The super revolution will be radical

The dramatic growth of self-managed funds has already transformed the Australian capital market. But that’s just the start. What’s about to happen is nothing short of staggering. New research shows that number Australians savings via self-managed funds is set to double in three years as younger people in middle income Australia leave the big groups to set up their own fund.

Australian listed companies and governments looking to develop infrastructure have not yet woken up to this change to the source of equity capital in Australia.

According to research by the SMSF Professionals Association and Macquarie the total number of self-managed funds rose to 503,320 as at March 2013 – a rise of 7.3 per cent in a year. Those funds have 958,095 members – just short of one million people (the assets in the funds rose 15.8 per cent to $496 billion).

The SMSF-Macquarie research shows that one in 12 Australian adults say they plan to open a self-managed fund in the next three years. That’s equal to 1.4 million people. If those people act on their plans then the number of self-managed fund members will more than double.

Self-managed funds already have 30 per cent of the assets invested in superannuation so that proportion is set to rise dramatically in coming years.

According to the SMSF-Macquarie research the self-managed fund movement is now appealing to people with lower amounts invested in superannuation. The average assets of current self-managed fund investors is $569,494 whereas those who have set up a fund in the last three years have average assets of $457,246.

The 1.4 million people looking to set up a fund in the next three years have much lower average assets – $292,153. Meanwhile 44 per cent are aged under 30 and 71 per cent have dependent children.

This is a middle income Australia that now wants to control its own density. A large number have parents with self-managed funds so the culture is spreading.

It looks as though the superannuation movement is moving into two camps – industry funds and self-managed funds. 

Groups like Colonial, AMP, MLC and BT will need to pedal very hard to prosper in this environment. They may be caught in no man’s land.

They will need to develop their services to self-managed funds but in many cases that will involve very different and lower fee structures.

The research shows that self-managed funds have a higher proportion of equity than centrally managed funds. There is also a sharp rise in small funds gearing to buy dwellings. Overall the growth in self-managed funds is wonderful news for Australia because it lowers the cost of superannuation (self-managed funds do not have to advertise) and people take responsibility for their savings.

But I suspect that the boom in single purpose funds investing in highly leveraged dwellings will carry some dangers, although the main result of the current low interest rate policy of the Reserve Bank will be to boost the price of dwellings, so the timing is good (Why Stevens is playing with fire, August 7).