A 'third way' for super

PORTFOLIO POINT: The number of SMSFs continues to grow, but the big managed super funds are fighting back to retain their members by giving them more investment choice.

There was $1.4 trillion tied up in Australian superannuation as of June 2012 and, with the federal government’s super guarantee legislated to rise gradually from 9% to 12% over the coming seven years, this figure will only be increasing – at pace.

With so much money at stake, the race is now on amongst the major superannuation fund players to retain members, and stem the leakage of funds into self-managed super accounts, by giving their superannuants more investment choice.

Entire industries have developed around the superannuation sector, employing hordes of financial planners, accountants, fund managers, bankers and more. This is nowhere more apparent than in the growth of the SMSF sector, which made up just 5% of the industry by assets in 1994 and is now both the largest and fastest growing sector, with more than 450,000 funds carrying in excess of $400 billion.

Such growth has naturally engendered some serious competition to attract a share of that money – and this is good news for investors in terms of the types of products and choices becoming available. Whether looking at setting up an SMSF, looking for greater support within one, or just exploring tentative steps toward greater control over super investments, the ground is becoming more fertile by the day.

The self-managed sector
Source: ATO

By asset value, SMSFs have the largest share of the different fund types, at about 30% and rising, closely followed by retail funds, with around $380 billion and industry funds with $265 billion of assets. From the table above it is also apparent that while real growth in SMSFs – net establishments – hit a peak in the September quarter of 2011, the sector is still growing strongly. Wind-ups typically peak with the end of the financial year in the June quarter, but this is trending downward as well.

SMSFs aren’t for everyone. They are costly to set up and maintain, meaning that they become more viable for those with larger super balances (which skews the age demographic higher), and the compliance requirements can be daunting.

The SMSF Professionals Association of Australia technical director Peter Burgess says while research indicates there is quite a large portion of the population who could possibly benefit from a SMSF who don’t have one, the initial group most likely to start one already has.

“A large proportion of the population who have 'controlling’ tendencies already have a self-managed super fund,” Burgess says.

He sees the key areas of growth to be in younger people, and in a personality type he calls 'coach seekers’, who typically need “a little more reassurance and a little bit more advice” before moving to SMSFs.

Paul Sainsbury, managing director of AMP’s newly-launched SMSF division, says he still sees strong growth. The new division, which creates the largest professional SMSF administrator network in the country, has been led by this demand.

“Increased demand for advice around self-managed super, coupled with technology innovation occurring, means that the economics of self-managed super administration look more attractive and there is increased demand for advice,” Sainsbury says.

What investors want

To understand the current trends it’s important to understand what people are looking for. One of the chief benefits of the self-managed sector is freedom of choice over investments, and there are certain investments that can only be made through a SMSF.

SPAA’s Burgess points to the example of small businesses, and the ability to lease business premises back from funds, and also the ability to be more specific in death benefit nominations and estate planning.

“There are some legislative concessions that only apply to self-managed super funds. It doesn’t matter what flexibility those larger funds offer, they haven’t got that capability.”

However, the range of capabilities people want is varied. The chart below is from a survey of roughly 1,400 people – about 400 with an SMSF and 1,000 without. It is immediately apparent that the vast majority of respondents, whether they were fund trustees or not (and SMSF members tend to be), have a preference for managing finances themselves – with various levels of assistance.

Source: Russell Investment

Particularly relevant are the second and third options. Fully 53.3% of non-trustees, and 51.2% of trustees – the majority of each – would rather 'do things themselves’, but are looking for information or help to assist this.

This is a common refrain. SPAA’s Burgess says the main reason people look to set up SMSFs is because “they are looking for more control and flexibility”. AMP SMSF’s Sainsbury says: “There is quite a lot of desire amongst customers for more control and flexibility around the management of their superannuation.”

It is important to note that the desire for increased freedom and control over investment decisions is also supported by statistics on performance – although accurate, timely and adequate data is hard to come by to track this. According to the most recent data from the Australian Taxation Office, average SMSF returns were 16.7%, (-6.3%), and (-6.7%) across 2007, 2008 and 2009 respectively, compared with 14.5%, (-8.15%) and (-11.7%) for APRA-regulated funds.

New offerings

SPAA’s Burgess says the growth of SMSFs is something other funds are beginning to have to address.

“Those funds are doing their own research and they can see where the outflows are going. A lot of that is going to self-managed super funds. That’s a concern and it’s what they’re trying to combat,” he says.

Different organisations are doing this in different ways. One of the largest and most visible responses is the creation of AMP SMSF. Sainsbury says the creation of the division is more complementary than a response to any 'threat’ from the self-managed sector.

“One of the interesting things that we’ve noticed is that of the entire SMSF customer base today only 14% of them have some sort of an association with an adviser. Whereas in the last year more than 40% of the SMSFs that have been opened, the clients have claimed to have some sort of a relationship with a financial adviser,” he says.

“We think we’re really well-positioned to play a role in helping them. Having the more traditional products together with SMSF capacity makes us more able to help our customers with their investment needs as they change over time. So we see this as being a highly complementary extension to AMP’s current businesses.”

At Australian Super, an industry fund with 1.8 million members and $42 billion of funds at last count, the impact of the growth in SMSFs is also being felt. In response, it has launched the 'Member Direct’ option, which allows direct investment of up to 80% of a member’s assets in ASX300 shares, a range of ETFs, and term deposits of varying maturities, through an online platform.

Australian Super’s general manager of product, Noel Lacey, says while this has not been entirely driven by movements toward SMSFs, it was a factor.

“It was a little bit of acquisition and a little of retention,” Lacey says.

“There’s clearly people leaving to set those [SMSFs] up. We weren’t losing a lot of people, but we were losing enough to know that a product addressing the shortcomings was going to deal with that leakage – and of itself might also be an appealing solution.”

He says Member Direct is pitched at people who were looking for investment flexibility but “without the headaches”.

“Most people who want and are interested in these sorts of products are looking for greater control, but don’t necessarily want the compliance and management complications that come with an SMSF,” Lacey says. “This is not a SMSF. It doesn’t replace them '¦ [but] in terms of cost by comparison to SMSFs or other things, it’s very cost effective.”

Australian Super’s Member Direct option costs an extra $180 per year plus brokerage fees, hundreds of dollars more than standard fees, but comparatively the cost of setting up an SMSF runs into the thousands of dollars, as do fees associated with 'wrap’ account products.

“There are a lot of people who set up SMSFs that just have Australian shares and term deposits. That is all. And they’re the ones that we were losing,” Lacey says.

UBS is launching a product in a similar vein, announcing a partnership with FNZ last month to provide a “direct to member” investment service with online access. The UBS product aims to provide investors will access to Australian and global equities, term deposits, model portfolios, managed funds and cash products.

“The solution provides an alternative to establishing a SMSF, at a fraction of the cost,” UBS said in a statement.

A third way?

The crux of this is that APRA-regulated super funds are becoming increasingly aware of their clients’ desires for control over their investments. Already products have been developed to move beyond the traditional choices of generally aggressive or defensive managed portfolios, or alternative 'wrap’ products, and SMSFs.

“It makes a lot of sense to see what the retail and industry funds are doing in terms of offering greater investment choice,” says SPAA’s Burgess. “I think it’s a good thing that they’re doing that.”

New offerings from Australian Super and UBS, and the potential for a vast number of others, as well as the increased administration and advisory capacity of AMP through the creation of AMP SMSF, point to a broader change in the superannuation landscape – that is, an allowance for investors who are meaningfully engaged in superannuation, and are looking for some increased level of direct investment control, but who require greatly varying levels of support in this.

Wherever you sit on the scale, from 'set and forget’ to an independent and actively self-managed fund, the super industry is adapting for a slice of that pie.