should expect a candid relationship with their adviser, with the tools and resources to monitor and report their wealth with support and education on financial markets. Traditionally, SMSF trustees have been reluctant to use platforms. However, clients with larger balances using a separately managed account structure on a platform can, with investment management, platform and trading costs, expect expenses to be in the vicinity of 0.45 per cent, which is a compelling proposition. With volatile investment markets we believe trustees should consider using passive investments, but active asset allocation decisions, such as investing in the United States rather than Europe, to meet their objectives. This is a significant trend we are monitoring closely and forms many of our SMSF clients’ investments.

Complementary to investing, all expressed the desire their adviser should be well-versed on all aspects of wealth creation, including property, and have access and support both within the financial markets community, but also value add through services, such as buyers’ agents, to help grow their SMSF over the long term. Trustees expect more than just ticking boxes for investment options with a more bespoke private office offering.

Time is Trumping Desire

“Our interviewees all expressed challenges in finding time to manage their financial affairs.”

The research concluded clients who avoided attending to their financial affairs, and brushed them aside into the too hard basket, would pay the price financially in the long term with SMSF performance. With the blink of an eye many of the research participants missed out on investment opportunities and creating wealth through their SMSFs.

Competing pressures of work, family and life in general made financial strategies essential to deliver the strong outcomes clients expected. A recent example where many research participants missed out on increasing their SMSF balances is the quickly moving Sydney property market. Secondly, with trustees heavily weighted in cash, there is the continued performance of Australian high-yield investments many participants of the research were missing out on. Compare this with cash management trusts, typically yielding between 1 per cent and 2 per cent, such as the SPDR High Dividend Yield ETF (SYI).

SYI has a current dividend yield of about 6.88 per cent, including franking. This is a very generous contribution to overall SMSF returns.

What about DIY SMSF trustees?

If outsourcing SMSF investments isn’t favourable, trustees should book a regular monthly time to undertake remedial action on the health of their SMSF. Non-advised trustees should also consider the merits of SMSF diversification and use their funds as a holistic wealth-creation and retirement vehicle, rather than a tax-effective structure to park property. Diversification of investments was a theme weaved within all aspects of the research.

How about advised clients?

Advised clients should be seeking monthly verbal communication with their adviser to ensure goals are achieved and momentum maintained within the wealth-creation paradigm. Partnering with a financial adviser was shown through the research to provide accountability, coaching and a voice in order to drive successful financial outcomes in the long term, as demonstrated through annual net gains in wealth key performance indicators.

Demonstrable Value

“Research discovered that clients who get advice at a sophisticated level obtain significant return of value. Indeed, the downside cost of not acting was usually significant.”

The caveat here is the type of advice. Interviewees expected advice to be independent and free of conflict and are willing to pay handsomely for advice that can demonstrate value. Interestingly, advice on philanthropy, charity and the ethical approach to SMSF investments was a recurrent theme weaved throughout the research. The advisory community should therefore consider how to offer this to clients – especially for those gen X and Y investors.

Our research mirrored what we’ve already seen before: net promoter scores for those under advice are significantly higher compared to most industries.

Clients advised they expect a holistic advice model, with advisers to be well-versed in the property market, investments, innovation and lending, and having the technology and tools to bring these together under one banner to grow their SMSF balances.

What about DIY SMSF trustees?

DIY investors should ensure they spend a considerable amount of time, effort and money to draw together the technology to monitor and track their financial affairs, all while ensuring they are increasing their wealth over the long term. For efficiency, trustees should consider flexible reporting systems to provide instant access in today’s dynamic investment market, such as powerful app-based tools like MyProsperity.

Advised clients and the impact of advice for SMSF trustees

Vanguard has published some interesting research on its adviser’s alpha model and the demonstrable impact support from the financial planning community can have on outcomes of clients’ wealth – which is especially relevant for SMSF trustees and was mirrored in our research responses. Interviewees expressed the positive impact of support, mentoring and coaching from the establishment to implementation of SMSFs and strategies within their portfolio. In fact, Vanguard believes strategic financial advice can add around 3 per cent, on average, to the overall performance of a client’s portfolio. These are impressive figures considering the muted returns in today’s investment markets.

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