Launched in Melbourne today by the SMSF Professionals’ Association of Australia (SPAA) and Russell Investments, the report highlights an opportunity for specialist advisers to help SMSF trustees take advantage of new developments in investment products and strategies which aim to help individuals reach their financial objectives in retirement.

The findings come as investors and advisers enter 2013 with a sense of relief over rebounding equity markets worldwide. 

Intimate with Self Managed Superannuation, the benchmark study into Australia’s rapidly growing SMSF sector, was commissioned by Russell and SPAA and conducted by the independent research firm CoreData. SMSF trustees, members of other super funds and high net worth individuals were surveyed from 17 September to 7 October 2012. In total, 1,555 Australian consumers were surveyed, of whom 437 were SMSF trustees and 224 high net worth individuals (HNWIs) without SMSFs.

Despite defending SMSF portfolios well during the sustained market downturn, cash investments took out the wooden spoon for asset class performance in 2012 returning just 4% compared to a 19.1% return for international shares. 

Portfolio diversity still hindered by wall of cash
SMSF trustees view traditional asset allocations as too inflexible, yet few appear to have built sufficient diversity into their portfolios as evidenced by the wall of cash which continued to grow in 2012.

Cash and term deposits accounted for 33.9% of SMSF investments in 2012, an increase from 2011 when they had 25.6%.  SMSFs reduced holdings to Australian equities to 37.1% down from 43.5% in 2011.  Australian equities, which rank as the second highest allocation in SMSF portfolios, were the second highest performing asset class of 2012 returning 19.7%.  Cash investments (71%) and Australian equities (70.2%) were the two most advised areas by financial advisers servicing the SMSF sector.

Russell Investments CEO Asia Pacific, Alan Schoenheimer, said the lack of diversification in SMSF portfolios was well illustrated by the concentrated allocations, at the expense of investing across multiple asset classes.

“As we’ve repeatedly witnessed, you can’t pick the winning asset class year on year.  Multi-asset portfolios which are built to meet specific objectives, regardless of the annual asset class winner, will need to be a key consideration for SMSFs looking to gain exposure to the mix of assets and adaptive approaches that will help them to meet their retirement objectives.

“Financial planners are well placed to educate trustees about the more recent adaptive asset allocation approaches employed by many funds – allowing them to readily adapt to changes in the investment environment and client circumstances,” he said. 

Trustees reasonably confident of meeting retirement objectives
With a growing number of SMSFs approaching retirement, 63.5% of trustees said they were at least reasonably confident they were on track to achieve their retirement goals.  Yet according to Russell, this means approximately 36.5% of trustees may fall short. 

“The investment environment today is considerably more complex than it was even just 10 years ago, and we’ve become more attuned to the risks which threaten retirement savings including longevity and sequencing risk. 

“Despite these challenges there is a breadth and depth of investment opportunities available to assist SMSFs to meet their retirement objectives – and specialist advisers have a pivotal role in the education of SMSFs about these opportunities,” Schoenheimer said.

SPAA CEO Andrea Slattery commented: “These findings by the study are welcomed by SPAA. We spend a lot of time and resources promoting the benefits of professional specialisation so a study that says there are commercial opportunities for financial planners who continue to upgrade their skills to meet their clients’ investment goals comes as no surprise.

“This latest research strongly endorses what SPAA has always stood for, which is higher competencies for special advisers in the SMSF sector.  Advisers who opt to adopt this strategy will find there are growing commercial opportunities as trustees look for more holistic investment strategy advice.”

Trustees confident in their investment knowledge
Evidence of SMSFs desire for control of their superannuation and investment decisions continued to come through in the 2012 research findings with 58.8% claiming they had strong or very strong knowledge of investments, and the majority (61.6%) relying on their own research to drive investment decisions.  

However Russell suggests SMSFs’ lack of portfolio diversification may mean trustees’ research is failing to identify opportunities for accessing asset classes such as international equities.  International equities returned 19.1% in 2012, yet SMSF trustees on average only have 6% allocated to the asset class.

“There is an expansive investment universe on offer through exchange-traded-funds (ETFs) or managed funds which offers SMSFs diversification across multiple asset classes and, for those who seek it, direct ownership.

“Financial planners may need to start broadening their advice services to include competency in new adaptive investment opportunities and other direct asset classes to provide strategic guidance to SMSF trustees and bridge the gaps in knowledge,” Schoenheimer said.

Decumulation in need of greater consideration
The study also highlighted the need for advisers to discuss with SMSF clients the most appropriate asset class mix in the decumulation phase, with only 43.9% of retired trustees indicating they had changed or were planning to change their asset allocation in retirement.

Alan Schoenheimer said: “The investment objectives are considerably different as SMSFs move between accumulation and decumulation, and it follows that the asset allocation should also adapt to this change in focus. Trustees nearing retirement clearly need to shift their attention toward asset allocation decisions.  

“This decision is not as simplistic as fully migrating a portfolio from growth to defensive assets and again reinforces the need for specialist advice to ensure portfolios are suitably equipped to withstand market changes and continue to provide sufficient income throughout retirement.”

Slattery said:“While ideally all trustees would adapt or at least reassess their investment strategy, it was pleasing to note SMSF trustees were adopting a more proactive approach than APRA fund members, with less than one third of these saying they had changed or were planning to change their asset allocation in retirement.

“The conversation needs to lead with strategy, not product or investment, with the intention of building confidence in, and understanding of, the advice proposition – a position SPAA fully endorses.”

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