Risk off: the new DIY trend

Risk reduction is now the most important consideration for SMSFs in deciding where to invest.

PORTFOLIO POINT: A new report shows risk reduction is now the primary driver for SMSF trustees in deciding where to invest.

Some shifts in direction are subtle, like a cruise liner slowly changing its course. And some, like a politician backpedalling on a broken election promise, are not.

There was a change in direction last year by SMSF trustees that would have to be classified as 'in the grey area’ – a bit in-between. It marks a change in how trustees invest, why they invest, what they’re investing in and how long they might be investing for.

'Risk reduction’ has stormed to the fore as being the most important consideration for SMSF trustees when deciding where to invest, according to new research.

A report by Russell Investments, for the Self-Managed Superannuation Funds Professionals Association of Australia, says risk reduction has overtaken traditional investment considerations, such as cost of investment and returns on investment.

This trend has emerged, according to Russell/SPAA, due to some marked attitudinal changes to investment asset classes between 2010 and 2011.

While SMSFs have always held a strong leaning towards two particular asset classes – Australian shares and Australian cash – the reasons for this preference have changed.

“While in 2010, trustees were waiting for a better investment option, in 2011 the primary driver is risk reduction,” the survey found.

Nearly half (48.9%) of investors and trustees have overweighted on cash, because it is now seen as the most appropriate asset class to achieve risk reduction.

But the percentage of investors “waiting for a better investment option” has fallen from 52% to 44.3%. Those who think equities are too volatile have nearly doubled, in percentage terms, from 17% to 32.4%. And the proportion of those who believe that cash can provide better returns than equities has also lifted significantly, from 14.8% to 20.5%.

Where that has showed up in actual investment allocations isn’t quite as decisive, but still speaks a few words. Allocations to Australian equities by SMSFs have actually increased marginally, from 42.6% to 43.5%, but Australian cash allocation has risen from 23.1% to 25.6% (an increase of 11.1% of original allocation).

(What isn’t necessarily shown in these figures is what was happening to equities during that time. It’s possible even the small increase in shares could be attributable to market movements, but unfortunately, we don’t know the timing.)

“So strong is the focus on risk reduction that cost and return have become much lesser drivers of allocation this year compared to last year,” the report said.

What does this mean for you? If you’ve been too scared to invest and hoarding cash, wanting to get into the market but haven’t quite been convinced of the benefit, then you now know you’re not alone.

While you’re moving to cash and are likely to keep it there (in a general sense), the report raised an issue over the asset allocations of SMSFs.

The report’s specific concern? That there is no difference between how you, as SMSF trustees, invest before and after retirement. You’re not backing off the accelerator during those years when classic investment theory says you should (i.e. the older you get, the less you can afford to risk, therefore the more you should have in cash).

It’s true that pension funds require greater liquidity, which should see trustees holding greater amounts in cash and fixed interest.

And while this won’t be a surprise for Eureka Report members, who are used to doing much of the running of their fund by themselves, the report suggests trustees are likely to have greater demand for what is referred to as “scoped advice”.

That is, a lot more trustees are going to 'dip in and dip out’ with requests for advice, based on short-term or educational needs, rather than getting advisers to look after the SMSF lock, stock and barrel.

Two other trends have emerged in recent years, the survey found, which indicate where the likely continued growth in SMSF numbers is likely to come from – women and Generation Xers.

Women have a greater need for super help. It’s a well-documented fact that average super balances for women are considerably less than the average for men, so women are going to have greater needs for advice to help make up for this difference in savings.

The number of women covered by super has been increasing, as too have their relative balances in relation to men, the report found.

SMSFs have a potentially greater role to play for women to increase their super savings, because of the flexibility DIY funds provide, as well as the superior control aspects of SMSFs.

And Generation Xers – those aged roughly from 30 to 45 – are the real growth sector. Unfortunately, they tend not to have the dollars in their accounts yet to make advice models work for either themselves or the potential advisers, but that’s not going to stop them.

Gen Xers are beginning to take to SMSFs, even though their average balances would normally seem a little short of what’s considered a healthy level on a cost trade-off (which is generally perceived to be $200,000).

Nearly 14% of Gen Xers are intending to start an SMSF within the next two years (and 10% of Gen Y is considering it also). Of those that do have SMSFs, nearly 43% of Gen Xers in the survey had balances below $150,000.

One very interesting number the report does try to quantify is the amount of money that is not in the super system because of the changes to contribution limits introduced by the Rudd and Gillard governments.

The reduction in contribution caps was designed to reduce the amount 'top-end’ participants could contribute to super, with the missing contribution estimated at more than $10 billion.

“Around two in five SMSF trustees would have contributed on average an extra $64,875 each to their SMSF if the contribution cap limits were raised, equating to a collective contribution of $12.4 billion,” the report said.

“This is slightly lower than last year’s $15.1 billion, suggesting the global economic turmoil has affected people’s willingness to invest. This reduction will significantly impact government’s objectives of adequacy and building a national investment pool.”

  • Industry education would be much easier if the ATO identified the accountants who undertake SMSF audits, says Institute of Chartered Accountants (ICAA) superannuation head Liz Westover. Under the new registration regime, ASIC will keep a register of all SMSF auditors, which Westover says will go a long way to solving the problem, but it would also be good for the ATO to distribute its lists of SMSF accountants to professional organisations like ICAA, so they can target education to specific members. Westover says it’s not a recruitment drive but part of the ICAA’s responsibility to promote professional standards. The ATO says it wouldn’t be practical or cost effective for it to maintain an exclusive register of SMSF accountants, because many prepare tax returns for entities other than DIY funds. As it is, the Tax Practitioners Board is the organisation responsible for registering tax agents.

  • Australians are still putting more money into self-managed super than any other type of fund, according to APRA’s December quarter data released last week. The data shows SMSF assets increasing by 2.2% to $399.9 billion, compared to public sector funds ( 2.1%), industry funds ( 2%), retail funds ( 1.6%) and corporate funds (-0.7%). SMSFs also had the largest proportion of total assets, accounting for 30.6% of the $1.31 trillion national pool. The number of SMSFs ticked up 7.08% from the prior corresponding quarter to 458,561.
  • A recent appeal involving an SMSF trustee, early super access and the ATO Commissioner illustrates how crucial it is for trustees to know when (and how much) they can withdraw from their superannuation. The Administrative Appeals Tribunal (AAT) upheld the case against the SMSF trustee Mason, who withdrew two lump sums totalling $45,000 as he was under the impression that turning 55 meant he could access the funds without any cash restrictions. What he didn’t realise, after talking to professionals, is that he should have started Transition to Retirement Stream (TTRS), allowing only partial access. Mason declared the amounts within his personal tax return but after an audit, the ATO determined they fit the category of illegal early access. The Commissioner said the amounts had to be taxed at Mason’s marginal rate, but the trustee was lucky: the Commissioner also decided to use his discretion and not make the fund non-compliant.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.

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