To date, do-it-yourself (DIY) super has been problematic for the financial planning industry. Turf wars with accountants and questions over how to achieve a profitable yet cost-effective service offering have dominated the topic.
Even the name, DIY super, has been a source of criticism, raising questions over whether most investors have the necessary skill to run their own self-managed superannuation fund (SMSF).
Meanwhile, as these questions over how advice and advisers fit into this popular domain remain unresolved, the army of investors keen to establish SMSFs marches on.
Progress is now critical if the financial planning industry is to capitalise on the burgeoning opportunity DIY super presents. It is time to dispel the myths, face some truths and devise some real answers.
A true collaboration
FACT: SMSFs are a collaborative effort drawing on the talents of accountants, administrators, lawyers, auditors and investment professionals to achieve the best outcome for a client.
This makes them quite a unique financial product and is an attribute which no doubt adds to the challenge of efficiently and effectively servicing these clients.
It can also make it confusing for financial advisers to know how they fit into this space, particularly as some experts warn it may not be in bread-and-butter investment services.
The number one reason 85 per cent to 90 per cent of people establish an SMSF is so they can choose their own investments. Yet for many advisers it is the advice around the selection of investments that is at the heart of their service offering.
So where do advisers whose value proposition is built solely around investment selection fit in this market? They don't.
"Technical strategy is where this market is based," SMSF Strategies principal Grant Abbott says.
"If you're looking at the fee-for-service model, it is difficult to tell clients what to do in terms of investing when 86 per cent choose their own. It is very hard to structure fees to do so. If that's the case, you've got to look at administration but that is hard, so the only way left is strategic advice where you charge for assets under management."
Abbott describes an adviser business model where income is generated through the provision of strategic advice, investments, estate planning and insurance to SMSF clients. Services such as trust deeds, training, administration, audit and compliance, technical advice, trustee education and marketing are all provided via a business platform.
In this model, some services are outsourced while others remain the realm of the adviser. Either way, a financial adviser acts as the coordinator, the ringmaster, bringing together all the different elements required to run an effective SMSF.
Known by another name
FACT: The term DIY super requires explaining.
"I have often said they shouldn't be called DIY because it implies a fairly simple, cottage industry-type thing in the backyard," Self-Managed Super Fund Professionals' Association of Australia (SPAA) chief executive Andrea Slattery says.
Advisers who are successfully servicing this mammoth self-directed superannuation market are leaps ahead of the majority of the planning industry in embracing the full concept and weight of what it means for an investor to have an SMSF.
And it starts with the language.
Forget DIY super as a label for all self-directed superannuation investors. These advisers talk about family superannuation funds where the adviser's long-term role is focused on generational investment and strategy. Sydney-based Eureka Financial Group director Andrew Jones says typically trustees that fall into this category have been a trustee for a longer period of time.
"They are older in life and estate planning is becoming more important. They are thinking about wealth generation for themselves and the next generation," Jones says. But there is no reason why the concept of a family super fund cannot start at 40-45 years for someone with young children. Abbott talks about family super funds as the new breed of SMSFs now emerging, a group distinct from the other DIY and SMSF segments.
He says in the DIY market segment, clients do everything themselves and can find themselves in trouble, and while the SMSF segment uses accountants for administration, they do the investing themselves and may use a financial planner for some strategic advice.
HLB Mann Judd financial planning partner Michael Hutton prefers to talk about DIY or SMSF vehicles as personal super funds.
"We think the SMSF structure is ideal for various reasons - flexibility, control, estate planning opportunities, transparency. The structure is ideal for them but we recognise they don't want to do it all themselves. We fill in the gaps for them," Hutton says.
He says the name change was introduced six months ago because the business found in discussing SMSFs with clients, it had to explain to an investor it did not mean they had to do everything themselves.
Perception issues
FACT: The majority of people think DIY super means they do everything themselves.
In reality, SMSFs are an ever-changing, highly evolving and complicated superannuation vehicle.
"Super compliance is very complex and really is not the sort of area that people who don't have the adequate experience and expertise can involve themselves," Townsend Business and Corporate Lawyers principal Peter Townsend says.
The perception that people can do everything themselves is at its highest when clients first flag an interest in SMSFs or have just established one.
"It is more of a perception from those that are thinking about it once they step in," Jones says.
"It is only a small minority that have embraced the education side and are aware of their obligation.
"Not until they start getting things wrong that there's an issue, then the reality really hits home that they can't do everything themselves."
One of the difficulties in dispelling this myth with clients is that advisers are not regarded as the only professionals who can offer advice on SMSFs. In fact, Slattery is keen to point out that the main difference between DIY super and an SMSF is the right to seek advice.
"It's always been a misconception that people don't know what they're doing, but we are finding it more and more they do know how to manage their life and do go to a lot of effort to know what they are doing," she says.
She says the perception that SMSFs do not require any advice becomes a problem when those recommending them do not know what they are doing.
Slattery also recognises there are advisers in the market who are not advising on SMSFs for other reasons, but who may be adding to myths around SMSFs. This includes dealer groups who only provide advice on certain superannuation products and advisers who may have the ability to put investors into SMSF but do not have the knowledge.
There is also a group of advisers who have good knowledge of SMSFs but are not advising clients on them because they genuinely think they are inappropriate for their clients.
"So there are people that are trying to tell clients this is not for you or they don't understand it themselves," Slattery says.
She says in this way, SPAA-accredited specialists are setting new standards in the area of trusted SMSF advice.
How to challenge and influence the DIY perception
FACT: Education and information remain the most powerful tools in dispelling myths.
Right from the get-go an adviser can play an important role as gatekeeper to all things SMSF because the first question investors need to ask is are SMSFs the right superannuation vehicle for them? "They might decide it is but without a doubt they are not for everyone," Townsend says.
"You have to commit time, energy and focus that you don't have to with industry funds or other options. And advisers will help you make this decision."
An adviser also helps with the natural follow-on questions a client may have, such as: If I set up an SMSF, how will I go about it and what can and can't I do?
It is these conversations with an SMSF specialist or appropriate adviser that will help evaluate whether SMSFs are a viable option for a client and, in the process, challenge the perception that investors can do it all themselves.
Lawyer Shane Ellis of SMSF Law agrees. "If the mums and dads were properly and fully advised when they commenced their SMSF either as a fresh fund or by way of rollover from APRA (Australian Prudential Regulation Authority)-regulated funds, then they would understand that a SMSF is not a fully DIY super product and that they do need assistance because the laws are complex and there are very dire consequences if they are not complied with," Ellis says.
These include losing tax concessions from the Australian Taxation Office.
Education and information is an ongoing process and does not end once an SMSF is established. Ellis says educational seminars go a long way to them understanding some of the intricacies of managing an SMSF.
This includes trustees appreciating that their fund can be multi-generational and their will does not bind the super fund's trustees.
Upskilling the specialist adviser is also important. South Australia-based Marinis Financial Group appointed an SMSF specialist two years ago. Principal financial strategist Theo Marinis says this was to ensure the business was competent and up-do-date in the area.
One of the main reasons Marinis believes there is a perception problem with SMSFs comes back to the way they are sold. He says often accountants have set them up in June and invested money in the cash account to receive a tax deduction, but the problem is the money is still in that cash account years later.
"If they think that's all that is involved, it's not true," he says.
Telling clients who are not suited to SMSFs is also important. "Too often they are just set up," Marinis says.
Advisers say clients do not have a problem getting their head around the fact that an adviser works with other professionals on their SMSFs and that this does not undermine their service offering.
Rather, they say helping the client to understand the benefit of having a number of professionals working on their SMSF demonstrates to them this is not the DIY vehicle they may have thought.
The role of the adviser
FACT: Good advice is the key to a healthy SMSF industry, which is good news for advisers.
Slattery is unfussed on what profession is a potential SMSF investor's first port of call for advice on SMSFs, a view shared by some in the legal profession as well.
"Superannuation gives everybody the right to get advice. If they wanted to do it themselves, you can. But you can't be your own auditor. There are people you have to use to get advice," she says.
Townsend agrees. "There is no obligation or concern with an investor saying they don't necessarily want a product in a box where they are required to use this lawyer, this auditor and this financial adviser. The most significant thing is the people you use are experienced," he says.
"Enough of our democratic rights are trimmed away. As long as you can buy shares and property without advice, you should be able to buy super. The freedom of getting it wrong is one of the best things about our society."
Townsend's main argument is that it would not take the average Joe long to realise an SMSF is a minefield if they did go and set up one themselves without advice. "I would prefer to see education rather than prescription. We are seeing that. The Irish government has an elegant piece of software so people can educate themselves on super, which is one of the Cooper review recommendations," he says.
But many consider financial advisers as the natural leaders in both the provision of SMSF advice and the pulling together of all the integral elements of an SMSF.
"It does need a champion, a driver, someone who sits in the driver's chair and knows what's going on because there are a number of people involved in it and it can run off the rails and you can get piecemeal advice," Townsend says.
"Whether it is an accountant or a financial planner, it is someone saying I am responsible for your super. I will use the appropriate people at all times."
An adviser's realm of responsibilities
FACT: A financial adviser's input into an SMSF is irreplaceable.
Typically, a financial adviser working in the SMSF space will be responsible for investments and strategy, including covering off issues such as salary sacrificing and pensions.
Further, knowing when the time is right to convert an SMSF to a pension is considered the role of an adviser rather than an accountant.
Given these areas require information from trust deeds, as well as reliable administration and auditing services, these activities will centralise the coordination of much of the exterior specialist activities with financial advisers.
HLB Mann Judd says it works with a different model. "Some advisers look to bring together all the collaborators. We try to make it easier," Hutton says.
HLB Mann Judd is a broad-based national accounting and financial planning practice that services clients ranging from those who want minimum advice to those who just want strategy or investment advice, and also those SMSF clients who want their full service offering.
Hutton says while an adviser will typically focus on advice around an SMSF's investment portfolio, making recommendations for investments and the implementation and administration of the portfolio, HLB Mann Judd also works on a client's contribution strategy, tax strategy, estate planning and pension planning.
"People that have an active well run personal superannuation fund are more than likely to end up with higher super balances because of better investment returns, largely because of an increased awareness of how much they can put in, when they can start a pension, et cetera," he says.
It is this detail and working with a client's portfolio that can make all the difference. For example, Hutton says a new client who was running an SMSF had an unrealised capital gain in this portfolio. If the client died and the SMSF was paid out to his adult son, this would have crystallised the $500,000 capital gain and generated a $50,000 tax bill.
"Advice can really help people get the most of the structure they have set up," Hutton says.
Trust deeds
FACT: Trust deeds should be outsourced.
Townsend says trust deeds are about counsel and guidance. In the absence of these, clients can pay too much for their trust deeds.
"I had an adviser shaking his head in awe that a client had set up his own SMSF and who was very proud he had done it. The financial planner was a bit bemused by this. He looked at the box of stuff and the client had gone to one of the larger firms and paid $10,000 for it. He could have gone a more cost-effective way," he says.
An adviser should not be drafting trust deeds unless they are qualified to do so or are working with a legal adviser. Professional indemnity for advisers does not cover them against providing superannuation trust deeds.
Townsend says while the various states' legal profession acts are slightly different in wording, they all share the same message that legal practice without a licence is prohibited. That said, he says the simple preparation of a trust deed has never been tested in a court of law because it is not seen as practising law. Trust deeds are, of course, changing documents, not only over the life of an SMSF but also in response to changes in regulation. Townsend says his business audits its trust deeds every two months.
In the absence of the right skills and this sort of dedication, financial advisers should work with the experts.
Wills
FACT: Legal advice is not optional in the area of wills and advisers must ensure when they are working with SMSF clients that the client has their affairs in order.
This is for the mere fact that wills do not cover SMSFs, so they require special consideration. According to Ellis, this is the biggest fallacy that exists with SMSFs.
"The trustees of the SMSF have the discretion to act as they see fit if there is no effective binding death benefit nomination in place or, even better, an SMSF will coupled with an auto-reversionary pension," he says.
It also makes good sense for a client to have a testamentary trust will and an SMSF will to ensure on their death their estate goes to who they want it to.
With the average size of an SMSF estate being close to $1 million, it can be a costly exercise to skimp on this critical legal area.
"In this area of law, prevention is better than cure and incredibly much cheaper, because you could be paying tens or even hundreds of thousands of dollars in legal fees from the fund if it has to fight an estate claim," Ellis says.
He says the other benefit is that SMSF laws are federal and are therefore safe from claims brought under state-made succession laws.
Administrative services
FACT: Most advisers would be hard pressed to come up with a more cost-effective way to administer SMSFs.
But does such outsourcing weaken the value proposition of financial advisers?
"Not if it's positioned properly," Multiport chief executive John McIlroy says.
"There is no need to have an accountant, but if a client decides they want one, we can have a four-way arrangement with the client, adviser, accountant and administrator."
The main argument over administration is the cost effectiveness of doing in-house some of the work required by SMSF clients. The size of the SMSF market means investors and advisers are spoilt for choice in terms of administrators. Some of the more mainstream operators include SmartSuper, SuperConcepts and Multiport.
McIlroy says the typical administration model for advisers is to outsource the administration, tax and compliance aspects of running an SMSF.
The main service it offers is its SMSF Ultimate service where all mail goes through Multiport. It administers cash accounts, reconciles accounts daily and provides online access. It prepares documentation for an accountant at the end of the year for the independent audit. In May, the business began issuing accountants electronic files so they could do accounts and tax returns.
McIlroy estimates about 15 per cent of SMSFs use services like Multiport's, with the remaining 75 per cent being serviced by accountants who conduct this sort of activity on an annual basis. Further, 50 per cent of accounting practices have less than 30 SMSF clients in their practice, so is it worthwhile them carrying out all the administration services in-house?
Despite the prevalence of outsourcing and the convincing nature of its argument, advisers still need to make sure their SMSF clients understand who is responsible for what.
Townsend says while a planner may not do the actual administration of their clients' SMSFs, they cannot say to a client it is not in their contract to administer a client's SMSF fund, therefore they won't deal with it. This is because they have negligence liability and perhaps even an implied contractual responsibility to their client. To cover them against this quasi-responsibility, Townsend says advisers should ask a client on a regular basis if their trust deed is being kept up to date and when it was last updated.
"Make it part of the formal review process. Advisers need to make sure they both understand what is to happen. Never assume. If an adviser finds an issue that needs to be dealt with, make a decision on who is dealing with it," he says.
Advice through the SMSF experience
FACT: Financial advice has a role far beyond the establishment of an SMSF.
The nature of an adviser's role depends on the capabilities of a trustee as well as what they want their SMSF experience to be.
For this reason, when an SMSF is established there should be a discussion with the client over what services will be done in-house and what will be outsourced. Jones says some clients are adept at share trading and might want to just be responsible for the trading within the fund. In this situation, reporting might be outsourced.
But in the life cycle of a fund, if a client wants control but does not want to actually do it themselves, a specialist will be central. This is particularly the case as trustees age.
"Older trustees do present issues," Jones says.
He says having a power of attorney certainly helps in deciding who is going to make decisions as trustees age. It is also important to decide when a trustee should stop being a trustee.
"A SMSF can be impractical to continue. Advisers can help with the decision of whether a SMSF is coming up to expiry," Jones says.
They also need help at pension stage and most agree this is the realm of a financial adviser to assist their client as to when this should happen and how. Administration houses can help financial advisers with the paperwork required for this stage.
At this point, it could be useful to bring in a lawyer to revisit issues such as estate planning.
