The pressures of information delivery, accessibility and efficiency are being equally felt in the administration and audit sectors servicing SMSFs. While there are some expectations for price cuts this year, Krystine Lumanta is told the industry must address a value awareness issue in order to agree on what is an acceptable price range.
As the popularity and growth of SMSFs continue into 2013, the need for quality administration and auditing is also increasing in conjunction with the sector’s expansion. Alongside the increasing efficiency pressures and competition between administrators and auditors themselves, cost is becoming a key differentiator between providers’ offerings.
According to the most up-to-date statistical overview from the Australian Taxation Office (ATO), the average audit fee incurred by SMSFs was $607 for the year ended 30 June 2010. As SMSFs with smaller balances become more common, particularly with generations X and Y, as a means to execute limited recourse borrowing arrangements, such fees would be considered too expensive. In addition, the varied costs in the marketplace for SMSF administration and audits are adding to the confusion of accountants, advisers and trustees.
A number of administrators and auditors are predicting lower prices in 2013, flagging the advancement of cloud technology and overseas outsourcing as major drivers. But no matter the chosen method for processing data, industry players agree the administration and audit sectors must land on an acceptable price range for the compulsory SMSF functions – tax returns and audits – while trustees must start to understand the value they are getting for a particular price.
While there are expectations for costs to come down, there are concerns the industry has been setting the price for both sectors, as accountants and advisers are also failing to understand the value of administration and auditing services. Furthermore, ‘cheapest’ doesn’t necessarily equal a quality outcome in terms of processing or security.
According to Evolv managing director Ron Phipps-Ellis, pricing has already fallen over the years in both the administration and audit space, as it has relied on supply and demand, so it is a matter of getting the balance right. “How low will it go in the admin space? That’s the same question for the audit space,” Phipps-Ellis says.
“The audit space has a natural floor resting point; I don’t know what that is yet and it’ll be different for every auditor, but generally in the marketplace. I personally think it’s going to be based on data-fed transactions versus non-data-fed transactions for accountants and also administrators, so there are a few segments in the market that will determine how low it will go.”
Odyssey Resources chief executive David Carter says as audits are very low margin, a high volume of work must be secured in order to profit, whereas superannuation fund administration has been a much more successful sector.
The cost of an SMSF audit has sat around the $5000 to $6000 mark at a large city firm, a provider in the suburbs will charge between $1500 and $2000 and a consolidator will ask for about $1200, Carter says.
“The mark-ups are about six to one from us to a wholesaler and a big Sydney CBD firm would have about 20 times mark-up,” he says.
“But if someone’s charging less than $250, they’re probably doing a questionable job and at some point in time the ATO will question that.”
The average administration cost across the whole industry is $2760 – 27 basis points over the average fund size of $1 million, thus not a large cost proportional to the amount of assets, Super IQ chief executive Andrew Bloore says. “There is still some downward pressure on the industry and as people use technology it becomes more efficient, but the reality is that there’s not a lot of space left in this industry for fees to come down,” Bloore says.
The influence of advanced technology, namely cloud technology, has transformed and altered the way clients are serviced. SMSF administration and auditing are therefore able to achieve new efficiencies that were previously impossible through manual processes carried out by physical staff.
The biggest benefit of the cloud is the high levels of productivity achieved, according to Supercorp Australia national sales manager David Mendelovits.
“The price went up, as you pay a fixed monthly fee for using the software as well as the new infrastructure,” Mendelovits says.
“But if you can have software that improves productivity and even if you did pay more for software, overall if you can bundle the funds that can be processed per accountant per annum, then you’re well ahead.”
As there are no start-up costs, no upfront training or upfront fees, costs are very much linear, he says. “The cloud has democratised the market. It means that even a small sole trader can report using cloud-based technology as well as a very large SMSF provider,” he says.
In addition, cloud technology has provided greater flexibility and accessibility, particularly as staff can now work from any location, as well as removing the need for IT services or maintenance.
“With technology developing so quickly, if you’re not a specialist, it’s very hard for you to understand what the issues are around data coming in [as] a different format from what auditors are used to,” Phipps-Ellis says.
“They can still do their verification work, or input data in the old way as an administrator, but it comes down to a pricing point again. You can’t compete on price if you keep those old habits going.
A further price challenge will be when audits are eventually outsourced to overseas providers, which doesn’t appear to be too far away. It has already commenced in the administration space.
Engage Audits chief executive Jo Heighway says sending administrative and audit work overseas has become a viable option for SMSF accountants, advisers and trustees.
“For those firms who aren’t able to build their own technology or they have a problem with finding expertise, [overseas outsourcing] is something that businesses are naturally going to consider to remain competitive,” Heighway says.
Outsourcing has emerged as a major player due to the dramatically reduced cost as a result of cheaper labour overseas.
However, Carter believes the costs will not come down in SMSF administration at this point in time. “There are not enough people willing to compromise the work and compliance,” he says.
“Also, accountants are denying that anybody can do anything cheaply, so, for example, anything under $400 means the work isn’t being done properly so we’re seeing some automation with a lot of work being sent overseas.”
He believes the quality of work produced by Vietnam-based Odyssey and other overseas providers is significantly better than what accountants are able to do in-house due to a lack of SMSF expertise; therefore overseas outsourcing becomes a better and cheaper option. “I’d give it one to two years for the major changes [to play out], but I think they’re already happening in terms of other compliance work going online,” he says, adding that super funds have been slower in response to the change.
“This is a relatively unregulated area at this point in time, so it’s important for people considering these services to do an appropriate due diligence on who they’re doing business with. You’ve got to know where your information is going, who’s doing the work and if something falls over, that the work can still be done and also that there isn’t any loss of data.”
He says Odyssey holds competence with Australians working in Vietnam, including himself, and he hopes to continue to promote good standards in the industry.
In spite of this, Bloore says some providers that are still figuring out how to deliver at a lower price have turned to overseas outsourcing for the wrong reasons, rather than the delivery of value. “I’m not suggesting they provide bad service or otherwise, but it’s the wrong way to go about it as technology is a much better way of getting more efficiency over your business,” he says.
“All that does is say, ‘I can get people that are cheaper than [Australia] to do the work I’m currently doing and that’s how I make my profit’. Also, if the only thing we’re battling over is price, then already the industry has got to change and that’s a reality.”
Heighway agrees and warns there are certain dangers in using an overseas administrator or auditor.
“From my experience, there are differences in the knowledge and expertise overseas [compared to Australian standards],” she says.
“There’s a lot of review and communication going on in the background, but from a Superannuation Industry (Supervision) Act compliance point of view, the level of knowledge is not where it should be.”
While the debate over sending work overseas and using the cloud continues, Mendelovits says it should not be a matter of ‘either/or’, as the two channels can in fact work well together. “There’s a lot of mixing and matching; people can do both,” he says.
“In fact, the cloud helps outsourcing because it means you don’t have to shift files from A to B because the person in India, for example, can access the data sitting on the cloud.
Industry setting prices
Heighway believes the SMSF industry is in danger of delivering poor products in the drive to compete on price. “The planning industry is moving towards a valued-based approach for that type of work and we need to be doing the same thing,” she says.
“We need to be educating clients on what the value is and charging a professional fee for its delivery. The battle of ‘who’s the cheapest’ is going to continue and it will be to the disadvantage to the client as they don’t know any different.”
According to Heighway, a number of new entrants have been “picking numbers out of the air” as a way of deciding what to charge, which is highly problematic.
“As an auditor, we get plenty of phone calls with people setting our audit fees and they are numbers that don’t have any basis,” she says.
“Operators in this space need to be pricing out their services and know when to say no, but I’m seeing a lot of firms say yes so they’re letting the industry set their fees and then attempting to paddle out as fast as they can to make it work.”
She says in the long term, unjustified prices will create problems with sustainable business practices and also increase the pressure for SMSF information to go overseas, which is not a desirable outcome for trustees.
Costs are at a point where they cannot be cut any further, unless the amount of service delivered to the client is reduced, Bloore says. “There have been all sorts of issues with people trying to drive down costs and there’s a point where it no longer becomes profitable. We are at that point,” he says.
Phipps-Ellis believes while the preparation of financial statements and tax returns are important commodities, not everyone is looking for reduced prices as SMSF trustees are now beginning to understand the difference between a pure tax service and those services that add further value.
“Price has to come down, but to what extent is somewhat unknown, but also known. There seems to be a floor price on the admin side of $1000 or thereabouts and $400 or $500 for the audit, so somewhere around the $1500 mark for admin and audit is where it seems to be going,” he says.
In the meantime, administrators and auditors must remain competitive and provide high-quality service to clients as there is no longer any room to under-deliver in the current market conditions and industry climate, Mendelovits says. “At the end of the day, it would be nice if it were a market where you could take your price up and maximise your profit, but it’s just not like that,” he says.