SMSF advisers – A convergence? – SMSF Feature Part 1

Accountants remain the most trusted advisers for SMSF clients but with licensing take-up remaining low following the accountants' exemption, what will this mean for SMSF members? Malavika Santhebennur finds out how financial planners can capitalise on this and gain the trust of this clientele.

Around two years ago, financial services industry experts asserted that the scrapping of the accountants' exemption to advise self-managed superannuation fund (SMSF) clients would change the landscape of the Australian financial planning industry.

With accountants no longer able to provide advice around the establishment of an SMSF, the industry perhaps envisaged an influx of accountants who would choose to become either fully or partly licensed, which would impact the broader planning industry.

However, numbers from the Australian Securities and Investments Commission (ASIC) have indicated the take-up of licensing options by accountants has fallen well short of the flood of interest that was expected.

This was despite the corporate regulator issuing frequent warnings that accountants who continued to advise without a licence would face punitive action.

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Fewer than 3,000 licenses had been approved at the close of 2016, and according to ASIC, this number had not changed drastically at the beginning of 2017.

The low numbers still do not alter the fact that change is afoot in the planning and accounting industry due to the licensing changes.

The fact of the matter is the number of SMSF members who said they had unmet advice needs reached the highest level observed. According to the Australian Taxation Office (ATO) SMSF statistical report for June 2016, there were 577,000 SMSFs holding $622 billion in assets with more than one million SMSF members. This was 29 per cent of the $2.1 trillion in total held in superannuation assets as at 30 June, 2016.

The ‘Vanguard/Investment Trends 2016 Self-Managed Super Fund Reports' showed 255,000 SMSF members had unmet advice needs, up from 212,000 members last year.

Out of the 255,000 SMSF members with unmet advice needs, 61,000 members wanted to receive financial advice on inheritance and estate planning, 55,000 wanted advice on Age Pension and other social security entitlements, while 52,000 wanted guidance on investment strategy and portfolio review.

Who do SMSFs turn to?

Investment Trends' senior analyst, King Loong Choi, said that 57 per cent of the 255,000 members surveyed preferred a financial planner while 52 per cent preferred an accountant for advice.

Choi warned that under the new licensing requirements, many accountants would not be well-equipped to meet these advice needs.

"Instead what this really says is there may be an opportunity here for a lot of financial planners to partner up with their accountants to better service SMSFs and their advice needs," Choi said.

"And we've got more evidence to show that those planners and accountants who are working more closely together, they're the ones who are typically doing better in the SMSF space."

The Financial Services Council/UBS Asset Management 2016 SMSF Insights report showed that while over 70 per cent used an adviser of some kind, planner usage had dropped from 46 per cent of members to 42 per cent, while accountant usage had increased from 25 per cent to 30 per cent.

The survey also showed older men (55 to 74 years) and those with a wide range of fund levels (from $200,000 to $1 million and above) showed above average trust for accountants, while they were least trusting of other sources of financial advice.

This begs a couple of questions: are there going to be sufficient accountants licensed and authorised to provide advice to SMSF clients? And what opportunities lie for financial planners to capitalise on the demand for SMSF advice and the void left by accountants?

Investment Trends research found nine out of 10 financial planners said their firm had already established a relationship of some sort with an accounting firm.

A survey of 430 SMSF planners found 24 per cent had an in-house accounting firm, and nine per cent had formed a joined venture with an accounting firm. However, 67 per cent did not have in-house accountants.

In terms of a current relationship with an external accounting firm, 10 per cent had no relationship with accounting firms, seven per cent received referrals from accounting firms only while 36 per cent had established two-way referrals with accounting firms and 14 per cent referred clients to accounting firms only.

Rocky road ahead

JWW Consulting industry consultant, John Wiseman, said he anticipated a period of difficulty and uncertainty ahead, with accountants unwilling to continue providing SMSF advice under the new licensing requirements, given the regulatory and compliance burden and the requirement to issue statements of advice.

"I know accountants who just won't even talk about self-managed super funds. If anything they'll say ‘go and see a financial adviser'," Wiseman said.

"I don't think they want to do it because with the huge regulatory burden of financial planners and with the amount of work involved, I don't think the accountants want to go down that track."

Wiseman also anticipated that costs would increase significantly for SMSF trustees who wanted to seek advice, resulting in a decrease in the number of SMSFs, with members switching to retail or industry funds, or a small Australian Prudential Regulation Authority (APRA) fund.

The ATO's SMSF statistical overview for 2014-15 showed in 2015 average assets of SMSFs reached $1.1 million, a growth of 20 per cent over five years. Average assets per member were $590,000, the highest over five years.

"Costs are going to go up significantly because a trustee or members of a self-managed super fund are going to need to go and get advice," Wiseman said.

"When it comes to audit, you've got the self-managed super fund auditors, and already a number of those have indicated that their costings are going to go up."

Financial advisory and chartered accountant firm, William Buck's wealth advisory director, Adrian Frinsdorf said the low licensing take-up by accountants would mean the principal adviser for most SMSF clients would no longer be able to advise on what was essentially a tax structure.

"There are a lot of good financial advisers out there but there are a lot of financial advisers who are very pro to using super wrap accounts instead of self-managed super funds," he said.

"I think they should go and focus on the ethics of the various groups involved. And I think accountants have always stood up with having fantastic ethics on the whole."

Frinsdorf warned that accountants and financial planners would be forced to work together under the new circumstances and said he knew of planners who were having comprehensive conversations with accountants.

However, he noted the reluctance from accountants to transition into the advice space.

"I think sometimes an accountant might not quite comprehend the amount of data that needs to be collected and advice that needs to be produced," he said.

"The financial adviser has the responsibility to make sure they've got the right information to make recommendations. So there's a lot of doubling up with the accountants getting that, passing it through, then it needs to come to the client so a lot of it will be an extra cost that the client will need to bear."

A different ball game

The challenge for accountants would be to justify the increased costs to clients who would refuse to accept paying more for advice that was always provided by accountants.

Vanguard head of market strategy and communications, Robin Bowerman said the challenge for financial planners was to demonstrate their value to a savvy clientele that was focused on costs, fees and advice fees, and a segment that required assurance that they were receiving value for money.

"One of the things that comes out of the research is SMSF investors are typically sceptical when people start talking about specific products or trying to push specific products," Bowerman said.

SMSF clients were seeking an advice proposition based on asset allocation, investment strategy, elements outside of investment like estate planning, insurance, and other structures. They were seeking a financial coach and consultant rather than an investment adviser.

"So the proposition for advice is interesting around SMSFs because it's not a typical, traditional type financial client relationship," Bowerman said.

"They're looking for different levels of advice. They've often got their own investment opinions/biases and the adviser obviously has to work with them to coach them through certain things."

SMSF clients operated in an ecosystem of the accountant, lawyer, and a financial planner that was perhaps linked with the accountant. But the challenge for planners was to earn the trust of SMSF clients.

"Accountants are in a very central trusted position because they're obviously doing the accounts of the SMSF. They're also typically someone who starts running their own business so they're a trusted source of reliable information, a validation source," Bowerman said.

With accountants needing to either attain a limited licence or a full licence to operate as a financial adviser, or form referral partnerships, SMSF Association's head of technical, Peter Hogan, said the association's members were largely opting to attain a full licence to provide product advice, and were doing so well before the new licensing regime came into effect.

"We will get a better picture at our conference when we have a mix of all our members coming in and we have an opportunity to find out exactly how they've responded to these changes and how businesses have changed," he said.

Click here to read part two of this feature: Superannuation reforms — the aftermath
Click here to read part three of this feature: All eggs in one basket