New figures from the Australian Taxation Office (ATO) have confirmed the growing dominance of self-managed superannuation funds (SMSFs) in Australia.
According to a recently released statistical report, based on information available as at June 2008, assets held in SMSFs have climbed to $358 billion, largely as a result of Simpler Super.
The sum of assets is significantly more than the $286.1 billion figure previously published by the Australian Prudential Regulatory Authority (APRA); and in another boon for financial planners, the size of individual SMSFs is also growing, with the average assets per SMSF sitting at a healthy $938,000.
Almost a third of SMSFs boast more than $1 million in assets, while the figures for the end of the 2006/07 tax year show only 24 per cent of SMSFs have assets less than $200,000.
But as fund balances grow, SMSF clients are seeking more control over their investments, particularly in the current market environment.
Russell Medcraft, managing director, Self Managed Super Institute, says planners need to deliver a business proposition that offers clients flexibility, control and a reasonable price for their service.
“What investors want out there now is more control than ever before, but they don’t necessarily want to give their financial planner control; they want control, and they want to pay a fair and reasonable price for that,” he says.
His firm has shunned platforms in favour of term deposits and exchange-traded funds, which he says deliver a low-cost, liquid and transparent solution to clients.
After establishing the SMSF for free, Self Managed Super Institute charges $550 per year, per member, plus an additional fee of $440 if the client requires advice or an investment strategy review.
“It’s more of a partnership now [between advisers and clients] than it ever has been,” Medcraft says.
“Investors are a lot savvier than they were two or three years ago and cash is king. They want the certainty of cash; they want to be able to spread the cash amongst more than one institution; they are aware of the issues on banks being able to stand by their deposits. So you can get an SMSF where a person will invest across the Big Four banks and feel a lot more secure than just having it in cash or fixed income-type investments that unfortunately are still exposed somewhat to the CDO [collateralised debt obligation] markets.”
Medcraft believes planners will need to reassess their business model in the new market environment, particularly if they have traditionally relied on platforms to generate their revenue.
“This market is really going to have a lasting impact on the planning community and the use of platforms,” he says.
“Mums and dads, especially those that have invested heavily in the last 12 or 18 months, are wanting to shore up their income position and cash is the best way to do it. The real 101 of financial planning is diversification across asset classes and not to be overexposed in cash, and that’s what I educate my clients to do, but what we’re in at the moment is unusual times, territory we’ve never been in before. If you’re going into cash, it’s hard to justify cash on a platform – it’s far too expensive.”
Michael Hallinan, special counsel to SUPERCentral at Townsends Business and Corporate Lawyers, says the growth in SMSF assets, and in particular the prevalence of fund loans, is attracting the ATO’s attention.
Fund loans account for 30 per cent of current audit cases and prohibited loans – those made to members or relatives – are the “single biggest” contravention reported by fund auditors, Hallinan says.
The Commissioner has noted that 500 funds had indicated in their annual returns that more than 80 per cent of their assets were constituted by loans, and the ATO is currently following up these funds to ensure the loans were properly documented, on arms-length terms, and were not with prohibited parties.
“As time goes on, the SMSF sector will become more and more dominant and so advisers should skill up – in terms of their knowledge and ability to be able to service clients who have SMSFs – and see SMSFs as being a growth area,” Hallinan says.
“The concern of the Tax Office is the fact that loans represent such a large proportion of the assets of the fund and secondly, the terms of the loans. In terms of what the adviser should do, they really have to look at the investment strategy and consider, firstly, whether there is an investment strategy, and [if so] whether the loans are consistent with that investment strategy.” ÂÂ
