Bridge the disconnect to sell SMSF trustees on value of advice

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February 21, 2017

There is no doubt that self-managed super funds have been a growth market in recent years. Australian Prudential Regulation Authority data shows the number of SMSFs increased 5 per cent, to 572,000, in the year to March 2016, with assets totalling $590 billion.

Advisers have failed to exploit this growth.

Vanguard/Investment Trends’ 2016 Self-Managed Super Fund Reports found the proportion of trustees using an adviser fell sharply from 62 per cent in 2007, to just 37 per cent now.

The 2007 number was boosted by Simpler Super, but there is no doubt the trend over the past decade is down.
The Financial Services Council (FSC) and UBS Asset Management’s joint 2016 SMSF Insights report found a similar story – the percentage of SMSF holders having a formal agreement with financial advisers fell from 46 per cent to 42 per cent from 2015 to 2016.

Advisers are also failing to generate revenue from SMSFs. The Vanguard/Investment Trends report states that two-thirds of planners are now providing advice to SMSF clients. But planners derive just one-fifth (19 per cent) of their practice revenue from such clients. That’s well short of the heady expectations back in 2013, when planners expected this cohort to deliver 31 per cent of sales.

Yet at the same time, an unprecedented number of SMSFs want to use an adviser.
The Vanguard/Investment Trends report highlights that 255,000 trustees have unmet advice needs – the highest level observed.

Among those, 57 per cent say they intend to turn to a financial planner in some guise to get those needs met.
“That shows there is huge upside for the advice market in that SMSF space,” says Matt Willis, Vanguard’s national manager – advisers.

Trustees are generally self-directed, hence their desire to start an SMSF. But in a low-return, high-volatility environment “many of them are probably feeling increasingly vulnerable and realising they do need some level of coaching or direction,” Willis says. “That’s the role advisers are going to play – helping trustees navigate uncertainty through the course of the future.”
So why, despite the desire for greater engagement, aren’t trustees using more advisers?

The Vanguard/Investment Trends and FSC/UBS reports – as well as the SMSF Association/Accurium report, Are Trustees Prepared for Retirement? – show a disconnect between how trustees use SMSFs and the services and value proposition advisers are providing.

In other words, the research highlights a gap between what advisers do and what SMSFs want. If advisers are going to profit from the growth in SMSFs, they’re going to have to become more savvy, deepen their understanding of trustees’ needs, and more closely align their services with trustees’ actions in four key areas: contributions, trustees’ use of advisers, drawdowns and choosing investments.

Investments: what trustees know and need to know

Financial advisers would say their investment advice is closely aligned with trustees’ needs,
but is it?

The Vanguard/Investment Trends report found that trustees believe choosing investments is the hardest aspect of having an SMSF. That’s backed up by the FSC/UBS report, which found the pressure of making your own investment decisions was the most challenging aspect of running an SMSF.

Recep Peker, head of research, wealth management, at Investment Trends, says the difficulty of making investments has been increased by market uncertainty and low yields. “That made a lot of SMSFs realise that to achieve goals they would need to take on more risk, so they need help forming portfolios,” Peker says, adding there is a “sizeable opportunity for planners to demonstrate how they can help in this area”.

Many advisers might blanch at an SMSF portfolio. The Vanguard/Investment Trends report highlights that significant concentration risk still exists. About 66 per cent of SMSF trustees say more than half of their fund is invested in one type of asset. And 28 per cent have at least half of their share portfolio in bank/financial stocks (up from 22 per cent in 2015).

Vanguard’s Willis says, “We could easily talk to trustees about what they have missed out on by not being as well diversified as they could be.”
There are signs, however, that advisers need a subtle, nuanced conversation with most trustees when it comes to their investment portfolio. For a start, SMSFs are diversifying over time.

Douglas McBirnie, senior actuary at Accurium, who oversaw the report the firm produced with the SMSF Association, says research found that when you look through SMSFs’ investment vehicles, allocations are a bit different to official figures.

“Our research showed that SMSFs have a higher proportion of assets held in fixed income than the ATO statistics suggest,” McBirnie explains, adding that SMSFs don’t hold fixed income directly – which is what the ATO measures – but in funds and ETFs. “We also found a higher allocation to overseas shares, which look very low (in ATO figures).

“It shows that perhaps their [planners’] advice is getting through.”

Advisers need to understand that trustees are trying and diversifying. Still, one area planners could be doing more in is ETFs. The number of SMSFs holding ETFs increased 18 per cent in the year to March, taking the total to 90,000, Investment Trends states. Trustees say they particularly want to use these assets to access overseas markets. They want more and better ETF research and educational materials, which advisers are perfectly placed to deliver.

That was reflected in the FSC/UBS report, which found ETF use increased from 20 per cent to 24 per cent from 2015 to 2016, with SMSF holders attracted by diversification, low cost and access to international markets.

Willis says advisers are still learning how ETFs work, and how they can execute them in an efficient manner within their business model. Vanguard is seeing more and more advisers who don’t use ETFs interested in learning about them; but more advisers are also using them and trying to integrate them into their business models.

Willis notes that platforms are efficient. “If an adviser is not using a platform and going direct on the exchange with ETFs, they need to work out how to efficiently build that into their business. There [is a lot to learn] around getting that right.”

Advisers also need to be mindful that their actions align with their words and what trustees want. The Vanguard/Investment Trends report finds trustees are increasing allocations away from direct shares – in managed funds, ETFs and cash. The proportion of SMSFs using managed funds is now 45 per cent, which shows a continued rise from the lows reached in 2013, when just 35 per cent used them. Also, 20 per cent now say they intend to invest in managed funds in the future, up from 10 per cent in 2013.

At the same time, trustees’ allocation to direct shares has fallen from 45 per cent in 2013 to 38 per cent, Vanguard/Investment Trends states. That decline, and the growing interest in managed funds, suggests trustees are less confident in their investment ability and indicates they are open to more help and guidance.

Yet planners indicate they are increasing allocations to direct listed investments at the expense of managed funds. Also, trustees are indicating they’re getting less information on managed funds from advisers, and more from word of mouth and online sources.

Overall, advisers need to avoid being patronising; SMSFs are diversifying and taking a greater interest in asset allocation. They’re open to using instruments and products such as ETFs and managed funds, areas where trustees and advisers both need guidance and more information. Advisers must also recognise the trend in SMSFs away from direct listed shares.

Contributions: tax concerns and room to grow

Advisers would say they are optimising contributions. The numbers aren’t so sure.

McBirnie says the SMSF Association/Accurium report finds that 57 per cent of trustees made concessional contributions to their fund in 2015, though that does encompass retirees. About 31 per cent of those contributed more than $25,000. “People are making use of those concessional tax treatments to get money into super,” he says. “But perhaps there’s room to do more if it’s only 57 per cent.”

He adds that trustees need to be getting advice on how to position themselves for the upcoming budget changes.

Vanguard/Investment Trends states the average SMSF contributed $28,000 this financial year and expects to contribute $28,000 next financial year. The report found that roughly 30,000 SMSF trustees say they need help with contribution strategies. Peker says advisers looking to help SMSFs with this should be thinking about tax implications.

From validator to coach

Advisers no doubt think they are deeply embedded in the trustees’ world but, in fact, they could become more integral. Willis says the Vanguard/Investment Trends report finds trustees see advisers’ major role as that
of validator.

“Trustees have got their own views; they have a keen, passionate sense of what’s happening, particularly in the investment space, and they’re using advisers as a validator for those particular views.”

Couldn’t advisers be doing more than validating decisions?

“It isn’t enough,” Willis agrees. “But it starts to lay the platform for what should be a much stronger relationship going forward. Not just working with the portfolio piece but insurance and estate planning, and ultimately becoming the coach for those individuals with significant balances now moving into that retirement phase, which probably creates a lot more work and stress and concern.”

That requires a shift from validator to coach, Willis says – a shift he says will probably happen in the coming decade.

To increase their role, he says, advisers need to communicate the notion of ‘adviser’s alpha’ – the value that comes about from having a relationship with a financial planner.

Drawdowns: opportunities for advice abound

As more baby boomers move into retirement, drawdown of assets is becoming a crucial issue.
Are advisers playing a key role in preparing trustees to move from accumulation to drawdown phase?

Investment Trends’ Peker notes that one-third of SMSF trustees are already retired and in pension phase; and those who aren’t retired tend to be 10 to 11 years away from it.

Of the 255,000 trustees with unmet advice needs, most (146,000) say they need help with retirement strategies, including for the age pension, longevity, investing for income, and retirement income product selection.

Vanguard’s Willis says the $64 million question is how to set up portfolios that deliver a good, reliable income stream through retirement.

But he notes that the research suggests much of the SMSF flow probably sits in allocation mode. “This is where advisers can start to deliver some sense of peace of mind for trustees and then, when they get into retirement, help build portfolios that best meet those needs,” he says.

Accurium’s McBirnie says when it comes to drawdowns, there is another area advisers can add value: sustainable spending.

“There is an opportunity there for advisers to be giving quality advice around what lifestyle is sustainable based on the level of wealth people have,” he says, adding that it comes down to what projection tools are necessary to give that type of advice.

“Retirement is very different to accumulation; it’s not about growing balance, but managing drawdowns and doing so sustainably,” McBirnie adds. “Advisers’ accumulation models are looking at the shorter term and how to grow balances or maintain a balance and spend the income, rather than the whole course of retirement and what’s a sustainable spending level.”

Positioning: be the coach with a broad focus

So, with these insights, how should advisers position themselves to better engage with the SMSF market?

Investment Trends’ Peker says SMSFs view financial planners as all about investment and investment performance. “Planners can benefit from diversifying their proposition away from investment selection, and helping with all retirement strategies,” he argues, adding that planners can also benefit from working closely with accountants.

Vanguard’s Willis agrees that advice is certainly far more than just trying to pick where returns are going year in and year out.

“There is more complexity in people’s lives; they’re a lot more time poor,” he says. “Advisers need to offer a more holistic financial advice proposition and coaching type of role. That’s where I truly believe advisers should look to place themselves.”

Accurium’s McBirnie says planners need to focus on retirement. “If you look at the SMSF sector, it’s much more about retirement,” he says. “Advisers need to make sure they have a good proposition for that. The biggest decision retirees face is how much they can afford to spend. Advisers need good models and strategies for how you advise clients in the drawdown phase. It’s not necessarily about maintaining the balance, but how you draw down sustainably over retirement.”


TOPICS:  AccuriumDouglas McBirnieMatt WillisRecep PekerSMSF trusteesVanguard and Investment Trends Self-Managed Super Fund Planner Report



About The Author /

Ben Power is a writer and journalist. He has written on business, finance, economics and investing for the Sydney Morning Herald, The Australian, Bloomberg News, The Australian Financial Review and Financial Times Business Media.