The desire by self-managed super fund (SMSF) trustees to control their fund’s investments may be blinding them to the need and benefits of proper diversification, according to Alan Schoenheimer, CEO Asia Pacific for Russell Investments.
He was speaking at the Melbourne launch of the third annual Intimate with Self-Managed Superannuation research report, which concludes financial planners will play a vital role in educating self-managed super fund (SMSF) trustees about the benefits of asset diversification during 2013.
The SMSF Professionals’ Association of Australia (SPAA) and Russell Investments said the report highlights opportunities for specialist advisers to help SMSF trustees.
“Trustees allocate a lot of money to Australian shares, cash and property,” Schoenheimer said.
“A lot of these people are self-directed, and they are invested in that with which they are familiar. It doesn’t mean it’s a well-diversified portfolio; it just means they are invested in what is familiar to them.”
Schoenheimer says there’s a clear opportunity for advisers to work with SMSF trustees to improve their portfolio composition.
“With this under-diversification comes a need to educate [trustees] about alternative [asset classes] and a wider set of opportunities that are available,” he says.
“A greater range of asset classes will lead to portfolios with better [investment] outcomes for the sector.”
Schoenheimer says the statistics demonstrate that SMSF performance has – on average – been sound.
“Dare I say it: they were lucky,” he says. “If other asset classes – notably international equities, improve in future then the outcome for SMSFs, which by and large are invested in Australian shares, won’t look so credible.”
Schoenheimer says SMSF trustees show a clear preference for investing in listed securities, so there is both a challenge and an opportunity for product providers to develop solutions that offer access to a wider range of asset classes, but structured in-line with trustee preferences.
CoreData conducted the research for Intimate with Self Managed Superannuation, with SMSF trustees, members of other super funds and high-net-worth individuals (HNWIs) surveyed from September 17 to October 7 last year.
In total, 1555 Australian consumers were surveyed, of whom 437 were SMSF trustees and 224 HNWIs without SMSFs.
Despite their role in safeguarding SMSF portfolios during the sustained market downturn, cash investments took out the wooden spoon for asset class performance in 2012, returning just 4 per cent compared to a 19.1 per cent return for international shares.
Portfolio diversity still hindered by wall of cash
The research found that SMSF trustees still view traditional asset allocations as too inflexible, yet few appear to have built sufficient diversity into their portfolios as evidenced by “the wall of cash which continued to grow in 2012”.
Cash and term deposits accounted for 33.9 per cent of SMSF investments in 2012, an increase from 2011 when they had 25.6 per cent. SMSFs reduced holdings to Australian equities to 37.1 per cent, down from 43.5 per cent in 2011.
Australian equities, which rank as the second-highest allocation in SMSF portfolios, were the second-highest performing asset class of 2012 returning 19.7 per cent.
Cash investments (71 per cent) and Australian equities (70.2 per cent) were the two most advised areas by financial advisers servicing the SMSF sector.
Schoenheimer added that the lack of diversification in SMSF portfolios was well illustrated by concentrated allocations, at the expense of investing across multiple asset classes.
“As we’ve repeatedly witnessed, you can’t pick the winning asset class year on year. Multi-asset portfolios which are built to meet specific objectives, regardless of the annual asset class winner, will need to be a key consideration for SMSFs looking to gain exposure to the mix of assets and adaptive approaches that will help them to meet their retirement objectives,” he said.
“Financial planners are well placed to educate trustees about the more recent adaptive asset-allocation approaches employed by many funds, allowing them to readily adapt to changes in the investment environment and client circumstances.”
Trustees confident of meeting retirement objectives
With a growing number of SMSFs approaching retirement, 63.5 per cent of trustees said they were at least reasonably confident they were on track to achieve their retirement goals. Yet according to Russell, this means approximately 36.5 per cent of trustees may fall short.
“The investment environment today is considerably more complex than it was even just 10 years ago, and we’ve become more attuned to the risks which threaten retirement savings including longevity and sequencing risk,” said Schoenheimer.
“Despite these challenges, there is a breadth and depth of investment opportunities available to assist SMSFs to meet their retirement objectives – and specialist advisers have a pivotal role in the education of SMSFs about these opportunities.”
SPAA CEO Andrea Slattery welcomed the findings saying they promoted the benefits of professional specialisation.
“A study that says there are commercial opportunities for financial planners who continue to upgrade their skills to meet their clients’ investment goals comes as no surprise,” she said.
“This latest research strongly endorses what SPAA has always stood for, which is higher competencies for special advisers in the SMSF sector.
“Advisers who opt to adopt this strategy will find there are growing commercial opportunities as trustees look for more holistic investment-strategy advice.”
To access the executive summary and full report for “Intimate with Self Managed Superannuation”, click here.
Plenty of new advisers and planners jumping on board the SMSF train. However, as with most new arrivals, they focus too much attention on investment, estate planning, insurance, etc advice side of things. Lack of focus and awareness of compliance, accounting, reporting and taxation of SMSF is major issue that caused delays in lodgement of SMSF returns. For example, when an adviser or planner sits down with a client explaining about benefits of running SMSF , majority fails to educate the client and be upfront about compliance obligations fearing it may scare the client away, therefore lost opportunity. That is short term focus on selling and revenue generation, at the expense of long term interest of the client. When the time comes for preparation of annual financial accounts and audit, the client will be surprised at the large amount of compliance requirements that they are no aware of hence many out it to the back burner, this includes the advisers and planners themselves for fear of annoying or losing the client. This is a trend that is occuring regardless of size of the dealership group or which large financial institutions the advisers or planners are attached to. I am speaking from ten years experience as a SMSF compliance, accounting, reporting and taxation specialist with a large SMSF administration company. No one wants to take action for fear of losing revenue stream, meaning losing bonus and being graded badly in annual review.
Hi disqus_Qad8mzci9P
I agree with the majority of what you are saying, and it is good you mention education of clients as a shortcoming of some planners / advisers who are not SMSF specialists.
My challenge to you is: What you going to do about it?
Maybe advisers / planners / clients are struggling with the compliance aspects of running a SMSF (and contributing to late lodgement) because they haven’t found a solution that suits them. It shouldn’t be difficult.
As someone with “ten years experience as a SMSF compliance, accounting, reporting and
taxation specialist with a large SMSF administration company” you have the opportunity to be part of the solution.