Diversification and liquidity key priorities for SMSF advisers amid market uncertainty


Rebecca Pope

While over 70 per cent of self-managed superannuation fund (SMSF) trustees are satisfied with their financial planner, a large and growing proportion of SMSFs still have unmet advice needs, according to the 2020 Vanguard/Investment Trends SMSF Planner report launched yesterday.

This year’s report surveyed over 3000 SMSF trustees and almost 200 financial planners on their investment priorities and industry outlook, and provides an insight into the opportunities and challenges facing the SMSF advice market.

SMSFs’ views on financial advice

While the number of SMSFs using some form of financial adviser has remained largely steady over the last 12 months, the use of financial planners has fallen from 215,000 to 190,000 in 2020.

Faced with heightened uncertainty due to the COVID-19 outbreak, the number of SMSFs with unmet advice needs have increased more than 6 per cent from 315,000 in 2019 to 335,000 in 2020.

As with previous years, SMSFs most often have unmet advice needs in areas such as investment strategy, retirement planning and tax planning – with cost of advice and confidence in advice some key barriers.

While 39 per cent prefer relying on professional advice, the report found that 61 per cent of SMSFs were open to using free non-personalised advice from sources such as government bodies and investment newsletters to help meet their needs.

In this challenging environment and uncertain investing climate, financial planners are struggling to grow their SMSF client base and revenue, with 46 per cent of respondents citing compliance-related issues as their biggest challenge.  Other challenges faced by planners include client education (33 per cent) and regulatory uncertainty (30 per cent).

“As demand for low-cost, quality advice grows, financial planners are often assessed on their value-for-money proposition. But aside from portfolio and financial outcomes, planners have an opportunity to define their value not just in monetary terms, but also in emotional outcomes,” said Rebecca Pope, Vanguard Australia’s Head of Intermediary.

“The value of developing trust and personal connection between a client and financial planner should not be overlooked. Particularly in times of market volatility, investors are looking for not only portfolio construction from an advisory relationship, but also confidence that their adviser can guide them through such uncertain times.”

Client engagement and product preferences

Retiree clients play a crucial role in SMSF planners’ client base, typically comprising over half of their total SMSF client base (53 per cent). Planners estimate that 16 per cent of this cohort are drawing down at an unsustainable level.

For SMSF clients in the accumulation phase, planners believe that 79 per cent are on track to achieve their retirement goals.

The most popular drawdown methods are the bucket approach (53 per cent) and income from investments (39 per cent). For retiree clients under the age of 65, planners are more likely to draw down from a range of assets without factoring in market movements (18 per cent, versus 10 per cent for retiree clients aged 65 and over).

Planners see longevity risk and generating sufficient income as their primary challenges when servicing their retiree clients, and are looking for better investment products to address these barriers.

Direct listed investments continue to form the bulk of new planner inflows from SMSF clients, comprising 50 per cent of their investments on average. Allocation towards cash and fixed income remain steady, accounting for a fifth of new inflows.

Planners’ use of listed diversified solutions continues to gain momentum, with ETFs (16 per cent, up from 12 per cent in 2019) and managed accounts (9 per cent, steady) receiving a substantial proportion of new SMSF inflows.

“ETFs and managed accounts provide planners great solutions to diversify their clients’ portfolios,” said Ms Pope. “They are low-cost, easy to implement and provide SMSFs access to different markets and asset classes, as well as liquidity benefits”.

Looking forward, planners expect flows to managed accounts to grow substantially over the next three years (from 9 per cent in 2020 to 12 per cent in 2023). Forty per cent of planners already use, and will continue to use, managed accounts for client investments.

Planner priorities are evolving

The current low interest rate environment has prompted planners to advise their SMSF clients to invest in a wider range of products, while paying down debt more quickly.

As a comparison, SMSF specialists are more likely to advise clients to invest in ETFs, direct shares and to pay off debt, while SMSF generalists (those with fewer than 20 SMSF clients) are more likely to recommend managed funds and fixed income products.

When selecting investments for clients, 69 per cent of SMSF planners cite diversification as their top priority. Some 60 per cent of SMSF planners also see liquidity as a key focus, jumping markedly as a key priority in light of heightened market volatility (from 34 per cent in 2019).

While this year’s report found many challenges facing SMSF financial planners, there is still opportunity for planners to improve uptake and focus on enhancing their advice propositions to support SMSFs both from an investment and emotional perspective.

About the Survey

The Vanguard/Investment Trends report is based on a quantitative online survey of 3,156 SMSF trustees and 193 financial planners, conducted by Investment Trends between February and May 2020.

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