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Is the Financial Planner’s role under threat on Superannuation’s New Frontier?

Frontiers are places where the old and new worlds meet and rules are rewritten, and geared investment property purchased through an SMSF could well prove to be superannuation’s new frontier?
How many of your financial planning clients have already herded their superannuation savings into an SMSF and ridden off into the sunset to manage their own futures? And how many more are seriously considering taking this step? APRA statistics tell us that SMSFs are now the biggest and fastest growing segment in the superannuation investment industry, managing 33% of Australian superannuation assets worth more than $500 billion[i]. The growing popularity of SMSFs has already changed the triangular client-advisor –fund manager interface of traditional retirement planning and the rising popularity of the geared property option, available only through an SMSF, will create even more changes. Where will this leave traditional financial advice providers in the next decade?
It is not hard to see why the move to SMSFs and away from traditional managed funds is taking place. The GFC and the Euro crisis have sapped the long term confidence of many managed fund share investors, while the compulsory disclosure of fund management fees has stoked the fires of their discontent. In spite of this, most privately managed super assets –an estimated 65% of the total – are still traditionally held in shares and cash[ii] – and many of these DIY funds are performing surprisingly well against the large managed funds. The latest official ATO statistics confirm that SMSFs outperformed large managed funds in three of the five years from Feb 2007 – Feb 2012.[iii].

And if that was not enough to bother the traditional fund management industry, there is also the fact that in 2007, SMSFs became the first and only Australian super funds able to borrow capital and include geared real estate in their portfolios. This does not seem to have had much of an impact in the super industry over the past five years, since the percentage of SMSF assets invested in property was only 3.5% by June 2013[iv], but a surge of interest in property investment this year has already drawn comment from the Reserve Bank, who are monitoring the rise of property gearing in SMSFs and have expressed concern that this option may put many inexperienced property investors in over their heads[v]. (The Reserve has denied the threat of a property bubble[vi], and the SMSF Professionals’ Association of Australia claims that that the geared property issue is “a storm in a teacup”, but registration of new SMSFs in the hot property price states of NSW and Victoria were twice as high as in the other states during the June quarter of 2013.[vii]
The underlying driver of this change is Australia’s deep seated love affair with investment property, but the real accelerant is a current boom in residential property prices – particularly in Sydney –fuelled by the lowest mortgage interest rates in years – which has transformed real estate into the most desirable asset class for many investors.
The shares vs. property battle is one I have witnessed many times over two decades of working as a marketing strategist and writer on major managed fund brands, and it always amazes me that so many Australians seemingly turn a blind eye to the fact while they may not be as volatile as shares, in the short term, property prices do fluctuate constantly and are subject to many outside influences from local rental demand to mortgage interest rates. They also ignore the statistics showing that long term prospects for the ASX and real estate are historically pretty much neck and neck. Far too many Australians apparently believe that real estate is as good as gold and just as safe as a government bond and never seem to evaluate the effects of lack of flexibility, liquidity and spread of risk, which are the downside of having all your superannuation eggs nesting in one leveraged property mortgage. And of course, now you can gear property through your SMSF, enabling ordinary Australians to use a super fund balance as a deposit, it is all too easy to make the move.
One immediate consequence of the shift from Managed Funds to SMSFs is that the role of the Licensed Financial Planner is beginning to blur. Financial Advisors used to be the key link between managed funds and investors, but with the growing popularity of the SMSF, the key advisory role seems to have been at least partly usurped by Accountants. The need to set up a new SMSF, particularly when the self managed fund is structured as a limited liability company and also controls a blind trust, means that the Accountant is often the primary source of advice for the setting up, structuring and registering the fund. Furthermore, the need to supply an annual audit to the ATO means that the relationship with the Accountant may continue for the life of the SMSF.
Not surprisingly, the major fund managers are already factoring these changes into their marketing plans. For example, both AMP and MLC currently offer accountants the opportunity to obtain at least a limited financial advisory licence which will enable them to actively participate in the SMSF market, as does CPA Australia. At the moment, only one in four accountants is an accredited SMSF specialist, but there will obviously be many more qualifying over the next couple of years if the move to SMSFs continues. The major banks also recognise their prime position as providers of mortgages of up to 80% on SMSF-owned properties and have their own financial advisory businesses. Westpac, for example, proclaims itself a provider of mortgages to the SMSF market on its website, while NAB partners with MLC.
The other new entrants in the SMSF market are real estate agents and property developers who are on the crest of a wave as property sales in NSW and Victoria continue to soar and high auction estimates continue to be beaten. And finally, there are the “personal wealth trainers” hanging onto the coat tails of this property boom. In Sydney, for example, middle managers and small business owners in their 30s and 40s are paying thousands of dollars to learn how to become rich through property, and rolling your super fund balance into an SMSF may seem to be a very tempting way to get started.
With the superannuation market in a state of flux and their position within it seemingly being eroded, Licensed Financial Planners should be defending their client base and justifying their fees as strongly as possible in order to reclaim the leadership position in the SMSF market, but I get the feeling that many are not be engaging with the SMSF market vigorously enough.
There is a very strong case to be made for the services of professional Financial Advisers in the SMSF industry. SMSFs are not ideal for every superannuation investor and the decisions to start an SMSF should only be undertaken within the context of the client’s personal financial situation and objectives. Furthermore, SMSF trustees must lodge a formal written investment strategy with the ATO and this must be regularly reviewed, and who better to provide this kind of discipline than a qualified Financial Planner? Obviously it would take the combined skills of a Planner, a Lawyer and an Accountant to set up a reasonably complex SMSF, but a Licensed Planner with a detailed overview of the Client’s investment strategy and priorities could make a strong case for leading this team. This is particularly relevant in terms of succession planning, which can be a complex issue in an SMSF that owns geared property. Just about every source of informationm on SMSFs I come across carries a disclaimer stating that it is supplying general advice only and that the prospect should obtain advice based on their personal circumstances from a recognised specialist – and who fits this bill better than a licensed Financial Planner who is willing and able to work proactively with an SMSF accounting specialists and a lawyer.
Geared property will probably be a strong motivation to start an SMSF for as long as real estate prices continue to go up and interest rates continue to stay down – and in the month of September 2013, average home prices rose by as much as $500 per day in NSW![viii] The SMSF Professionals’ Association of Australia (SPAA) welcomes licensed Financial Planners as associates and provides SMSF specialist accreditation, so why not climb onto the juggernaut instead of chasing behind it?
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Copyright David Said, October 2013
[i] Source APRA, 2013
Fin Review, 29.9.2013: C.Joyce – “SMSF effect on property is $450bn elephant in the room
[ii] Fin Review, 29.9.2013: C.Joyce – “SMSF effect on property is $450bn elephant in the room
[iii] Source ATO
[iv] Fin Review, 29.9.2013: C.Joyce – “SMSF effect on property is $450bn elephant in the room”.
[v] SMH 26.9.2013: “Reserve Bank warns of DIY super trend”.
[vi] SMH SMH 29.9.2013 editorial commenting on RBS statement: “The housing bubble: alert but not alarmed”
[vii] ATO SMSF Statistical Report – SMSF establishment statistics as atr June 2013
[viii] SMH October 2, 2913: “Home bonanza as prices rise by $500 a day”.
Copyright David Said, Oct, 2013