The impact of the impending Future of Financial Advice (FOFA) reforms, increased competition from lower-priced providers, new technology and market volatility are the key game-changing issues for the SMSF sector.
A notable trend in the market is the growing number of investors who are keen to take control of their superannuation. SMSFs are becoming easier to access and clients are veering in favour of the do-it-yourself approach. Also, the amount people are investing in their super fund is increasing, so it is becoming a more meaningful proportion of assets.
"There are more players (service providers, advisers) in the market wanting to be involved in a large, fast-growing and potentially lucrative market. This creates increased competition and lowers costs for people wanting to start their own SMSF,"
HLB Mann Judd Sydney SMSF specialist Andrew Yee told IFA.
In addition to it becoming easier and cheaper for investors to set up an SMSF, they are becoming more financially savvy so they are happy to take on a bigger role in running their own fund.
"Through technology and new product providers it is becoming easier and less costly to run the thing. That's brought down the number of assets at which it becomes worthwhile to do and therefore there are more people that apply," Sharesight executive director Andrew Bird told IFA.
Market representatives explain that first advisers need to understand how their role in the SMSF market is changing, then they need to decide how to go about remaining competitive.
"They're changing quite significantly. [Advisers] are being asked to be more accountable for complex advice, which means that they need to become confident and sufficient in an advice capacity for the services that they are providing," Self-Managed Super Fund Professionals' Association of Australia (SPAA) chief executive Andrea Slattery told IFA.
Uncertainty around providers' rules about how they can manage and charge for their services appears to be influencing advisers' decisions to specialise and attain further qualifications and accreditation in the SMSF area in order to remain competitive.
"Advisers ultimately have to better understand some of the compliance functions that the accountant used to look after," SMSF Academy managing director Aaron Dunn told IFA.
"The adviser needs to know about not only the investment and strategic side, but [also] needs to understand the compliance that goes with it."
Advice for advisers
To keep on top of the market during these changes, market participants strongly urge advisers to plan their business and be ready to support their clients.
FOFA reforms on the horizon mean advisers need to ensure they are properly licensed and qualified to be able to service the SMSF market. Market volatility also means it is important for advisers to look after their clients.
"Advisers need to ensure clients are properly serviced and not taken for granted. They [advisers] need to be seen to be providing a service and not just a product," Yee says.
"[They] need to improve their value-add services to their clients, for example, tax planning, business and succession planning [and] estate planning."
Dunn notes advisers should be going down the specialist route and keeping ahead of the game if they want to hold onto or gain clients.
"You need to be a very good strategic specialist in this area. You need to know how the law and rules can apply to the advantage of your client," he says.
"[Advisers] need to be able to identify trends and see what's happening and how it can advantage your clients.
"If you understand the law and can keep on top of many of the changes that are happening, then you can continue adding value to your client and keep their confidence ... knowing that you're looking after their best interest."
Institute of Chartered Accountants in Australia head of superannuation Liz Westover agrees, telling IFA advisers should be aware of the impending changes and plan accordingly.
"I think that is an opportunity to get in front of your clients and say 'look, this is what is coming, make sure you're aware of this and make sure that you're adhering to the rules'. It's a great opportunity to go out and educate your clients on a lot of the changes in legislation," Westover says.
Advisers who enter the SMSF market also need to ensure they choose their products, systems and service partners carefully.
"[They need to] ensure that this combination can and will deliver the quality and timeliness of the value proposition they are wanting to deliver," Class Super director Kevin Wyld told IFA.
It is also very important for advisers to seek qualifications for specialising in the SMSF space if they want to remain competitive, Slattery says.
"I think the new way for advisers to work in this market is [to] become appropriately confident through SMSF specialist adviser courses or accreditation," she says, adding that to understand the complexity would give a competitive edge.
Advisers should provide a form of scaled advice that is appropriate based on the clients' needs - to become client focused rather than business focused, she says.
"In the past, people provided a product which was appropriate or provided a service, and they delivered that service without a lot of interaction with the client, without trying to educate them or to develop some kind of relationship or partnership of trust," she says.
Outlook
The outlook for growth in SMSFs looks bright as the market continues to go from strength to strength. Although for advisers, the uncertainty is creating a challenging time.
"We believe that the SMSF market will continue to grow. There will be competition from the other superannuation sectors, that is, industry funds (IF) and personal custodial superannuation, including account-based pension accounts. We see the latter as the big losers of market share, as there will be great penetration from IF and SMSFs," Wyld says.
"Some of the IFs are now looking to offer an SMSF solution to their members with higher account balances to keep them in the fold. Technological advances will ensure that the size of the SMSF account to ensure viability will diminish rapidly. So the traditional rule of thumb of $200,000 will no longer be relevant."
Yee agrees the overall outlook for the sector still looks bright. He also notes there may be an increase in investment in direct property as clients look to take advantage of the flat property market.
In contrast, there may be a fall in investment in art and collectables in light of tightening regulations in that area.
The SMSF market is expected to continue strengthening, with growth only damped by the reduced superannuation contribution caps applying from 1 July 2012, whereby the $50,000 concessional contribution cap for those aged over 50 is being reduced to $25,000.
"The reality is all that has happened so far is talk and debate. Even though we might be tired, we've all just got to drink a bottle of FOFA Gatorade and get ready for it again," Dunn says.
The need to become a specialist in the market becomes more important as the SMSF sector continues to grow. Otherwise, advisers may struggle to keep their clients or gain new ones if they don't remain competitive in their field, Dunn explains.
But some are concerned the constant changes and review of the SMSF system may cause people to lose confidence in the sector.
"They way I see it, we have gone through this huge review of the superannuation system and we've had this opportunity to get it right, and then I think it's time to pretty much leave it alone unless we absolutely need to make changes," Westover says.
"We should stop the tweaking. It's the tweaking [that] is causing people to lose confidence. It isn't making people opt out of SMSFs; it's making them opt out of super altogether." «
Changing face of technology
The introduction of new self-managed superannuation fund (SMSF) technology could well change the level of assets needed to start a fund. While some recommend that, by rule of thumb, at least $200,000 per member is needed to start a fund, software and technology developments may cut costs and make SMSFs more accessible to those outside the high-income bracket.
Macquarie Specialist Investments has made its Macquarie Equity Lever investor data available on Class Super's SMSF administration solution, a joint initiative that will benefit SMSF trustees, advisers, administrators and accountants.
Equity Lever gives SMSF investors access to Australian Securities Exchange-listed securities so they receive income distributions, franking credits and capital gains.
With the combined strengths of both parties, advisers will be able to give more timely updates to their clients about their investments, and using the investor data they will also be able to show SMSF trustees how to make better decisions about their investments.
Through the effective use of new technology, the time it takes to administer a fund will be demonstrably reduced.
"This is already being reflected in the market with the price, and the client feature offerings being made to clients include discounts for embracing smarter electronic systems, with enhanced up-to-date reporting and the ability to view real-time member balances," Class Super director Kevin Wyld told IFA.
HLB Mann Judd Sydney SMSF specialist Andrew Yee told IFA: "New entrants and existing SMSF providers and advisers are introducing new technologies to reduce their own costs and to get an edge over the competition.
"They are also able to pass on technological improvements to processes in the form of reduced fees or 'add-on' services."
Yee says the desired level of assets needed to set up an SMSF is still under consideration, but HLB Mann Judd recommends that at least $100,000 per member is needed for a good-sized fund or $400,000-500,000 for high-wealth individuals.
However, he explains advisers and service providers need to upgrade their systems and processes to ensure they can compete against lower-priced competitors that have the new technology.
"With more entrants in the market, costs will be forced lower and therefore make it easier and cheaper for people to start their own fund. Technology, such as the use of cloud computing, web-based or online systems and systems which integrate investment transactions to fund reporting requirements, reduces administration costs for SMSF trustees," he says.
"Also, more hands-on trustees are able to take advantage of new investment reporting and administration services, which reduces the amount of 'professional time' that is spent on their fund, thereby reducing fees paid to service providers and advisers."
But some note that although new technology is changing the face of the market, the issue is not as significant as some think. Clients still consider reliability of their adviser to be more important than cost.
"[Technology] is where the big drive is happening. The reality though is that it's happening at the larger administration end. The issue is that it is an enormously fragmented market," SMSF Academy managing director Aaron Dunn told IFA.
"Technology is making some enormous inroads, but [it isn't] a core part of many businesses. [Some] don't have sufficient numbers of SMSFs to embrace the technology and a lot of people still take the relationship that they have with their provider first.
"Cost is an issue, but not a key issue. But it is becoming a very competitive space in trying to attract those new funds in and that is where the pricing point is becoming interesting."
