Mayflower Consulting founder Sarah Penn’s SMSF journey began 15 years ago and has culminated in the establishment of her own business servicing the sector. She reveals to Darin Tyson-Chan how some institutions are only just starting to understand how SMSFs work and believes a full-time focus on the sector is a must for success.
How did your involvement in the SMSF sector come about?
I’d been vaguely involved in the sector over the past 15 years in roles with Asgard and Macquarie. In fact, the very first task I was given at Asgard was to review their Investor Directed Portfolio Service, which had been specifically produced for self-managed super clients. My last year at Macquarie was really focused on SMSFs and included reviewing the opportunities for Macquarie across all aspects of self-managed super, looking at how Macquarie could compete successfully in the sector very strongly in cash and whatever other products and services might be brought to market. It was a great opportunity to learn every last detail about self-managed super and the nuts and bolts of how it all works. I became somewhat fascinated by it, so when I got the chance to start my own business, it’s the sector I focused on.
What services does your business offer?
I’ve been running my own business for six months now and where I’m finding I can add a lot of value is offering management consulting with an SMSF overlay. I think it’s such a misunderstood arena by most institutions and as a result they find it very hard to get traction in the sector. It’s a situation that’s useful to me as it enables me to assist them understand all of the moving parts of SMSFs, who all the players are, how accountants, administrators, auditors, financial planners, stockbrokers and software providers are interrelated. Looking at it from a retail super perspective, which is very linear, it’s very difficult to then understand how self-managed super fits into that paradigm because, of course, it just doesn’t.
Did this lack of understanding a surprise you?
It didn’t surprise me. I think the super industry, generally, has been running on such a good wicket under a particular structure. So you have consumers, they see a financial planner, they have their 9.5 per cent super guarantee that goes into retail super or a platform, the fund manager behind it makes money, the planner makes money, the platform makes money, the consumer gets a reasonable product to save for their retirement, everybody’s happy, but it’s very linear. There are a whole lot of assumptions in the structure that do not hold for self-managed super and I think it’s in the underlying assumptions where the problem is. Firstly, self-managed super is not linear. So you might talk to an accountant about setting it up, you might use an administrator to actually set it up, you might see a financial planner for strategic advice, you might see a stockbroker for investment advice or you might do everything yourself or use any combination of those services. I like to talk about the value grid as opposed to the value chain, and that non-linear approach is very hard for people to understand if they’re not in self-managed super.
Is there another factor at play?
The other issue is that there is an assumption across the industry that if you don’t have a financial planner, you’re not that clever and you don’t have any money. Fundamentally that’s just not true, but it’s an underlying assumption of the whole retail super industry and you can see the assumption is there because any time a product is built for people who don’t have a financial planner, most of the features are taken off and it tends to be for people with not much money. In self-managed super that just doesn’t hold true at all. Also from a funds management point of view they’re looking to provide a fund-of-funds-type product, but that’s the opposite to what people in self-managed super want.
How receptive are financial services organisations to the need for a significant change in the way they interact with the sector?
In the past they haven’t wanted to accept this need to change. There’s a famous quote that says: “All truth passes through three stages. First it’s ridiculed. Second it’s violently opposed. Third it’s accepted as being self-evident.” I think that’s exactly the journey that’s happened with self-managed super. So at first it was ignored – it was just a few people playing around the edges and not something any of us needed to worry about. Then it was ridiculed – people with SMSFs don’t know what they’re doing, they all need to be stopped, it’s a disaster, they’re all going to lose money, they really need a financial planner, how come they don’t have a financial planner. And now it’s been accepted as fact. So I think even four or five years ago the business I’m starting now would never have gotten off the ground. But now it is accepted as fact and it’s patently obvious the sector’s not going anywhere and it’s here to stay. So now it’s a matter of realising there is a lot of money and people in the sector and they need to participate. Furthermore, they know they don’t get it so they’re very willing to have a conversation about what they do need to understand..
What are the struggles for the smaller sector participants?
For smaller businesses I’m seeing pricing as a real issue. There’s a lot of industry talk about price pressure, with prices coming down as a result of the commoditisation of accounting services and this trend cannot be denied. But for the services that add a lot of value, and people are willing to pay for, the prices are not coming down and are in fact rising. Advisers and accountants that are doing very well in this field are offering more and more bespoke services and are pushing towards having fewer clients, higher-value services and higher prices, but they need to have pricing models and service models organised around it. They need to understand the services they are offering, what they can outsource and what they should do themselves. There are a lot of pieces to the puzzle and that’s where it’s difficult for small businesses because they’re so busy just running the operation.
Is servicing the SMSF sector becoming a mutually exclusive proposition?
I think so. It’s just too complicated an area, technically, to dabble. There are too many areas where you can easily mess things up for your clients if you’re not completely abreast of all the latest legal and technical changes, case law and ATO rulings. There are a lot of changes going on at the moment. I’m a member of a number of SMSF LinkedIn groups and the questions people put forward are extremely technical, and I don’t think it’s reasonable to think you should be able to answer all of those questions unless this is your bread and butter. I also note the Australian Securities and Investments Commission has struck off a couple hundred auditors in recent times and I think again that’s just an indication you have to be doing this as a permanent proper part of your business or not doing it at all.
What’s the most significant change you’ve seen in the sector?
I don’t think I’d call out one significant change, but it would be a number of factors that has propelled SMSFs into the mainstream. When SMSFs were a thing that should be ridiculed or gotten rid of, there was so much pressure from some of the large institutions to make SMSFs as unappealing as possible, but that outside pressure is a large part of what ended up causing the sector to become more professional and more solidified, creating organisations like SPAA. Also the combination of Simpler Super, there was a spike in establishments then, followed by the global financial crisis, that really shone a very harsh light on retail super, that pushed the SMSFs over the edge from being a small part of the industry that some accountants recommended to a significant component of the superannuation industry.
What’s the one thing you would change about the sector?
My first thought would be to get accountants and financial planners to like each other more, but the problem with that is they’d probably become more like each other and I actually don’t think that’s useful because they bring such different skills and views of the world to the table. But I’d really like to see small businesses have more confidence in themselves and the services they offer their clients. I think a lot of planners and accountants, probably more so accountants, have this nervousness about whether they’re really providing something of deep value to their clients and I’d like to see them stop worrying about that.
Looking at the next 12 months, what’s the biggest challenge for the sector?
I think the Financial System Inquiry focus on borrowing is going to be a quite a challenge. It’s probably one of the last areas where the bigger institutions and driving forces in the background, such as industry funds, have a chance to try and take a key selling point for SMSFs off the table. So I think there is going to be a fair bit of noise around it and I think for practitioners it’s going to be important to ignore the noise until definitive decisions are made or work proactively with groups like SPAA to help shape the final outcome.
