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SMSF trustees’ desire for control confirmed

Most people who have established an SMSF were not motivated by dissatisfaction with the returns generated by a retail or industry super fund, but by a greater level of control and choice over investments, new research has found.

According to a survey commissioned by the Financial Services Council (FSC) and UBS Global Asset Management (UBSGAM), 59 per cent of respondents indicated a greater level of control was their main reason to set up an SMSF, while only 20 per cent said they did so because of poor performance from a retail or industry super fund.

“That is what I found very interesting from the report: the investment return was not the most important thing when someone decided to move into that environment,” UBSGAM head of Australia and New Zealand Bryce Doherty said at the launch of the ‘State of the Industry 2014’ report today.

“I assumed that people went to SMSFs because of investment outcomes, but the research found people mainly wanted control and flexibility around their investment accounts.”

FSC chief executive John Brogden said the motivation to set up an SMSF was in stark contrast to the goals of super funds regulated by the Australian Prudential Regulation Authority (APRA).

“[It] is a fascinating contrast. [Investment return] is the most important issue for an APRA-regulated fund; that is the only decision that matters,” Brogden said.

The survey was held among 600 SMSF holders nationwide in October and was included in the report launched on Monday.

It was conducted by Kreab Gavin Anderson’s market and social research division, GA Research.

The research also found the level of engagement from SMSF trustees with their superannuation was much greater than with members of retail and industry funds.

While the average super fund finds it hard to communicate with members, almost two-thirds of respondents to the survey, or 64 per cent, said they checked their SMSF portfolio at least monthly.

Yet, only 26 per cent make changes on at least a monthly basis, demonstrating SMSFs are not used as trading vehicles, but that most trustees do regard them as a vehicle for long-term investments.

Yet, there were also still significant gaps in trustee knowledge about their fund.

For example, 28 per cent of respondents said they did not know whether their fund was leveraged or not.

There is also little suggestion trustees benchmark their performance against the market or other funds, once they have switched to an SMSF.

“One of the dangers is that you set up an SMSF and that is the last time you look at what everyone else’s performance is,” Doherty said.

“You look at the bottom right-hand corner of your papers and you say: ‘Good, it went up, that has worked.’ But that is not always the case because people don’t benchmark themselves.”

Historically, SMSF had been heavily exposed to cash and Australian equities, he said.

And although this has worked well for some time, it has dragged on performance over the past year.

“From the research, we see that SMSFs have been heavily overweight cash and domestic equities,” Doherty said.

“There have been different times during the last 10 years, where that has not been a bad move, although it does mean that over the last 12 months the SMSFs that we’ve surveyed have underperformed APRA funds.

“We did see from the research that 15 per cent were talking about diversifying their portfolios by taking up global equities. [But it is] still a relatively small number; we would expect that to expand.”

Brogden argued the regulators needed to create a more comprehensive view of developments in the SMSF sector, an argument the FSC officially put forward in its submission to the Financial System Inquiry led by David Murray.

“One of our recommendations to the Murray review is that APRA should have a system-wide view on the self-managed super industry,” he said.

“That $550 billion, nobody is looking at this from a system-wide perspective. We think somebody needs to play that role.”

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