Much of the discussion is merely hypothesis.

The reality is that financial planning and the financial services industry more broadly have not done a good job of managing relationships with accountants.

Why is this?
Historically, four issues have generally plagued the relationship between accountants and financial planners:

• Trust
• Client ownership
• Expertise
• Sharing revenue streams and costs

More recently, independence has become a major issue, in particular, independence from major financial institutions.

The majority of accountants in practice, and we’re talking over 90% of accountants, are not involved in the provision of financial services.

They are certainly involved in superannuation and self-managed superannuation funds (SMSFs), but this is largely in the form of providing advice on the most appropriate tax structure for a client. An SMSF generally forms part of this tax structure.

The changes announced by Minister Shorten will see, over the next three years, a number of accountants moving into the provision of financial services and advice.

Our expectation is that accountants will become authorised to provide advice, in a limited or restricted form, in superannuation and SMSFs.

Do accountants want to expand their advice capability into other areas such as investment and life insurance advice? Our research indicates that the majority will not.

Would accountants prefer to work with financial planners who offer advice across a range of specialisations such as life insurance, investments and retirement planning? Preferably, not.

So, where is the opportunity for financial advisers?
Firstly, it is worth noting that there are over 60,000 accountants in practice in Australia. That’s a big market!

Secondly, there are two very clear opportunities for advice, particularly for advisers specialising in:

• Investment advice, particularly on direct assets (e.g. Australian shares), and
• Life insurance specialists.

The ATO introduced measures on 7 August 2012 as part of the suite of measures announced within Stronger Super. These measures are intended to address potential risks and strengthen the regulatory framework in which SMSFs operate.

These measures mean that trustees of an SMSF, are:

• Required to conduct a review of the fund’s investment strategy on a regular basis
• Required to consider insurance for fund members as part of the fund’s investment strategy
• Required to value the fund’s assets at market value for the purposes of preparing financial accounts and statements.

From our research and discussions with a large number of accountants, a clear preference has emerged to work with specialists in their respective fields.

For example, most accountants manage the day to day administration of SMSFs for their clients. They do not manage the assets within the SMSFs and are generally not authorised to advise on investments, asset allocation and portfolio construction.

The most recent SMSF statistics released by the ATO to the end of March quarter 2012 shows that the majority of investments invested in SMSFs are direct assets such as Australian shares, cash, term deposits and property, both commercial and residential.

The table below outlines the asset allocation of SMSFs as a whole as at March quarter 2012.

Direct investment accounts for over 75% of the total assets of SMSFs. Only 5% of the total assets are invested in managed funds.

SMSF members clearly have a preference for direct investment rather than through an investment platform.
Is the SMSF asset allocation appropriate to the needs and risk profile of SMSF members? Maybe. Then again, no one has tested this. The SMSF may be concentrated in direct property and it is debatable whether this would meet the ATO requirements for diversification.

A trusted relationship with an accountant may give you access to valuable information on a fund’s asset allocation.

Investment specialists, particularly in direct shares and portfolio construction, have a genuine opportunity to assist and advise the SMSF clients of accountants on the most appropriate portfolio for their clients.

In terms of insurance, a recent study indicated that over 90% of SMSFs were either underinsured or did not have life insurance.

The ATO statistics indicate that the average number of members in an SMSF is two. Let’s call them “mum” and “dad”. Both will need advice on the most appropriate type and level of insurance cover.

Specialist advisers in life insurance – those with 10 or more years’ experience advising in life insurance – would add significant value to an accountant’s clients in assessing their current insurance coverage, through other super funds or outside of super.

The challenge, though, is not just for financial advisers. The challenge needs to be laid down to accountants as well. By not expanding into financial services they may be missing out on valuable opportunities, not just to increase the value of their business but also to provide greater assistance to their clients in growing and protecting their wealth and retirement savings.

This article first appeared in the September issue of the van Eyk View. 

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