The good, bad, and potentially ugly for SMSFs
“Two hundred thousand dollars is a lot of money. We're gonna have to earn it” Clint Eastwood said as Blondie in The Good, the Bad and the Ugly, on the work a gang of three were going to have to do to find a hidden fortune.
The recently released 2018 Vanguard/Investment Trends SMSF report offers insights into the hard work the nearly 600,000 Australian self-managed super funds are putting into growing their retirement savings.
The sector has grown rapidly over the past ten years and while growth in the number of new SMSFs being set up each year has slowed, it remains the largest sector of the superannuation asset pool representing just over 30 per cent of overall superannuation assets in Australia.
Two in five SMSFS now have balances of over $1 million, and the report offers an annual update on how trustees are managing this money, and what their issues and concerns are.
This year there were three notable themes running through the findings – impacts of regulatory change, the demand for advice, and portfolio construction challenges.
Regulatory change
Far from the lawlessness depicted in the spaghetti westerns of the sixties, trustees are operating in an increasingly complex regulatory environment.
Impacts of this regulatory change played out in this year’s findings, in particular due to several new rules coming into effect in July 2017.
Portfolio structures are being impacted by the federal government’s introduction of the $1.6 million cap for pension accounts and these changes are seeing SMSFs having to review their portfolios and potentially maintaining assets in the accumulation phase or increasingly looking to invest outside of their fund to address both the risk of exceeding caps and the regulatory uncertainty.
Clearly ‘concerns about regulatory change’ was the biggest challenge cited by trustees in managing their fund this year.
This is likely to become a greater issue in the short to medium term for SMSF trustees with the ongoing Royal Commission into financial services and Productivity Commission’s draft report into superannuation both likely to have considerable impact on the federal government’s policy agenda.
Advice
SMSFs who currently work with an adviser are increasingly saying they value their relationship with satisfaction scores on the up. This year 86 per cent of SMSFs rated their adviser good or very good.
Each year, this research highlights areas of advice which SMSFs would like to be able to access but currently are not – these are labelled ‘unmet’ advice needs.
In 2018 almost half of the respondents said they have unmet advice needs – notably in the areas of inheritance and estate planning, tax planning and investment selection.
A major barrier for trustees in seeking advice is the growing belief that costs are too high.
The opportunity embedded within these results is how advisers can better demonstrate their value and justify the investment in advice, in addition to meeting some of the specific technical needs of this sector.
Managing the money
Many fund trustees operate with more sophisticated investment knowledge than they are perhaps given credit for, and by virtue of running an SMSF, they are more engaged than most with their own financial security.
However it shouldn’t be taken for granted that the industry’s interpretation of what constitutes a well put together investment portfolio is the same as the investing publics’.
For the first time this year the survey asked specific questions about both the level of diversification and the understanding of the concept among trustees, with a common concern over the years being that many SMSFs carry higher risk in their portfolios due to a concentration of funds in individual Australian shares and cash.
The survey asked trustees whether they agreed it was important for an SMSF to be well diversified and 82 per cent either agreed or strongly agreed. However, when asked how well diversified their SMSF portfolio is only 54 per cent responded that it was either well or very well diversified.
Digging a little deeper into what trustees considered to be a well-diversified investment portfolio, almost two-thirds thought a portfolio of 20 shares got the job done.
Given that the average SMSF has about 17 shares in their portfolio according to Investment Trends, that answer should not be surprising as it recognises the reality a lot of trustees seem comfortable with.
However, a 20-share-portfolio fails professional tests of diversification and would be classified as a relatively high risk portfolio given, in particular, the concentration of the Australian share market in resource companies and banks.
What was encouraging however from this year's trustee survey was a recovering interest in managed funds and a greater appetite for investing overseas, both of which go towards mitigating some of the risk from the lack of diversification.
A key question that remains for retired trustees is whether they have the appropriate level of diversification and risk protection built into a portfolio now in pension mode, because the impact of unexpected downturns in the domestic economy could be far more dramatic for those with a shorter investing timeframe and without the ability to replenish capital from employment.
This article first appeared in the Australian Financial Review on Tuesday, 3 July
Robin Bowerman
Head of Corporate Affairs at Vanguard Australia
09 July 2018
www.vanguardinvestments.com.au
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
July - September 2018 archive
- Living expenses for retirees on the rise
- Still a long and bumpy road to travel on the way to a U.S.-China deal
- Smart spouse investing
- How financial advice helps create wealth.
- What the ATO will be keeping an eye on in FY19
- Examining the S in SMSF
- Trade tensions to choke global growth: Moody’s
- Tools for budgeting, cash flow, Super and more ….
- Statistics show SMSFs not just for the rich
- SMSFs lose thousands in property, investment scams
- The good, bad, and potentially ugly for SMSFs
- What politicians use to tell you how Australia is going.
- Estate planning in the new environment
- ATO issues alert on super, tax scams
- SMSFs: Our 'hardest' jobs
- ASIC issues alert over big gaps in SMSF trustee knowledge
- Super savings gap for women stuck at 30%
- Statistics for all Australians
- Super set to play bigger retirement role
- Why SMSFs want estate-planning advice
- The power of financial role models