How technology is enabling financial advisors to achieve true control, diversification and risk mitigation for Self-Managed Super Fund (SMSF) trustees.
Despite the best of intentions, many self-managed super funds (SMSFs) have largely failed to deliver on the original promise of greater choice and control over how their superannuation monies are invested.
Traditionally, the typical asset allocation for an SMSF has been limited to cash, term deposits, local managed funds and some direct local equities. More recently, this has expanded to include direct property investment.
So just why has the asset class diversification and allocation within SMSFs been so poor? There are two main reasons. Firstly, trustees seeking to ‘do it all themselves’ through a shoebox and spreadsheet approach have either lacked knowledge of the investment alternatives available and/or the skills and experience to initiate and manage the ongoing administration and timely reporting requirements associated with investing in diversified asset classes, such as foreign equities. Secondly, where SMSF trustees have appointed financial advisors to manage their SMSFs on their behalf, these advisors have been stymied by administration systems technology incapable of cost effectively managing the taxation and reporting requirements that accompany a broader and more sophisticated asset range.
As a result there has been little appetite for actively managing a diversified SMSF asset portfolio and this has led to a narrow and rather ordinary SMSF investment mix that in many cases could have been delivered equally well by a retail or industry superannuation fund. Nowadays these funds routinely allow their members to select from a variety of pre-set strategies such as a balanced option, as well as a member direct option empowering a member to transact directly on local ASX listed equities or ETFs, albeit limited to the ASX300.
Contrary to gaining greater control, the investment options of SMSF trustees have been somewhat limited. Even those who have opted for direct property through their SMSF have been faced with the considerable challenge of administering their investment and the inherent risk of putting all their eggs in one basket. It would seem that the key points of differentiation that made SMSFs so appealing to so many in the first place – greater control, diversification and risk mitigation – are yet to be realised.
This appeal could be further stymied by the government’s controversial proposal to cap transfers into super at $1.6 million, and reduce the non-concessional super contributions limit to $25,000 a year. It has been suggested that SMSF trustees who contribute more than $25,000 a year to super will not be able to take advantage of a concession offered by the government which allows them to carry forward unused pre-tax contribution limits for up to five years. With the average SMSF account balance increasing incrementally each year, this is set to affect more SMSF members by July next year when the super reforms take effect.
However, there are positive signs that the SMSF landscape is evolving. A growing desire among SMSF trustees for more effective risk mitigation is fuelling a move away from riskier and cyclical equities towards a broader range of fixed income type assets and foreign equities that deliver a more balanced portfolio approach. Further, legislative measures and the banks tightening of limited recourse borrowing arrangements are leading some baby boomers to seek out greater asset class coverage in their SMSFs, rather than relying on direct property alone.
A key enabler of this diversification of SMSF assets is the relatively recent emergence of next generation administration platforms that are capable of managing multiple asset segments and classes – and their associated taxation and reporting requirements – with ease. By ensuring self-administration is no longer a time consuming or costly exercise, these platforms offer advisors a true alternative to wrap platforms and deliver on the original SMSF promise of greater control.
Savvy advisors are harnessing the power and extended capabilities of these new platforms to move well beyond traditional SMSF administration. To their delight, it’s now possible to take an Individually Managed Account (IMA) approach to portfolio management within an SMSF tax vehicle. On behalf of their client, advisors can actively manage their client’s investment models utilising an extensive asset range, while also accessing optimised tax management and consolidated reporting. On the portfolio management side, this delivers the freedom to run their client’s SMSF in exactly the same way a fund manager would run an investment fund. For example, should foreign markets be performing better than local markets, they have the flexibility to alter the asset allocation of the SMSF to capitalise on this development. These new-found capabilities have opened up a wealth of investment opportunities for SMSFs that extend well beyond cash, term deposits, local managed funds and some local equities, to include a mix of residential, commercial or industrial property, local retail bonds and foreign assets – such as government securities, corporate bonds and direct investment in well-known brands such as Apple, Google and Walt Disney Co.
Financial advisors can now go to their SMSF clients and offer them any kind of asset class they would like in order to achieve a more balanced asset allocation within their fund that reflects their risk profile. As a result, advisors have never been in a better position to deliver on the original SMSF promise to provide trustees with greater choice and control over their superannuation monies.