Beyond the Hype

IN EARLY March, AMP’s managing director and chief executive, Craig Dunn, sat down to lunch with a group of journalists to discuss self-managed superannuation.

His attendance was testament to the increasing importance of self-managed superannuation funds (SMSFs) for financial services companies, as is the fact that AMP’s SMSF business unit – launched seven months ago and now a market leader – reports directly to him.

The message was clear: ‘the SMSF sector is big and growing and we want a big slice of it’.

Dunn was candid about the opportunity he sees and his plans to take advantage of it.

“SMSF is the largest and fastest growing sector in the market and that makes it attractive to us,” he said. “We intend to continue to dominate market share.”

Not only was he convinced of the opportunity, but also that financial advisers have a key role to play. “We believe strongly in the value of advice and feel our advisers should be actively involved in the SMSF process,” he said.

At the recent SMSF Professionals’ Association of Australia (SPAA) national conference, held in Melbourne in mid-February, there was further evidence of the sector’s coming of age.

From relative obscurity only a decade ago, the industry association was able to draw more than a thousand advisers, accountants and trustees from across the country to celebrate all things self-managed super.

“We now have political clout,” SPAA’s CEO, Andrea Slattery, told guests at the association’s 10th anniversary gala dinner.

But while the sector may be growing in importance for the large institutions and occupying a more significant spot on the political map, many advisers are still cautious or unsure about how to turn the clients’ apparent
interest into actual business.

This report looks beyond theIN EARLY March, AMP’s managing director and chief executive, Craig Dunn, sat down to lunch with a group of journalists to discuss self-managed superannuation.

His attendance was testament to the increasing importance of self-managed superannuation funds (SMSFs) for financial services companies, as is the fact that AMP’s SMSF business unit – launched seven months ago and now a market leader – reports directly to him.

The message was clear: ‘the SMSF sector is big and growing and we want a big slice of it’.

Dunn was candid about the opportunity he sees and his plans to take advantage of it.

“SMSF is the largest and fastest growing sector in the market and that makes it attractive to us,” he said. “We intend to continue to dominate market share.”

Not only was he convinced of the opportunity, but also that financial advisers have a key role to play. “We believe strongly in the value of advice and feel our advisers should be actively involved in the SMSF process,” he said.

At the recent SMSF Professionals’ Association of Australia (SPAA) national conference, held in Melbourne in mid-February, there was further evidence of the sector’s coming of age. From relative obscurity only a decade ago, the industry association was able to draw more than a thousand advisers, accountants and trustees from across the country to celebrate all things self-managed super.

“We now have political clout,” SPAA’s CEO, Andrea Slattery, told guests at the association’s 10th anniversary gala dinner.

But while the sector may be growing in importance for the large institutions and occupying a more significant spot on the political map, many advisers are still cautious or unsure about how to turn the clients’ apparent interest into actual business.

This report looks beyond the hype to assess the opportunities and obstacles on the road to becoming an SMSF specialist, and it presents advice from leading practitioners about how you can secure a slice of this increasingly popular pie.

Dollars and cents

According to Australian Taxation Office (ATO) statistics, total assets held in SMSF structures exceeded $450 billion as of October 2012. There are just under half a million SMSFs set up on behalf of more than 900,000 Australians and that number is growing.

In 2011/2012, 35,276 SMSFs were opened – up from 28,031 in the previous year, according to the ATO. Delegates to the SPAA conference were told that “four SMSFs are set up every hour in Australia currently”. Indeed, SMSF trustees control around one third of superannuation money held in Australia.

Clearly, the pie is substantial.

It is little wonder that across the financial services industry, professionals are viewing the sector with dollar signs in their eyes. But for advisers, getting a slice of the action is easier said than done.

The Intimate with Self Managed Superannuation report – issued recently by SPAA and Russell Investments and produced by CoreData (SPAA-Russell) – offers a rosy assessment of an adviser’s chances of getting into the SMSF game.

According to the study, 26.2 per cent of people who do not have an SMSF currently list lack of knowledge and education as their main reason and would be open to setting one up if they had the right professional advice.

SPAA’s NSW chapter treasurer, James Power, who is an adviser at CXC Financial Partners in Sydney, is also optimistic about the opportunity. “There are lots of pieces of pie to go around because there are different professionals that are suitable for different clients,” he tells ifa.

“Some trustees will want to work directly with buyers’ agents and stockbrokers, others just with accountants, while others will want more holistic financial advice.”

The percentage of SMSF trustees that are happy to skip the holistic advice part may not be a minority, however. According to Vince Scully, a chartered accountant whose business, SMSF Finance Specialists, is regulated as a mortgage brokerage, thinks the SMSF opportunity is often overstated.

“People talk big numbers on SMSFs as if it’s some great honeypot, but when you actually break down what people want, the numbers don’t look so good for advisers,” he tells ifa.

“Every SMSF trustee needs an auditor, and virtually every SMSF trustee will have an accountant for the tax issues, which adds up to at least $2,000 to $3,000 revenue and that’s a necessary cost that’s not going to go away,” he explains.

“Some further monies will often be allocated for technical and administrative advice, often serviced by the accountant, but when it comes to the opportunity for investment advice and financial planning, the pot gets much smaller. SMSF trustees traditionally have been reluctant to engage on this.”

A poll conducted by Vanguard Investments in February suggests that the appetite for SMSFs may be much greater when it comes to advisers than with the clients they advise.

At a road show event in Sydney attended by more than 300 financial advisers, 65 per cent of respondents to a live poll said they regularly recommend SMSFs to their clients. And yet only 11.3 per cent indicated that SMSFs make up more than 50 per cent of their workload, with 46.6 per cent indicating SMSFs make up less than 10 per cent.

SPAA-Russell says that “the use of financial planners as the primary source of advice for trustees remains steady, with 54.3 per cent using an [independent financial adviser]”. At the same time, it concedes that number is down from 55.5 per cent the previous year – not to mention the fact that that’s still almost half of trustees evidently not interested in professional advice at all.

Nonetheless, there is clearly a buck to be made by offering services to the half-million Australians who have an SMSF and the numerous others who may be considering setting one up. The question is, What do you need to do to get in on the action and what other challenges remain?

The battle for control

While a sizeable proportion of SMSF trustees may be reluctant to engage professional advisers, the battle is not necessarily won just by getting them into the room.

Even those trustees who are interested in planning services are often looking for very specific advice and, according to specialists, can often be quite different from other clients to work with. In order to prepare for this nuanced relationship, you need to look at the drivers behind opening up an SMSF in the first place.

Quite simply, “it’s about control,” says Vince Scully.

Tim Mackay, an SMSF specialist adviser and director of Quantum Financial Services, concurs: “The clients in SMSFs are different,” he tells ifa. “They are fundamentally more interested in seeking control; they want flexibility; and they will not just sit down and listen to you as ‘expert’.”

Perhaps one of the key reasons for this yearn for control is that many trustees already consider themselves ‘experts’. According to SPAA-Russell, a majority of trustees (58.8 per cent) claim they have “strong or very strong knowledge of investments”, with 61.6 per cent indicating they rely heavily on their own research in implementing an investment strategy.

Only 30 per cent said they derive their strategy from a financial planner.

In order to best handle this potentially tricky power dynamic, Tim Mackay suggests a “mindset shift”. Rather than lecturing clients, he advises acting more like a coach, working in partnership with clients and making room for their preferences and own research.

SMSF specialist Adam Goldstien, director of dual accounting/financial planning firm Skeggs Goldstien, flags the need for a different mental approach. “Trustees are looking for a particular type of adviser – one that is really an SMSF specialist and not a run-of-the-mill investment and asset allocation adviser,” he says.

“Advisers need to realise the vast majority of trustees are not interested in managed funds – they’re into direct equities, direct property and areas where you can really retain control.”

SPAA’s James Power also thinks familiarity with these asset classes is an important part of becoming a successful SMSF adviser. “You really need to be clued up on direct investment,” he says.

In practice, implementing this new mindset might mean more time and more research. “SMSF trustees generally ask a lot of questions, compared to other retail clients,” says Mackay.

One the one hand, this has the risk – or at least, the cost – of man hours attached to it. On the other hand, he says working with trustees can also be more rewarding for this reason, since your own knowledge and strategy is being challenged.

Mackay identifies a further benefit of working with SMSF trustees: “When you’re dealing with clients that are more financially literate and fully understand what they’re getting into, that takes away some of the inherent risk,” he says.

He suggests that while trustees can be tricky to deal with, once you have made the necessary mindset and strategic adjustments, you might just find them more enjoyable to work with than other clients.

Back to school

Of course, altering an advice philosophy and approaching SMSF clients in a certain way is not simply a matter of skimming through a textbook on direct investment. Overwhelmingly, the practitioners canvassed for this report said the biggest challenge in becoming an SMSF specialist is the knowledge level required and the need for serious, continuing education.

On top of dealing with clued-up clients who are likely to have firm views about their investment choices, SMSF advice requires knowledge of all the additional compliance, tax and legal.

“The rules around normal superannuation are complex enough,” says Mackay, “but with SMSFs there are complexities that don’t apply to standard superannuation or investment advice and if you’re not trained and qualified you should not be offering SMSF advice.”

In particular, advisers need to be familiar with the Superannuation Industry (Supervision) Act (the ‘SIS Act’) and the regulatory framework of the ATO rather than the Australian Securities and Investments Commission, to which most advisers are accustomed.

Mark Borg, a SPAA-accredited adviser and principal of AMP Financial Planning practice MBA Financial Strategists, says regulatory and compliance knowledge is the highest priority.

“The SMSF space is littered with legislative potholes,” he says. “You really need to have a deep understanding of the relevant laws and regulations.”

Administration is another key area where you would need to enhance your knowledge, Borg says. “You need to have specific processes in place for SMSFs, so making sure your back office is structured in a particular way to cater to that [is key],” he says.

Some administrators are “not particularly skilled,” he adds, meaning the adviser needs to be – so they are aware of any mistakes or problems. Unless these technical and administrative skills are provided by your dealer group, Scully says, you have no choice but to learn them yourself.

The specialists interviewed for this report unanimously agreed, however, that just learning the skills is not enough. If you are serious about specialising in SMSFs, official accreditation is the optimal path. Accreditation is offered by industry bodies such as SPAA and the Chartered Accountants, as well as – increasingly – by higher education institutions such as the University of Adelaide and University of New South Wales.

Private sector financial education provider Money 101 recently launched a course in association with The SMSF Academy and Deakin University to take advantage of the growing demand for specialisation. The ‘SMSF101’ course includes SPAA accreditation and coursework is marked and assessed by industry professionals.

“Across the board there is a need for greater competence and specialisation,” SMSF Academy managing director Aaron Dunn said at the course’s launch in Sydney in January.

But while there is a growing awareness of, and demand for accreditation – evidenced by the emergence of a competitive SMSF education market – the courses are a significant commitment.

Scully describes the process as “costly”, while Power says the SPAA course is so difficult that even experienced advisers come “close to failing”. And yet they all agree that it is necessary, both from the point of view of attaining the necessary knowledge and signalling to customers that they have done so.

“Saying you’re a specialist and being a specialist are not the same thing,” says Golstien bluntly. “Unless you go through one of the few respected accreditation courses, you’re not a specialist.”

So, if you are serious about getting into the SMSF game, it seems there is little wiggle room. You have to be skilled and ready to abide by the standards of an increasingly professional sector. The potential consequence of being under-skilled goes beyond your professional reputation. As Power reminds us, “There are people’s life savings at risk.”

Ahead of the game
While the road to SMSF specialisation is fraught with challenges – from dealing with potentially prickly customers to taking on an intensive study program on top of your daily practice management and research tasks – history may show that the risk of not getting on board is even greater.

As the SMSF sector grows there is also a growing expectation that competent advisers will have some knowledge of this important space, or at least be able to refer a client to a specialist who does.

This was the impetus behind AMP’s launching its SMSF unit. “It wasn’t just that we saw a potential return to our shareholders,” AMP SMSF chief Paul Sainsbury told that same media lunch. “Our research was telling us that customers expected us to be knowledgeable in this area.”

The attractiveness of the sector goes beyond the ability of investors to get their hands on and take control of their super. As Mark Borg concludes, “Australians like to be in control of their own money – it’s in their nature – so as they become aware of SMSFs it naturally appeals to them.”

Sainsbury says the global financial crisis (GFC) has also helped shift the balance of personal finance management. “The GFC has focused attention on how people view value and trust and many more people are now looking to position themselves at the centre of their financial situation,” he said.

Combined with growing dissatisfaction with industry super funds, this trend towards greater personal finance accountability is compatible with the rise of SMSFs. If you’re willing to put in the hard yards, it’s likely to pay off.

For AMP’s Craig Dunn, it comes back to business basics: “The battle for market share in the SMSF space will be won by whoever best understands the needs of SMSF clients.”

Friend or FOFA?

Business opportunities and the Future of Financial Advice (FOFA) reforms are not often mentioned in the same sentence.

However, for those who are inclined towards the ‘glass half full’ philosophy, the FOFA reforms may actually be a friend to advisers specialising in the SMSF space.

According to James Power, an SMSF specialist at CXC Financial Partners and NSW chapter treasurer of the SMSF Professionals’ Association of Australia, the fee-for-service business model championed by the reforms suits your typical SMSF trustee.

“The new regulatory regime is perfect for SMSFs because the types of clients that have SMSFs are generally less reluctant than other retail clients to pay an upfront fee,” Power says.

SMSF trustees often have a higher net worth and will be more amenable to paying the upfront fees often associated with other professions such as lawyers and accountants, he adds.

Talk about silver lining.

Accountants versus advisers

As financial advisers wake up to the opportunities presented by the growth of the SMSF market, so too do accountants, who have long touted their expertise as the remedy to the additional tax and compliance requirements associated with SMSFs.

But do accountants pose a threat to advisers in the SMSF space, or are they useful referral partners?

Vince Scully, SMSF Finance Specialists: “If you can find good accountants to work with as a team, it is going to lead to referrals but you have to find the right people to work with. SMSFs have been great for adviser-accountant relationships because it gave them something to talk about and some common ground, with teams being built around SMSF clients.”

Adam Goldstien, Skeggs Goldstien: “I definitely think accountants are competition to planners in this space. From July, a lot of them are going to look seriously at getting a licence themselves and provide at least strategic advice and seek to cut the adviser out of the deal. But there are still good opportunities to maintain strong referral relationships with those accountants that don’t want to get licenced.”

Mark Borg, MBA Financial Strategists: “The ideal situation is for the accountant and financial planner to work hand in hand. I don’t see accountants necessarily as a competitor; I see them as a potential partner.”

Paul Sainsbury, AMP: “Increasingly, accountants and planners are looking to work together on this but they need to have a clear model.”