SMSF – the super vehicle of choice?

17/04/2012

To say that Self Managed Super Funds (SMSFs) have increased in popularity in recent years is somewhat of an understatement. In the five years to 30 June 2010, SMSFs accounted for almost half of the total increase in Australian superannuation balances.

This growth has largely been fuelled by consumers’ desire to have greater control over their investments, as well as to take advantage of the increased flexibility offered by a self managed fund. This rate of growth appears set to continue as an increasing number of younger people are setting up their own funds – driven by the convenience and transparency offered by online access.

Continued improvements in software technology will impact the way SMSFs are established and maintained, while enabling accountants and advisers to offer consumers more timely and improved services. As the SMSF sector continues to grow and competition between providers inevitably increases, the ability to take advantage of the latest advances in software technology will be critical to those groups looking to grow their market share. The increased efficiencies available through improved technology will also be one of the main catalysts for those looking to drive consolidation within the market.

The traditional SMSF offering

The SMSF market has traditionally been serviced by a highly fragmented network of small-to-medium sized accounting firms that have been responsible for the initial set-up, ongoing reporting and tax return lodgement of their clients’ funds. While the trustees of some SMSFs also seek professional financial planning advice, the majority of SMSFs have no formal relationship with a financial planner. The limitations of existing technology has meant that the costs related to the administration of a self managed fund have prohibited all but those with significant superannuation account balances from participating, effectively making the benefits of an SMSF inaccessible to the masses.

Key SMSF market drivers

The introduction of mandatory superannuation has meant that Australia has developed into a nation of investors, almost all of whom will inevitably build up a significant superannuation nest egg to help fund their retirement. However, as Australians draw closer to retirement and begin to take an increased interest in their retirement savings, they often find themselves constrained by traditional, less-flexible superannuation products and frustrated by their ongoing asset based fees.

Therefore, the most common drivers toward starting an SMSF are a desire to have greater control over the way that assets are invested, wanting more flexibility in terms of investment choice, and getting access to potentially powerful tax planning strategies.

According to Australian Tax Office (ATO) estimates, 94.5 per cent of all SMSF members are over the age of 35 – indicating that younger Australians have traditionally showed little interest in taking direct control of their super. However, evidence suggests that this trend is already changing with 10.8 per cent of all new SMSF members in the June 2010 quarter being under the age of 35.

The continued development of online banking-style technologies in the SMSF space will most likely continue to drive this trend towards a younger market. These emerging technologies deliver SMSFs in a format that younger generations can more easily relate to, as well as helping to reduce the costs associated with the administration of SMSFs, thereby making them more accessible to younger generations.

The potential impact of SMSFs on industry funds

Industry funds have consistently been losing their ‘large account balance’ members to SMSFs in recent years and this trend looks likely to continue.
The resulting reduction in average member balances increases pressure on fees as the industry funds are forced to spread their members’ costs over a proportionately smaller pool of money. Industry funds are increasingly finding themselves forced to develop more flexible solutions for their members in an attempt to retain them and slow the loss of funds to SMSFs. Software technology will be an integral enabler in this shift and will inevitably lead to further consolidation in the industry fund market.

The role of advice

Over the next decade there is likely to be a situation where we see a polarisation of superannuation membership between simple low cost MySuper style products and flexible SMSF like products. As the client base matures and broadens for SMSF style products, there will be an increasing requirement for investment and lifestyle planning. This, combined with the introduction of FOFA and the fee for service environment, will see advisers increase their attention on this segment of the market.

Technology enabling SMSF growth

Technology will be integral to the continued development of SMSFs and their mainstream accessibility. Technology has the power to improve the quality, effectiveness and value for money of SMSF products and services, leading to a significantly improved outcome for both consumers and administrators.

For advisers this will take the focus away from the administrative burden and allow them to focus on the value adding activity of assisting them with investment and planning decisions.

About the author

Darren Stevens

Darren Stevens

Director, Product Management & Strategy

Darren Stevens is the Director, Product Management and Strategy for Bravura Solutions and is based in our Melbourne office. With more than 26 years of experience in the financial services and IT sectors, he combines his actuarial background and deep product knowledge with strategic thinking.

Darren’ responsibilities include further developing, refining and executing Bravura Solutions’ corporate strategy for both its Global Wealth Management and Global Transfer Agency divisions, the global strategic direction and product management of Bravura’s Wealth Management product suite and leading merger and acquisition activity.