Less than 1 in 3 SMSF trustees sought advice in 2022

According to the Vanguard/Investment Trends 2023 SMSF Report, 2022 marked the lowest wind-down rate in over 10 years with about 9,000 closing their SMSFs in 2022, down from over 16,000 the previous year.

According to the latest report, which was conducted between February and March 2023, the average age and wealth of newly established SMSFs have both increased over the past 12 months. The average age rose from 42 to 45, while the average balance at establishment has increased to $300,000, up from $220,000 the previous year.

The main reason for establishing an SMSF hasn’t changed from previous years, with the desire for more control over investments cited by almost 70 per cent of new SMSFs.

“At the heart of many SMSF trustees is their desire for control and autonomy,” said Balaji Gopal, head of financial adviser services at Vanguard Australia.

“The research shows that trustees are increasingly interested in taking control of their investments as they seek greater transparency, flexibility, and the ability to tailor their investment strategy to their unique needs.”

According to the report, just 27 per cent of trustees indicated they sought advice in the past year, even though the bulk of trustees — both advised and unadvised — expressed the need for advice.

This was coupled with a sizeable jump in the number of SMSFs without a financial adviser and with unmet advice needs — 270,000 in 2023, up from 235,000 in 2022.

The Vanguard/Investment Trends report also highlighted that advised SMSFs identified their biggest advice need as finding good buying opportunities, while unadvised trustees pointed to a need for strategic advice and support to understand changes in regulation.

Advised investors also appeared more informed, with 55 per cent reporting that they were aware of the Quality of Advice Review recommendations, compared with 47 per cent of non-advised trustees. However, many felt the recommendations either wouldn’t impact them (16 per cent) or were unsure about the potential implications (22 per cent).

Around 20 per cent of unadvised SMSFs said they are open to seeking financial advice in the future, with female trustees, in particular, signalling a greater appetite to seek an adviser, as well as those entering the transition-to-retirement phase.

“The value of advice is never more crucial than in times of market instability, similar to what we are currently experiencing. Advisers have the opportunity to offer a myriad of advantages to investors, from filling in the financial literacy gaps to meeting unmet advice needs,” said Mr Gopal.

The commonly reported barriers for unadvised SMSFs open to seeking advice were unclear cost, lack of trust in advisers or previous experience with financial advisers.

However, large segments of SMSF trustees self-assessed their financial literacy as poor to average, including 30 per cent of trustees under the age of 44, and 42 per cent of female trustees.

“Importantly, the right advice can deliver more than just a better investment outcome. It could be life-changing, whether that’s through providing clarity on complex financial matters, coaching amid challenging market conditions, or bringing peace of mind about retiring well,” Mr Gopal added.

Unsurprisingly, nearly half of SMSF trustees conveyed concerns with the $3 million cap confirmed by the government in the recent federal budget, while one in four (24 per cent) felt it was a positive development. Almost half of respondents who rejected the idea said it was unlikely they would personally be affected.

Economic conditions impact SMSF asset allocation

According to the report, one in five SMSFs said the prevailing economic conditions have had a significant impact on their approach in selecting investments, with many moving away from shares and into cash.

Over a third of SMSFs indicated an increased allocation to cash and cash products, while direct share investments saw the largest relative decline in most SMSF portfolios.

“With the current unsettled economic landscape of high interest rates and inflation, capital protection remains a priority for most SMSFs,” said Mr Gopal.

“It is typical to see increased allocation to defensive assets such as fixed income or cash products during uncertain times. With interest rates rising, the data suggests SMSFs are favouring assets that they see as low risk, with trustees now allocating 22 per cent of their assets to cash products.

“However, we believe Australians saving for retirement should take a longer-term view and avoid reacting to short-term market conditions. It’s not unwise to have cash reserves in a portfolio but that should form part of a broader diversified and risk adjusted approach, rather than a tactical decision.”

The report also found that, in addition to diversification, time savings and access to active management, the ability to access specific sectors is a growing driver in SMSFs choosing to invest in managed funds.

“Investing in managed funds provides investors with a powerful tool to diversify their portfolio without the high costs and risks associated with buying individual shares,” said Mr Gopal.

“However, it is important for investors to conduct thorough research into their investments, including costs, exposures, and risks, in addition to evaluating performance.

“By doing so, investors can make informed decisions to help them achieve long-term investment success.”