The second half of 2012 saw an extraordinary level of take-over activity in the Self Managed Super Fund (SMSF) administration space. The sector has long been regarded as a ‘cottage industry’ due to its high level of fragmentation, which has persisted despite remarkably strong growth in fund numbers over the last decade. With even the largest of SMSF administration firms holding less than two per cent of the overall market, the potential for consolidation has become an increasingly hot topic among industry insiders, and many have begun to believe that a large-scale wave of consolidation is now overdue.
AMP appears to agree and has openly declared its intention to aggressively build market share and “industrialise” the administration of SMSFs. To this end, it has recently made a series of high-profile acquisitions and can now boast a list of well-known names such as Cavendish and Multiport, along with Andrew Bloore’s new venture, SuperIQ. In relation to the acquisitions, AMP’s Paul Sainsbury released a statement saying, “This is an exciting and attractive sector and it makes sense for AMP to look for growth opportunities in this market.”
So far, Australia’s other major financial institutions have chosen to wait and see how AMP’s foray into the sector progresses before announcing their own intentions. However, there are various factors that suggest consolidation may become a major trend in the SMSF industry in the coming years. One of the biggest of these factors is the shift toward outsourcing.
The majority of small to medium accounting businesses (these groups make up the lion-share of firms administering SMSFs) provide a wide range of accounting services and often only look after a small number of self managed funds. As a result, these firms frequently have trouble finding and retaining staff with the specialised skills required to administer an SMSF. In addition, their processes tend to be highly manual and inefficient causing unnecessary errors and delays.
In an address given by ATO Assistant Commissioner Stuart Forsyth in September 2012, it was revealed that 26 per cent of SMSF tax returns are not being lodged on time. This statistic suggests that a significant proportion of accountants are not only struggling to cope with the complex nature of the work involved in administering a fund, but that they are unable to develop the necessary systems and processes to ensure that annual compliance work is being completed on time.
To add to this existing burden, persistent industry lobbying and a growing focus on the importance of ensuring adequate supervision of the rapidly growing SMSF industry has led to a government review of the arrangements regarding the so-called ‘accountant’s advice exemption’. This exemption has provided accountants with the ability to recommend SMSFs to their clients without the need to meet the compliance and disclosure standards required of a licenced adviser.
This is set to change, with the federal government announcing legislation which will require all accountants wishing to give advice on SMSFs to hold a limited Australian financial services licence. This increased responsibility is driving many accountants to consider outsourcing their SMSF work to an external specialist. Kath Bowler, National Development Manager at SMSF Advice Limited presented part of an Investment Trends survey to the SMSF Professionals Association of Australia (SPAA) in June 2012 which indicated that 22 per cent of accountants planned to outsource their SMSF work if the licensing legislation was implemented as proposed.
Outsourcing potentially provides a ‘best of both worlds’ solution for an industry based heavily on personal relationships between suburban accountants and their clients. Outsourcing ensures the relationship between the accountant and their client is retained, while allowing the administration work to be done professionally by a team of specialists. By limiting themselves purely to providing SMSF administration services, an outsourcing firm can more easily streamline their operations and apply their focus to developing the most effective processes for delivering timely lodgement and reporting.
However, from a technology point of view, the move towards consolidation and outsourcing begs such questions as; ”What sort of software solutions will the large-scale SMSF administration firms of the future require?”, and ”Will the products that are currently designed for small to medium sized firms be able to properly cater for the needs of an ‘industrialised’ sector?”.
A large administration firm needs to be able to take advantage of their size to achieve economies of scale so that they can operate more profitably and efficiently. For instance, they require a more ‘business-centric’ system that allows them to process common transactions in bulk across multiple funds rather than a traditional ‘fund-centric’ system that generally only allows users to work on one fund at a time.
A large scale operator also needs business-wide workflow and reporting tools that provide them with information about the progress of work across their entire client base. For a firm that may be responsible for tens of thousands of funds, the ability to quickly pin-point blockages in the processing cycle is critical to ensuring that agreed service standards are maintained and that fund returns are being lodged on time.
As a firm grows, its book of funds often becomes more diverse in terms of the investment types that have to be catered for. One of the key advantages of a self managed fund is the ability for members to invest in almost any asset type they choose – so large administrators will require a software solution that allows them to easily manage complex investment instruments such as futures and options, as well as assets that are held in foreign currencies. If an efficient solution for managing these complex investment types is not properly implemented, they can easily create a bottle-neck in the administration process and lead to a significant decline in efficiency.
In addition to a powerful investment management system, an online communication portal is an important tool, vital to maintaining efficiency and ensuring fund compliance. An administrator will often be presented with transactions which cannot be properly processed without further information from the client. Deferring the processing of these transactions to the end of the year not only reduces efficiency, but can also result in inadvertent breaches of contribution caps, pension draw down limits, and even lead to a breach of the terms of the Superannuation Industry Supervision Act (SISA).
Comprehensive online reporting and the introduction of integrated transaction querying tools and document management has the potential to drastically reduce processing delays and provide members with more timely information, allowing them to avoid any inadvertent breaches.
Ongoing growth in the self managed super fund sector seems assured as more and more Australians look to take control of their retirement savings. However, legislative change and the ever increasing consumer demand for better service at a lower price is disrupting the traditional software model.
The development of a new and more powerful generation of SMSF administration software, tailored to the needs of large administrators, will allow the industry to provide a more comprehensive and timely service to members, at a lower cost. This technology driven shift will open up the benefits of self managed funds to a much larger proportion of Australians, driving increased member engagement across the industry and allowing more people to take personal control of their retirement savings. This is the way forward for SMSFs.