SMSF establishment at a 10 year low while unmet advice needs continue to grow

The annual rate of Self-Managed Super Fund (SMSF) establishment has slowed, with just over 20,000 SMSFs being set up in the first quarter of 2019, down from the 40,000 established in late 2010, according to the latest Vanguard/Investment Trends SMSF Reports – the nation’s most comprehensive research into SMSF trustees and their advisers.

Launched yesterday, the reports collate responses from almost 5,000 SMSF trustees and close to 300 financial planners who advise SMSFs, providing a clear snapshot of the priorities and issues facing SMSF trustees today.

The SMSF sector represented around $747 billion in retirement savings as at March 2019, growing at a slower pace than the preceding 12 months following the impacts of recent industry events, compared to $1.8 trillion invested with APRA-regulated super funds.

“There has been a lot of uncertainty for SMSF trustees recently, particularly in the lead up to the federal election with the Australian Labor Party’s proposed policy to remove refundable franking credits from Australian shares,” said Robin Bowerman, Head of Market Strategy at Vanguard Australia. “However, the proposed policy change did highlight the risk of regulatory change to SMSF trustees and the high levels of home country bias in many portfolios.”

The report also delved into attitudes to other proposed changes to SMSF regulation including the increase to the maximum number of members from four to six, which more than half of advisers saw largely as a positive move, where trustees were unsure of the impact.

The proposed ban on borrowing for investment property was rejected by planners with a majority saying it would have a negative impact on the industry with nearly a third of trustees agreeing with this sentiment.

The total number of SMSFs grew to 598,000 at the start of the year, up just two per cent from the same time last year. The average SMSF balance is $1.2 million, with report findings over recent years showing a trend of lower fund balances and younger trustee ages at the time of establishment.

Despite declining establishment rates, there is still significant appetite among Australians to set up an SMSF, with one in five super fund members planning on setting one up in the future, citing greater control and better returns as the main motivators.

SMSFs are defensive and aiming to diversify

In an uncertain investment climate, more SMSF trustees are taking a defensive stance in their asset allocation.

“Investors’ outlook for market returns is very low at 1.4 per cent, far below the expectations of many economists, including those at Vanguard,” Mr Bowerman said, “this is most likely impacting trustees’ choices about asset allocation quite heavily”.

Despite this, SMSF trustees remain most inclined to invest further in blue chip shares, with 54 per cent citing this as a likely investment choice over the next 12 months.

SMSFs’ allocation to cash increased slightly over the past year to 25 per cent, largely at the expense of unlisted managed funds which dropped by two per cent.

While many SMSFs have adopted a defensive mindset, their appetite for diversifying investment products has increased.

This is highlighted by SMSFs’ use of exchange traded funds (ETFs) with the number currently investing, or planning to invest in ETFs in the year ahead, surging from 140,000 to 194,000 in the last 12 months.

The findings also showed that SMSFs are seeking greater exposure to overseas assets, especially through ETFs, however 52 per cent of respondents cite lack of knowledge about overseas markets and currency risk as the top barriers to obtaining more exposure.  

Looking forward, while building a sustainable income stream remains a key investment goal for many SMSFs, a growing proportion (15 per cent) say protecting their assets against market falls will be their key focus for the year ahead.

Room for advice

The number of SMSFs with unmet advice needs is at a record high, jumping from 275,000 in 2018 to 315,000 in 2019, with their top advice needs relating to estate planning, tax and income strategies, post-retirement planning, portfolio strategy and investment selection.

More SMSFs are experiencing challenges in managing their fund, with many struggling to reduce the time and cost of managing their SMSF. Investment selection, choosing what to invest in, is cited this year by trustees as the hardest aspect of managing an SMSF.

The number of SMSFs who use a financial planner has remained steady throughout most of the past decade but overall satisfaction with financial planners has declined to a seven-year low, with falling satisfaction with level of fees and perceived value for money being the key satisfaction gaps to address.

A lack of confidence in the expertise of advisers is now the number one barrier for SMSFs seeking advice on their unmet needs sitting at 32 per cent, with adviser fees the second biggest barrier at 30 per cent. Despite this, over a third of financial planners expect their SMSF business to increase over the next three years (36 per cent) compared to 15 per cent who expect it to decline.

Vanguard Australia Head of Intermediary, Rebecca Pope, commented on the value this research can provide financial advisers in uncovering the key advice needs of the sector.

“This year’s report showed the ongoing challenge for advisers to find and retain new SMSF clients. This research has for year’s highlighted areas of unmet advice for SMSF trustees, with the top needs almost always focused on areas such as estate and tax planning, providing valuable insight for those seeking to build up their SMSF business,” she said.

“The report also provided some insights for advisers into SMSF trustees’ attitude to alternative forms advice, with more than half saying they would consider over the phone or advice via web chat if it would reduce the cost of the advice service.”

 Key points:

• While SMSF establishment rate slows, future growth prospects remain strong with one in five super fund members planning to set up an SMSF in the near future
• SMSFs are being established at a younger age
• The adoption of ETFs by SMSFs continues to rise with intention to invest in ETFs surging almost 40 per cent in the last year
• The unmet advice needs of SMSF trustees’ are vast and growing
• Cost and trust are two major issues for SMSFs trustees seeking advice