There are 416,000 self-managed super funds in
Australia, with assets approaching about $360 billion, yet there is little hard
data on SMSF asset allocation or investment performance. A Professional Planner/Russell Investments
roundtable examined how trustees make investment decisions, who they rely on,
and the latest developments in portfolio construction – including the growing
role of exchange-traded funds

Hogan: It’s clearly a big market. It, in the last five years, has gone
from being, in dollar terms, probably smaller than the managed fund area, the
public offer area, to a position where it’s now the largest in terms of dollars
under management, funds under management. It’s now the largest way that people
actually pay for their retirement. There are an average of two members per fund,
and [an] average account size of $450,000, so the average fund is just under a
million bucks.

Dixon: There are about 416,000 funds, with about $360
billion in them.

Curtin: It’s interesting to note that the growth of
SMSFs has been 20 per cent, until the past couple of years, whereas within APRA
funds it’s about 8 per cent. So you can see the momentum that’s behind SMSFs.

Wells: According to the Investment Trends research, there’s two reasons
why I set up an SMSF. It’s either an active choice because I want control, or I
think I can do a better job myself; or it’s a more passive choice where my accountant
or my adviser has recommended that I do it. So if you think about the former,
where control is such a driver, even those who have advisers and accountants,
control is still a driver. And I’d love to hear from those of you who deal with
the clients, whether you’re different in terms of how much control they want,
to other clients that you work with. But given that that’s such a driver, and
they’re very generous about their own assessment of their own performance,
perhaps, you know, they’re not seeking advice as much as, indeed, perhaps they
should.

Colley: It depends what you call control, because I did
a bit of a survey amongst our clients, and I said, ‘Well, why did you set up a
self-managed fund?’ And one guy told me it was, ‘Because the other funds wouldn’t
do it for me’. And in one case, they wouldn’t roll over something in 2007, and
so [the client] got some technical benefit out of it, and he reckoned that he
saved about $100,000 in just that one action that he did, that he could do in
his self-managed fund that they wouldn’t let him do elsewhere. And another one
was being offered some bonus shares from his overseas company, which is a
public company. And he couldn’t have put that anywhere else but a self-managed
fund.   So that was how he saw control; that is that if I get offered something,
then I can put it into this thing that will allow me to do that, which just happens
to be a self-managed fund. Other people want that control over the investments,
and they’re getting quite heavily into investment strategies with their funds.
And they do quite a good job. Sometimes they do it well by themselves, other
times they need financial planners to help them.

Satill: I’ve found that over the years, being an accountant in my previous
life, and also now a financial planner, that a lot of people like this idea of “control”,
but they don’t actually really know what control means. They want to be masters
of their own destiny, but again they don’t really know what that means. Because
they still defer to advice the whole time. I’ve got a client at the moment, and
he doesn’t want to go into the sharemarket. And all he wants is real estate. So
yeah, we go with a property instalment, and you can do that. But when it comes
down to what the client is looking for, often the clients don’t know what they’re
looking for.

Skelly: I think that’s a common trap for self-managed
super funds. Bricks and mortar, direct [Australian] shares and cash – that’s
what they hold. And there are risks with that, as we know.

Colley: Big funds hold the same things. So where’s the difference in the
risk?

Skelly: But as you know, Australia makes up a
relatively small market capital of the world. So is that the most sensible
place to have all your assets, in Australia?

Knox: The SMSF sector appears to
confuse corporate Australia because its growth, I would suggest, has occurred
because of disillusion with what’s in the market today [and] they’ve, for whatever
reason, tried to take control. Whether that’s investment-driven, or
personality-driven, or whatever, it seems to me no-one controls the sector,
which is an interesting start point. But I would put to you that the cost structure
of the [managed funds] industry has weighed heavily and created the growth of
the SMSF sector.   The cost of investment management, the disillusionment of
managed investment schemes not protecting assets on the way down, has probably
been a key driver in that. The cost of platforms, et cetera, has just overweighed
most people’s reason for using the traditional sectors. And in response, what’s
happened is corporate Australia is now clamouring to get into the SMSF sector,
to sell to it, and I don’t think selling to it is the solution. I think
actually working with it is probably a better outcome.

Colley: Yeah, I agree with you. I think that what corporate Australia
failed to do probably around about 2000-2003, when we saw a drop in the market,
was actually understand the self-managed fund market, to develop products which
either would have slowed down the growth of self-managed funds, or been
complementary to the development of those funds, from an investment product
point of view. And it seems to have failed to do that, and that’s why people go
directly, without virtually any products and support.

Keenan: And I think that’s the point about control. If you think about the
three sectors that dominate – property, cash and shares – it’s because most
investors understand, they can touch those brands that they invest in through
shares, they can touch the property they invest in, they understand the cash
they’ve been investing in. That comes back to this element of emotionally owning
that element of control. Fifty per cent of our shareholders in iShares in
Australia are in self-managed super funds. I think that comes back to that
control element, controlling the cost, controlling the liquidity, and understanding
what they’re investing into.

Knox: I think the challenge for
the financial planning community was the reader of the magazine; historically
speaking, until recent times, nearly all people who were licensed have had an
overweight decision to managed investment schemes, because dealer groups
themselves have not been comfortable with planners dealing in direct asset
ownership, whether it be equities or the others. So dealer groups have
literally said, ‘We will not deal with the SMSF sector.’ But the message I’m
giving there, ultimately, is direct asset ownership is the key to the growth of
the SMSF sector, not managed investment schemes, except for hard-to-get-to
areas such as small cap stocks or emerging markets, or something where clearly
unitised investment can add demonstrable value. And ETFs [exchange traded
funds] I think are a lay down misere for the growth of the sector, because they’re
easy to get to, give the same exposure and they cost very little.

Wells: So does that mean that advisers need to have a new skill set, and
that is the ability to advise on direct?

Dixon: I think there’s a structural challenge in that. I don’t think it’s
the skill set or the mindset of the adviser. It’s to do with the legacy of the way
the industry has grown up, where the licensing provisions make it extremely
difficult for the responsible managers to manage the affairs of an adviser
dealing with direct securities. And therefore, PI [professional indemnity]
protection, they almost preclude people from doing it.

Hogan: It’s becoming more common though. I do direct shares, and have
done direct shares for a number of years, with self-funded clients and
non-self-funded clients as well, and there’s not a concern.

Knox: I agree with that, Peter, but what I would say is that’s probably
because of the growth of the SMSF sector. If that hadn’t grown, I don’t think
the call for direct asset ownership would be quite as strong as it is today.

Wells: I think there’s a number of things aligning. There’s the point
that you’re making, the growth of the sector, and there’s the GFC and this
focus on fees. And all these things are aligning to encourage the dealer group
to allow advisers to advise on those assets. And certainly the statistics that
we’ve seen from Investment Trends show that more and more SMSF advisers who
have SMSF clients are looking to advise also on shares. And the ones who are
already advising on shares tend to have more SMSF clients.

Keenan: And is it linked to independence as well? By far and away the
greatest take-up of – and again I’m speaking from the ETF perspective, that’s
where I come from – but most, by far and away the biggest take-up of our
product in Australia is in the independent financial adviser market. And it’s
our experience that, you know, they are the ones more likely to be managing large
self-managed super funds.

Knox: Why do you think that is,
Tom?

Keenan: Because I think they have more flexibility in
their approach than just direct equities.

Dixon: Unfortunately…the accountant with the CPA logo and Chartered
Accountant logo is far more trusted in his community than any financial
adviser. So, even if you go and force these accountants to go and get an AFSL
licence, they’ll probably go another step up on the row as being [regarded as]
slightly more trusted, and doing the right thing for the clients. When people
get upset with the accountant, you see this [statement]: “Accountants are forcing
people into SMSFs.” No, they’re more comfortable dealing with their accountant
every year, who’s been helping them with their either personal tax or business
tax. And a lot of financial planners don’t realise that these guys over in the
accounting side, or the accounting independent side, are being respected more
in the community. And…when they tell someone [to set up an SMSF], they think, ‘Hey,
they want me to do my own thing, and have my own control; this guy’s on my
side.’ Whereas [when a planner says it, they think], ‘You want me to go into
the AMP, there must be some sort of commission in this for you, there must be some
sort of fee; I don’t trust you.’

Colley: That fits also with the characteristics of the individuals that go
into self-managed funds, because they’ve usually got their own businesses, some
sort of structure. So self-managed funds is just an adjunct to the corporate structure
they might have.

Hogan: The interesting comment that I think Cooper
made at the conference a couple of weeks ago was that the reason why he’s becoming
more comfortable with self-managed super funds in the sector is because of the
engagement of people in it, who use self-managed superannuation funds, they’re
actually actively involved in their retirement savings.

Wells: They’re hungry, they’re hungry for investment, specifically,
information; they’re hungry for it. I mean, it’s such a contrast to the industry
fund. And the biggest threat to industry funds is the more affluent end of the
industry fund [membership] going into and setting up their own SMSFs. The
industry funds aren’t really able to respond to that. And that’s an opportunity
for the advice community as well.

Knox: A point I’d like to really
put to the table is most of the discussions around the SMSF sector always seems
to want to compress and control it. So the responses tend to be either licensed
accountants or whatever, and I thought Cooper’s comment was quite embracing. I thought
it was an encouraging statement. I think if the whole key word shifts to an
education program, ultimately the more educated people are on the whole concept
of SMSFs, the more they’re likely to behave in the regulatory environment. Very
few people genuinely want to step out of that. And I think the so-called areas
that are difficult are those people [who] have set their SMSF up and have
difficulty understanding that the assets are not theirs, they’re actually part
of a trust, and they get a bit carried away and want to use those assets for
paying down personal debt or buying personal assets. And if you control that -
there isn’t a lot of evidence that that’s rampant – I think the rest of it’s an
education program.

Wells: That’s really an important point, because if
you’re trying to have a conversation with SMSF investors, I think it’s really
important for the companies to realise that they have to get their head around
the fact that they’re not in control anymore, it’s actually the investor who’s in
control. And so there’s an element of respect that has to come with that, in
terms of how you have the conversation with the investor. And I think, clearly,
advisers who are working with SMSF investors understand that, understand how
that works. It’s a little bit like social media, you know: ‘Oh, my goodness, I
can’t control the message!’ But the fact is, people are talking anyway, and this
is a really engaged audience. They’re talking anyway, they’re making decisions,
they’re doing it whether we like it or not. And so if we can actually get
involved in that conversation without trying to control it, then it’s going to
be much more effective.

Colley: There’s probably two ways
your financial planning can go. We get involved with the comprehensive
financial plan, but often what you find with some clients is that they only
want to go halfway, so they get the strategy advice, and the actual investment
decision is left with them. So off they go and do their direct investing. Do you
find that, Peter?

Hogan: Yeah, yeah, a lot of people like to have a
conversation about certain shares and stocks, but they tend to initiate that
conversation, rather than wanting me to be actively ringing them up and playing
broker. They don’t want me to be broker, but they want someone to bounce ideas
off.

Skelly: So is that the right kind of advice that SMSFs
should be getting? I mean, isn’t there something at a portfolio construction
level they could be missing if they [only] want to talk stock stories?

Hogan: Yeah, sure there is. No, that’s absolutely right. And I think the
thing is that we try and encourage our clients not to be in just Aussie shares
and cash, and that there would be international funds, managed funds that
perhaps they should use. Certainly what we find is that they’re open to
suggestions around diversification, provided that what you’re suggesting is things
they can’t easily do themselves. They’re quite happy to use the third party
provider, but if they feel they can do it themselves, then that’s typically
what they’ll want to do.

Curtin: There is a good point in
that one. There is inherently a bias within SMSFs. There is an asset
concentration there. Sixty per cent of assets are either in Aussie shares or in
cash. So I think there is an awareness that we need to give to clients in that,
you know, diversification is key to reduce your risk. So rather than chasing
return, and getting a better result from the APRA fund, you know, what we
should be considering is the risk piece as well. So I would put it to the table
that there is a return-versus-risk conversation or risk conversation to be had
with clients. One of the things that we’re identifying is the education piece. We know the sector is very, very confident, maybe even over-confident, we know
they want control, whatever the definition is around that control. However, I
would suggest that confidence and control doesn’t equal competence, so there
will always be a need for advice in some way, in this sector. And that issue of
education is absolutely critical, because there is just not enough education
out there. And we’re seeing in this sector that they are highly educated, they
are the higher income earners, as such, and yet, when tested, 69 per cent of
SMSFs said that they had a good understanding of their obligations, yet only 51
per cent of investors said they were the trustee.

Hogan: Getting back to what you were saying about competency, one of the
driving areas that SPAA [Self-Managed Super Fund Professionals’ Association of
Australia] has been set up for, when it was set up seven or eight years ago,
was how to raise the standards of the professionals in the industry, who are
advising this space, because I think it was probably fair to say it’s not a
problem that’s been entirely solved; and whether licensing of advisers or even separate
licensing for accountants who can do audits, whether that’s the answer or not,
I don’t know. There does need to be more work done in that area. But we found
that the professional advice that was given left something to be desired in a number
of cases. The accountants, particularly, play an incredibly important role in
this sector, because in the end the Tax Office can’t possibly audit 420,000 funds
a year. They rely entirely on the auditors of those funds to actually, as best
as they can in the circumstances, ensure that the funds that they look after
are run appropriately. And so they’re critical. And the fact that a large
number, as you said, of accountants do fewer than ten [audits] – some would
only do one a year – I mean, with all the other things that accountants have
been asked to do in their professional lives, how can they possibly stay on top
of superannuation when they have such a tiny part of their business devoted to
superannuation? Something needs to be done.

Hoyle: How well developed are the average SMSF trustees’ asset allocation
and portfolio construction skills?

Satill: In my experience with SMSFs, what people basically want is to try
and stick within the Australian market, because they can see it, and they can
follow it. And they have an aversion to investing in international shares, because
a) they don’t know how to do it, and b) they don’t like the concept of managed
funds, they don’t understand it. So really it is an education process that we try
and deliver, and I’m finding that I’m gradually educating my clients to
diversify, and to have investments overseas, and by using either ETFs or
managed funds for those areas. But it is a slow process, because people can’t
control their investments overseas, because they don’t know how to follow – so
this is the big issue. And, you know, again with ETFs, I use ETFs in a big way,
but again the thing is that unless there’s something listed, like an iShare,
right, and we don’t know how to monitor, they don’t know whether it’s good, bad
or indifferent.

Hoyle: But is an SMSF trustee more or less receptive
to your advice and guidance than a non-SMSF client?

Satill: No, I think they’re both the same. A lot of people have watched
the market over the last year, and people talk to their friends the whole time,
and they’ll compare levels of advice. You know, someone will say, I have one
client who is risk-averse, he says, and you’ve got probably 70 per cent of his
portfolio in cash at the moment – term deposits. And today you’ll find them
saying, ‘I’m not happy with the performance of my fund.’ So this is the
situation that you’re having to deal with.

Hogan: Are you accountable for the investment performance of his fund?

Satill: Yes. I am, actually.

Hoyle: So an SMSF member, or trustee, doesn’t necessarily come to you
equipped with a higher level of skills and expertise than what’s called an ‘ordinary’
client?

Satill: I don’t think they’re any different. I just
think that basically they just compare themselves to their friends, and they
talk amongst their friends, and they say, ‘Why have you told this person this,
and not me that?’

Curtin: But isn’t this a typical example of investor
behaviour? In some ways it’s becoming much more tactical. You know, ‘What stock
will I buy?’ rather than the strategic. Asset allocation drives between 80 and
90 per cent of your return, and the other 10 or 20 per cent is clever stock
picking. Well, we seem to have the exact reverse here, and investor behaviour
getting embedded in the SMSF industry, which is, I become more tactical and I
just become a smart thinker. But at the end of the day, this SMSF is a super
fund. It is for retirement. So the driver should be to accumulate your wealth
for retirement. How much time have we spent around thinking of the asset
allocation that’s required within SMSFs, which I think is probably the most
critical thing? So is that another natural bias that we’re seeing in the SMSF
market? So we’re seeing that immediate investor behaviour issue; we’re seeing local
over global; we’re seeing concentration over diversification. So we’re seeing
all these things happening, and I think we have got to shake this tree a little
bit harder to make sure that we don’t have inherent biases in SMSFs, which
maybe have grown up in other segments.

Keenan: You can’t control what you can’t understand, and so outside
domestic shares and cash, and property, people have less understanding of fixed
income. They’re not as familiar with the brands in international investing as
they are with Australian companies. And so it comes back to that point about
education.

Wells: We need to make asset allocation sexy, because
if we can prove to the SMSF investor that it does impact their performance,
then perhaps they’ll be more inclined to listen. But one of the marketing
strategies we’ve always adopted when talking to SMSF investors directly is you
never talk about asset allocation, because their eyes glaze over. You have to
talk opportunistically. You know, hopefully you’re talking to them about an
opportunity that is going to benefit them, of course, but that’s one of the
things that, you know – when you’re talking to advisers, yes, talk about asset
allocation; when you’re talking to SMSF investors it’s not opportunistic enough. You know, when you’re looking at what are you competing with in the marketplace
in terms of messages, you don’t think, well, it’s going to be other – one part
of what you might be competing with is another ETF, for example. But you’re
also competing with residential property and you’re competing with shares and
structured products, and all these other things that they’re looking at right
now are the competitors, which is not an asset allocation argument. So I think
a big education piece around asset allocation…is absolutely warranted, I agree
with you. But I think we need to…really prove the benefits to them, so that
they’ll embrace it.

Hoyle: What do we actually know about the asset
allocation and the investment performance of SMSFs as a group?

Colley: As a body, our clients, they represent a balanced pool. I could
pick particular funds where they’ve got large exposures to bonds, and they have
had for many, many years, and that’s been a successful fund as well. And I’ve got
some pensions which are in rather diabolical situations at the moment, because
they’ve gone heavily into equities. But basically the overall portfolio we’ve
got is a balanced portfolio.

Skelly: One thing I want to put on
the table, we’re assuming SMSFs do get the right financial advice, whereas in
the financial crisis I think one in five stopped getting professional advice.
So I think that some of the stats that we’re hearing around the room are based
on SMSFs ever getting advice. In fact, there’s a large proportion who aren’t.

Hoyle: Something like eight out of ten SMSFs are set up on the advice
usually of an accountant. And that accountant is often not licensed to give
investment advice.

Satill: They’re not recommending a financial planner
either.

Hoyle: Right, so these funds get set up, presumably
the contributions go into the fund, and then they’re effectively saying to the
trustees, ‘Right, you’re on your own.’ And is this why we get these weird asset
allocations in SMSFs?

Keenan: We even see that in our products, where a typical
advice client will have a portfolio [that is] typically along the MSCI World, MSCI
All Countries World, benchmarks. The non-advised are buying more things like
China, or our emerging markets [ETFs] only. Obviously that’s because they’re
chasing return, and not constructing portfolios but being more opportunistic.

Hogan: If you have an adviser, part of the process, where you get them
engaged in asset allocation, is that they have to have an investment strategy.
And so you have to sit down and have that conversation with them – first
question you ask a new client is, well, where is it? And they’ll sort of go, ‘I
don’t know.’ So the first thing I do is write one for them.

Hoyle: Doesn’t an accountant have to do the same thing?

Hogan: The accountant’s not allowed to.

Hoyle: But doesn’t the accountant have to say, ‘You’ve got to have an
investment strategy – I can’t help you with it, but you have to have one’?

Wells: The number one [source] for who’s having the largest influence on
your investment decisions, the number one is ‘my own research on the internet’.
And then number two is daily newspapers.

Satill: People are trying to do a lot of research themselves. But one of
the big problems they are faced with today is that you read every day in the
papers that Australia’s got the strongest economy in the world, the second
strongest economy in the world. How do you go and tell a person that you should
go invest internationally when you read Europe is a basket case, China’s holding
back at the moment? You might have a China philosophy or you might have a
particular philosophy, and you might say, Okay, the US dollar is at an all-time
high against Australia. Maybe now is the time to get into ETFs for S&P 500,
when the Australian dollar starts weakening you’re going to make some money.
When?

Knox: I do respect your expertise as planners and the
ability to guide. But, as an adviser, why wouldn’t you focus on big picture
issues in investment disciplines and asset allocation, rather than delving down
to believing you can create an investment portfolio where the performance gets
monitored and it’s better than somebody else’s?

Satill: Let me say, I do, I do have asset allocations and I have a
strategy, and I try and convince my clients; but you’re always going to find
the clients who try and say – who argue with you, saying why they shouldn’t do
it.

Hogan: Financial planning is a process where you do
the strategy first. And the last step of the process is the investment. But you
still come to a point when they want to talk about particular stocks, or they
want to talk about how they invest in a particular asset class.

Colley: What we find with our largest self-managed funds is that there’s a
propensity to have more managed funds. The less money they’ve got, they’ll go
to direct stocks. Now, whether that’s a more gambling sort of approach than
those that have only got a small amount of money; or those that have got a lot
more money in there, the self-managed funds, whether they’re prepared to go to
advisers, and advisers then balance their portfolio with managed funds.

Skelly: What about the intersection of tax advice and investment advice?
Are we as an industry doing enough on the tax-meets-investment side?

Dixon: No. Because, for example, ETFs, if they’re run with a very passive
approach to index turnover, are so much better for your client than even the
best active manager. Because the active managers, with their high turnover in
the accumulation phase, are spitting out short-term capital gains all the time,
getting taxed while you’re still in the accumulation phase. That’s taking 15
per cent off the table. The better ETFs that I’ve seen keep that to a minimum,
because index changes are relatively small. So it’s a much, much better result.
So let’s say you’re XYZ product manufacturer, you should be thinking about
going, well, I’m going to have a fund for you, but this is the SMSF version
where we’ll consciously reduce the turnover, and we won’t just keep selling. You
know, we’ll try and reduce the amount of short-term capital gains.

Skelly: So we need to evolve our products to think about tax?

Colley: Exactly, because it gets back to control, flexibility, and that
idea where people can actually pick a stock, sit on it for as long as they wish,
and then make that decision as to whether they get the capital gain.

Dixon: So if I was an active manager, I’d at least create a low turnover
version of every one of my funds, because a lot of the turnover they create,
they’re just thinking about winning the league table with the gross returns,
because that’s how they pay them, that’s how they benchmark them, that’s where
flows come from. But SMSFs are not totally unique, because a lot of people try to
develop products in retail land that can do the same thing. But one of the
massive advantages is, you can hold your assets from the age of 40, convert to
a pension at 60, and never pay the capital gains tax.

Colley: So you probably want to have an accumulation-style fund in that
phase of super, and a pension-style fund, if you might have large capital gains
coming in.

Hoyle: Do we have any idea of what proportion of
self-managed super funds are actively advised? And what proportion are not?

Satill: I would say to you that if 20 per cent of self-managed super funds
were advised, that would be a lot.

Wells: That’s exactly the number; it’s 19 per cent. Well, certainly 19
per cent of SMSF investors used an adviser in the last 12 months. That was at
August 2009. It’s actually probably a higher figure than that. And 45 per cent
said they’d used an accountant.

Satill: Accountants are lacking control. I’ve seen it over the years. And
accountants don’t readily recommend that a client goes to see a financial planner.
And it’s almost from a fear of losing that client, because if [the client gets]
comfortable with that financial planner and the financial planner says
something which the accountant has not said before, the client starts wondering
about the other advice that the accountant has given. And accountants are
always scared, and that’s why you’ll find – if you look at any
accountant/financial adviser relationship, the accountant and financial planner
are not in partnership. You will see that only a small portion of clients use
the financial planner.

Colley: I think it works both ways. You see financial
planners reluctant to recommend accountants, and accountants reluctant to
recommend financial planners unless they’ve got some close relationship, like
you point out.

Satill: The problem is professional indemnity insurance
for accountants. Accountants are petrified of giving advice, and they’d rather give
generic advice, and really don’t want to give investment advice. I’ve seen that
time and time again.

Hoyle: Tom, you’ve said that half of your investors
have self-managed funds? Do you ask them why? And where does cost come into
that decision-making process?

Keenan: Cost is a big driver, but it all comes back to this, what we’ve been
talking about for most of the morning: control. Control over cost, control over
liquidity, control over the after-tax outcome. Control in a lot of the things that
the traditional managed fund traditionally hasn’t helped. And so, yeah, an ETF
can give exposure to equity markets for a fraction of what has traditionally
been the case, and that is a major driver.

Dixon: If you’re an adviser, it takes a while, particularly if your
businesses works on commission, but it leads you to actually have the guts and
ask for your fee. I’ll tell you with the GFC, it’s hard to ask for your annual
retainer. It’d be much easier to keep on slipping it out the back door. Don’t
forget how powerful for a retail investor it is showing something like [listed
investment company] Argo that charges 0.1 per cent per annum, and Rob Patterson
has been running it since before I was born – I think he started his job in
1969 – and it’s beaten the market by 1 or 2 per cent a year. And that’s a chart
that’s pretty easy to show people.

Keenan: And the MER on a fund is just one part of it. They’re traded on
the ASX, so the savings from implementation are real from an adviser’s business
[perspective] as well.

Dixon: And the record keeping is a lot easier. Same
with people’s accounting systems. Deals really well with ASX listed shares, and
talks to CHESS. Every managed fund provider is using a different platform. And
have you tried transferring a managed fund in specie, compared to transferring
an ASX share? Not something I’d recommend to anyone who likes themselves. You
know what I mean? It’s a horrible experience. ETFs certainly – if you want to
get your [managed fund] into self-managed super funds, whatever fund you have,
turn it into an ETF as well.

Curtin: Managed funds today, I think
they constitute maybe 10 per cent or even less of all assets within SMSFs. So I
guess that in itself, that’s not the major competitor. If I look at the asset
allocation of that self-managed super fund, we’re talking about direct shares
and cash; so is ETF the proxy for a direct share option, as well as investing
that cash that’s out there in the market? Because with the direct share pieces
you can become very tactical, do your own research on each stock and then you
choose that, et cetera. At the end of the day you actually have a little bit of
risk in that research, and the rigour behind it. So do you see that ETFs are
going to actually provide that rigour for clients, and become an easier
implementation piece? Hence why it is becoming quite popular?

Keenan: I think the benefit of ETFs is flexibility. So they can be used to
allocate longterm, buy-and-hold strategic asset allocation. And we see that
used a lot. And I think as well as they can be used, actually. So if someone wants
to make a call on a market, and that’s not a long-term view, then they can do
that. But the point is that they control when they enter, when they exit; they
control exactly what market they’ve been looking for. So we’ve heard a lot that
international investing is difficult, not a lot of self-managed super funds
invest internationally. And I think part of that is that they haven’t had a
vehicle to do so. International managed funds tend to be more expensive, they
tend to be less liquid, and so therefore the end investor has less control over
that international investment. [An ETF is] on the ASX, T+3 liquidity, like any
other stock, and so it brings that element of control. And so, hence I think
that international investing may become more popular than selfmanaged super
funds, given this new vehicle that is now there for them to look at.

Knox: A trustee can be both tactical and strategic: they could compose a
portfolio, a new class in ETFs around the risk profile, if they had that
discipline. Conversely they can sell quite rapidly through impulse or
tactically if they want to, on a weekly basis. I’d suggest a lot of them will
do that.

Wells: I think that’s an important point, because part
of the opportunistic nature, particularly when it comes to the share trading of
SMSFs, is I want to win, you know, I want to beat the market. A lot of active
traders are trying to do that, and many active traders are SMSF investors. And
so I think that’ll be the education piece, because I’ve still got to feel like
I’m achieving – the human nature element of it. It’s got to still feel like I’m
achieving something. If I’m just buying a market, I can’t really beat that
market. So therefore, I think the point you make about having those different
tweaks, I think that will become appealing.

Satill: One concern though, about ETFs, some ETFs, is the thinness of the
volumes on a daily basis. And you never know if…your share is fairly valued or
not. And who’s buying the shares? Is it iShares buying it back, or is it another
person? These are always the concerns that a lot of people have, either
management or whatever.

Curtin: I think the notion of
being clear on the outcome. I think, what if the outcome of this portfolio, as
such, is going to be more critical, and what’s its role in the portfolio? One
of the things that we’re considering at Russell is this outcomeoriented portfolio
piece, and considering what we’re building our ETFs [for] and saying, ‘Well, what
role did that play?’ Is it playing the income role, is it playing the high
dividend role, et cetera, et cetera, for an SMSF player. So I think focusing on
the output is as critical as focusing on the inputs, from an ETF perspective.

ROUNDTABLE PARTICIPANTS

Graeme Colley – national technical manager, ING Investment Management

Patricia Curtin -
managing director, retail, Australasia, Russell Investments

Alan Dixon -
managing director, Dixon Advisory

Peter
Hogan – financial planner, Avenue Capital Management

Simon Hoyle – editor, Professional
Planner

Tom Keenan – director, iShares Australia

Ian Knox – managing
director, Paragem Partners

Trevor Satill – financial planner, Picadilly Financial

Amanda Skelly -
director, product development (ETFs), Australasia, Russell Investments

Sally Wells -
founder and managing director, endgame communications

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