Late last year, Andrew Varlamos launched OpenInvest to allow SMSF trustees to engage directly with a suite of fund managers. He reveals to Darin Tyson-Chan what motivated the development of the investment platform and shares his frustration with the current licensing regime for accountants.
How did you become involved in the SMSF sector?
I was working in Asia 11 years ago in a software business and I came back to Australia and did two things pretty much in the same week. I set up my own SMSF through my accountant to give me flexibility and control of my investments and secondly I co-founded an investment platform called Powerwrap. I did both on the basis of realising we’re going to move from one monolithic structure, with no transparency and little control, to one in which people have more choice, visibility and control. That was the start of dealing with SMSFs and the professionals who look after SMSFs, as well as getting an understanding of the sector through looking after my own self-managed fund.
What triggered your interest in the sector?
I just thought there was an unnaturalness to an industry structure in which four banks and two other financial institutions controlled everything. It just didn’t make sense to me that there was so little choice, that things were monolithic and vertically integrated. It’s very hard to have the space to do innovative things when you’re part of an organisation where everything is done in a particular way. So I thought there is going to be change and a vertically integrated model over time breaks down as new entrants compete in different components of the value chain. So it’s interesting from an intellectual perspective and I thought you can build a really big business out of the inevitable change. Also, I’d had some experience in breaking down a vertically integrated industry when I worked in the energy sector.
You launched OpenInvest last year. What does it offer SMSF members?
At the moment 70 per cent of SMSF members are unadvised or self-directed. This, however, doesn’t mean they are all really well educated nor does it mean they’ve gone through some accreditation program ensuring they have the skill set to manage their own retirement savings. So there are all of these self-directed individuals running their own superannuation fund, but they’re not sitting in front of a computer screen trading with mass confidence. They need help, they know they need help, they say in surveys they want help, but they’re sceptical of the industry and don’t know who they can trust. So that’s why we built OpenInvest. We started with a blank piece of paper and asked what do self-directed SMSF trustees say they want. They say they want choice, they say they want transparency and they want to be in control. That means the only system they’re going to find appealing is one that is full of content, full of choice and is conflict free. So we set up a marketplace where SMSF trustees can have direct access to a range of fund managers, Further, we promised the SMSF investor we will always treat the managers equally and we’ll never push the merits of any manager over another because of a conflict of interest. We’ve also promised to treat the fund managers equally and assured them we will never compete with them. So the investors and the investment managers know they are engaging with each other in a conflict-free marketplace.
Have you determined the optimal number of fund managers it would take for the OpenInvest platform to serve SMSF investors in the best possible manner?
It’s a delicate balance to know the difference between too much choice and not enough. If we’d launched with only two managers and said you choose between them, there would not have been enough choice. If we went with 20 at the start, there would have been too much choice. We went live with six in November and Macquarie and Clime have joined subsequently. I have several more in the pipeline and I think before too long we’ll be at 10 managers. That’s a nice number to pause at. It’s a lot of choice and we’re open so down the track there will be more, but we need to think how to make it easier for people to choose if we have more than 10 managers on the platform. I don’t know what the optimum number of managers is and we’re not there yet. But today they can choose from eight managers, in a really engaging way to get to know those managers, and I think that’s a really clean, ethical and interesting way to do it.
Should the sector be concerned about the large number of unadvised SMSF trustees?
I think so. The data shows some of these self-directed SMSF trustees are smart and some of them are ex-financial services people themselves and they know all about diversification. But the data shows the vast majority don’t know how to achieve diversification and therefore they are in an overly concentrated portfolio. That doesn’t mean they’re going to get a bad outcome month-on-month or year-on-year because if they are overly concentrated on say mining stocks and the mining sector booms, they’ll do better than any manager out there. But it means there is a real risk people are taking and sometimes they don’t understand this until it smacks them in the face.
Is there a solution that would enable and encourage more people to receive financial advice?
I think the solution to have more SMSF trustees receive financial advice already exists. That is, we’ve got thousands of people across the country trained and educated with university degrees and are members of professional accounting bodies who know all about structuring SMSF portfolios as part of a holistic wealth management solution. The problem is the licensing. You have to be licensed to provide financial advice and it assumes you are going to be doing everything, including investment advice, and it’s just too hard. That’s part of the monolithic nature of the licensing regime and it goes hand-in hand with the fact there is no open architecture online investment solution where you can pick your own manager. But now there is with OpenInvest and there may well be others in the future. If the licensing regime was not so monolithic and it recognised the fact that accountants are different to planners insofar as accountants want to manage structural issues and don’t want to make decisions on investment portfolios nor benefit from the associated revenue, then there is a solution that can be crafted that really fixes the advice gap very rapidly.
Is the current advice landscape conducive to implementing a solution like you’ve suggested?
I’ve always got an optimistic mindset about this. I think we’re currently in a fuzzy area when it comes to advice, post-royal commission, but people are going to draw breath and they’re going to look at this from a big picture perspective. That includes Treasury, the regulators, the accounting bodies and the SMSF Association. As the dust settles they can pause and examine what the industry actually now consists of, what’s the problem and, given we don’t have a vertically integrated industry anymore, do we really need a monolithic licensing regime predicated on a vertically integrated industry. Maybe then the licensing regime can be recrafted to reflect the new reality. This may not be years in the making, but it won’t happen next month.
What’s the most significant change you’ve seen in the SMSF sector?
One is how the sector has achieved mass-market appeal. It has gone from a relatively small part of the industry to now accounting for a third of it. SMSFs now offer a viable, sensible superannuation solution that the accountants can help manage. I don’t think anyone would have predicted that sort of change 15 years ago. When that happens it goes in lock-step with what’s necessary to make it happen, which is an increased efficiency and sophistication of the software applications supporting the people performing the administration work. That’s not a surprise as I think that was always going to be the case.
If there was one thing you could change about the SMSF sector, what would it be?
The one thing that just makes the operation of the sector harder is the unwieldiness of a licensing regime that’s not fit for 2019 and not suited to an environment where financial institutions don’t dominate all elements of the value chain. I’d like to change this because you’ll then have the ability for the individual accountant, the trusted adviser of the SMSF trustee, to speak to clients openly on a range of issues to do with the SMSF without having to worry if he or she is crossing the line into licensed financial advice.
What’s the biggest challenge facing the sector in the year ahead?
The ability of the sector to focus on the big picture and the future rather than quibbling over the finer details, the big picture being the need to help individuals, who have built up a substantial portfolio inside their superannuation fund through years of hard work, to deploy these assets to allow these people to have a dignified and enjoyable retirement. That’s the big picture and changes to the rules here and there are fine detail that may lead to this being missed.