Hillross CBD general manager Paul Heanly not only provides SMSF advice, he runs a fund for himself and his wife too. He takes time to share with Darin Tyson-Chan the concerns he has about opportunists that could wreak havoc in the sector.
How did your exposure to the SMSF sector happen?
I’ve been advising since 1999 and I was probably an early adopter of SMSFs. I’ve had a fund myself since the year 2000 so I’ve been involved in the space for 13 years as both an SMSF adviser and a trustee. It means I’ve seen both sides of the fence now for a long period of time and it’s a big part of what we do here as a business.
What motivated you to set up your own SMSF?
Definitely the control associated with SMSFs and the ability to buy direct equities at that stage, which was really the nicest thing you could do within an SMSF. We didn’t have wrap accounts that offered the ability to purchase direct equities back then and I was just interested in building a direct equities portfolio and not pay management expense ratios, but being able to manage the tax side. I liked the ability to see the money go into a bank account and then being able to choose where that money was invested. So for me it was the control and the aggregation of my account and my wife’s account.
Was that the genesis of advising SMSF clients as well?
No it wasn’t because we already had a number of clients with SMSFs. My business partner was 20 years older so he had a number of clients who were already in that space. They were funds that had predominantly been set up by their accountants and the superannuation laws in the ‘90s were quite different to the ones we have today. There were different tax deductions and there were a whole range of other things you could do around superannuation that were a bit more interesting. So it really was an extension and a development of those circumstances.
Does having an SMSF help you advise clients in the space?
That’s definitely been a plus. It’s given me a better understanding of things like the compliance obligations, what’s possible, what’s not, the things trustees should be focused on, why you would actually have a fund, what are the benefits, and what I’ve taken out of the experience that has been good and what’s been annoying over the years. So it has definitely helped from an advice perspective.
Do you provide administration services?
We’re not administrators, so we outsource all of the administration. If clients come to us with an existing fund, it’s likely their local accountant is doing the administration. If they’re happy with that arrangement and the price, we’ll leave it in place, but if they’re not happy with it or they think they’re paying too much, then we’ll put them in touch with a specialist administrator. We service about 200 SMSF clients, which is around half of the total number of clients we have.
Have you seen any potential problem areas with SMSFs?
We’re always getting asked the same question: ‘Can I buy my mum’s house within my SMSF?’, so the real push at the moment around residential real estate leveraged into SMSFs is I think fraught with danger and is probably going to end in tears in due course. The government will have a huge interest in how that all works out. We haven’t advised anyone to include a residential property in an SMSF, but we’ve been asked plenty of times about it and we’re getting more enquiries on it.
How do you think this problem has arisen?
I think in the SMSF space there’s a point in time and a marketing opportunity that people are actually going to exploit, which is pushing the message that superannuation has been a bad investment and a lot of people see super as an investment and not a tax structure. So if they think it’s a bad investment, then there’s a long way to go to get them around to a point of understanding, so that’s part of the problem. You’ve then got the perceived opportunity for people to be able to get access to superannuation early and buy something they really understand, which is residential real estate. And I think we’ve got a situation where SMSFs are being sold and not advised on and that is a very distinct difference. I think there are people selling SMSFs to individuals who don’t need them, shouldn’t have them, and don’t understand their obligations. That’s the bit I think is going to end in tears. Will they have paid too much for the residential property? Probably. Also it means they put a single asset in a single asset class in a fund. Is that a good idea? I don’t think so because it goes against everything we talk about like diversification, liquidity, transparency, low transaction costs and flexibility. So residential real estate doesn’t deliver any of the things we like and you end up with a single asset in the fund that is leveraged.
Is there any way holding residential property in an SMSF can work?
If you have a client who comes to you and he’s an expert in property development and understands the market and knows the price point, he can actually add some value based on his expertise. Then I think that’s a good thing, but there aren’t many people like that around.
Is there one definitive source responsible for selling SMSFs rather than advising on them?
It’s like a lot of things in our industry where it’s likely to be a particular organisation, licensee, planning group or adviser that will come to the market having identified this as an opportunity. They’ve identified the opportunity and they’ll come to the market and they’ll probably do well, but they’re also likely to create a huge amount of havoc along the way. We see that all the time. For example, in the funds management industry there are different products coming to market all the time that are appropriate at a point in time because there has been either a need or an opportunity identified and you see people pile in. I don’t think it will be any of the big institutions or the guys that are here for the longer term. I think it will be people around the periphery who’ll be responsible for it. It could be the local accounting group who think they can play in this space and sell SMSFs to their clients.
Are you seeing SMSF clients increasingly seeking a piece of specific advice only?
No. With the clients we have the SMSF assets are only part of their entire wealth portfolio, so you need to be delivering the advice across everything. Plus often in the accumulation phase the SMSF holds the member’s life insurance, so you can’t really advise on the superannuation part and not touch on the risk piece as well. And when you’re doing that you’re entering the realm of estate planning because you’ll be looking at the beneficiary’s rights. You can probably provide advice for clients who say ‘we’re here and we want to get to there so help me do that via an SMSF’ and that’s okay, but I don’t think you can have an ongoing advice relationship without incorporating the broader picture.
What would you nominate as the biggest change you’ve witnessed in the SMSF sector?
Changes to the contributions caps is one. It’s made a big difference because SMSFs can’t get scale. When I started you could just put a lot of money into super. So if a client writes a cheque for $5 million, it would definitely be going into an SMSF. But if they can only write a cheque for $450,000, other offerings like industry funds become more appealing. So that’s had a massive impact on SMSF uptake. The move away from the accounting space to specialist administrators has been another big change. They’ve really grown into the market even though they’re still only taking up a relatively small part of the market, so accountants are still holding the larger share. That’s definitely going to change. Technology is also making a massive difference to the space, so being able to actually record and manage what the client’s got is a good thing. Gearing is another significant change; being able to gear in an SMSF. I don’t understand why the government allowed it and I think it will become an issue, but someone obviously thought it was a good idea.
If there was one thing you could change about the SMSF space what would it be?
It would be the contributions caps. I think we should be putting more money into superannuation. There’s absolutely no doubt about that. The limits at the moment, particularly for people later in life, are way too low and those individuals are going to be significantly disadvantaged. I wouldn’t like to be a guy that’s 55 now with 10 years to go before retirement. People in this situation have really been hard done by superannuation. So we really need to raise the contributions caps and by doing that I think we’ll see a greater uptake in SMSFs. So I think that would be the change I’d make.