24 February 2012
Resurgence - how the SMSF tide can rise further (SMSF growth part 3)
Over the past couple of weeks, we’ve reviewed the data indicating that SMSF growth has moderated, as contribution caps have started to bite and the average new SMSF has shrunk. But what does this say about future growth prospects?
Although SMSFs account for ~$400bn in assets, SMSF membership is still only ~5% of the working age population. What would it take for SMSFs to suck in another $400bn?
The answer is pretty simple – it’s going to have to come from members with large account balances in collective funds. For another $400bn, however, well over 1 million members would have to switch from their collective funds to SMSFs, generally one by one.
This would be a massive distribution effort. Is it realistic?
Actually, yes. Because, in our view, substantial incentives have been created for a wide range of market participants to supply or support an SMSF business model. These include traditional players and many new players largely shut out of super, which have been able to enter thanks to SMSFs.
These are just a few of the forces in play:
- FoFA: unbundling of commissions from products removes a remuneration incentive for financial planners to recommend collective funds. If you have to get clients to opt-in, doing so for SMSF clients is no more difficult than collective clients, and it’s seen as a good way for planners to demonstrate they are adding the value to justify their fees.
- MySuper: the Cooper Review created a host of new constraints on collective funds, while largely whitewashing SMSF shortcomings. And even modest SMSF reforms such as restrictions on collectibles were subsequently watered down.
- Accountants are making a fortune: Tria estimates that SMSFs have created a new revenue stream of well in excess of $1 billion pa for the accounting profession. Small wonder that an SMSF is often the first product an accountant tries to cross-sell their clients.
- SMSFs are funding the banks: SMSFs have cash deposits of ~$100bn, mostly with Australian banks. They have a far higher exposure to deposits than collective funds, and SMSF deposits are likely to be favourably treated under Basel III rules. In a world where funding remains difficult to obtain, it could be argued that the banking system cannot do without SMSFs at present.
- Every man and his dog seeking capital loves SMSFs: from property developers and real estate agents to collectibles auction houses, newsletters, and vendors of “attractive investment opportunities”, SMSFs have allowed a huge range of parties with no prospects of raising capital from professional investors, to target the pool of super assets.
Against a background of technology allowing SMSFs to be marketed to much larger numbers of investors, SMSFs benefit from a combination of strong incentives, powerful vested interests, and the apparent blessing of Government.
Furthermore, SMSF distribution is available via accountants across the country; there are roughly ten times as many CPA’s and chartered accountants in Australia compared to financial planners. While not all accountants advise on SMSF’s, the proportion that does is a large and influential distribution force.
There is also the prospect that established retail wealth players may swing their business model behind SMSFs. Who could blame them? With industry conditions difficult and it getting harder and harder to offer collective solutions, the lightly regulated SMSF route must look increasingly tempting.
For the SMSF tide to surge to new heights therefore requires it to reach into the heart of the collective funds and extract the mass affluent segment – their largest and most valuable members. Collective funds need to provide an attractive offer for these members before competitors do.
As enormous as that switching task is, it’s not inconceivable. Via a combination of short-sighted policy and unintended consequences, powerful incentives have been created which favour SMSF business models. While there are members with a genuine desire and acumen to manage their own super, the concern must be that these incentives are resulting in SMSFs being marketed far more widely than should be the case, with the risk of sub-optimal retirement outcomes.