Dining out on SMSF opportunities

A new investment performance survey by self-managed superannuation fund (SMSF) specialist provider, Multiport, offers a glimpse of the increasing role planners are playing in the sector.

It revealed that 350 SMSFs administered by Multiport, all of which received advice from planners, produced returns for the 12 months to July 31 this year that matched fund managers for investment performance.

With a risk profile between balanced and moderate risk, the funds achieved an average 10.15 per cent return for the year, compared to researcher Morningstar’s averaged return for balanced retail super of 11 per cent for the period.

The survey generally reflects an increased presence of planners in the SMSF sector, due in part to demand for their services from clients and also accountants, according to Multiport chief executive John McIlroy.

He is one of a number of planners and representatives of specialist SMSF provider groups that suggest immense new opportunities are opening up for planners in the fast growing sector.

The sources told MoneyManagement that the opportunities generally lie in both the amount and nature of the work available to planners and in their relationships with accountants, the sector’s traditional gatekeepers to the SMSF trustee.

Change equals opportunity

They also suggest that the opportunities are being driven by recent legislative changes, mainly relating to the Financial Services Reform Act (FSRA) and superannuation regulations, and also by the increasing compliance burden placed on accountants by the Australian Taxation Office(ATO).

The opportunities also apparently stem from a reticence by many SMSF trustees for one reason or another to be able to better invest the growing balances that have built up in SMSFs, now said to be an average of about $300,000.

Finally, there is growing opportunity for both planners and accountants in the sheer volumes of SMSFs being created in an ageing society, believed to be running between 1,500 to 2,000 funds each month, adding to a current SMSF total of about 310,000 Australia-wide, with about $190 billion in assets.

McIlroy himself believes the opportunity for planners in the market partly results from an increasing trend by smaller accountancy practices to outsource the advice component to planners and specialist SMSF providers.

“We are seeing some increase in this trend by a number of accountancy practices, notably those with a small number of super funds, say 20 or less, who are telling us effectively that they don’t want to get involved with SMSFs beyond the financials and lodging tax returns, because it’s not core to their business,” McIlroy says.

Tougher compliance

“There’s also the feeling that the Australian Taxation Office is getting tougher on compliance, and they don’t necessarily have control over what the client does with the money, so they should outsource these services.”

Like most industry sources, he believes maximising opportunities in the sector lies in accountants and planners working together, and in conjunction with a specialist provider, which can provide up-to-date information on the SMSF that is valuable to the planner, accountant and client.

McIlroy bases his opinion on a cursory extrapolation of the total number of SMSFs that are either audited by accountants, which he estimates to be about 80 per cent of the total number of SMSFs, or 270,000 SMSF funds.

He added that there are industry statistics to suggest that on average each of these accountant practices audit about 27 funds each, presenting opportunities for external planners to market their advice services to them.

McIlroy also believes the environment of choice of fund gives more initiative for planners to enter the SMSF market than in the past.

“The extent of an unlicensed accountant to give advice about starting a SMSF is a bit grey currently [under choice], but certainly if an accountant wanted to provide a more comprehensive advice service to his clients he should be licensed,” he says.

SMSF Professionals’ Association of Australia (SPAA) chief executive Andrea Slattery said “any talk of the role of planners in relation to the accountant in servicing SMSFs would have to be about opportunity rather than competition”.

“There’s an enormous opportunity for planners and accountants for business in the SMSF sector, and they really should be working together to maximise these opportunities.”

She says a “common misconception out there is that there is only a certain amount of advice you can give to a SMSF trustee, as if you’ve got your planners and accountants in a box, and if you take an accountant out that means planners have more room to spread or vice versa”.

“In fact, the market for SMSF advice is actually huge and there is not a limit to what you can do from an advice capacity. There are, for example, more than 33 pieces of legislation that impact on advice capacity, depending on what your professional background is in SMSFs.”

Slattery says all of the recent legislative changes allow planners to add real value to SMSF trustees, if indeed they have real knowledge and experience to be recognised as professionals.

Dual beneficiaries

“There is an absolute role there for a planner in the SMSF sector in that a planner is the only one who can advise on investment strategy or risk strategy or analyse those sorts of things if the trustee doesn’t actually do it.

“On the other hand, there’s an absolute role for the accountant to do the financials and lodge the returns, if the SMSF trustee/s don’t actually lodge the returns,” Slattery says.

Super Concepts national sales manager Justin Sadler says the SMSF market offers opportunities for those planners that “become structural financial planners for self-directed clients, rather than the traditional product adviser”.

“Planners can definitely play a fee-for-service role in assisting clients with their structural issues when it comes to managing their affairs in a SMSF as well as assisting and advising the accountant,” he says.

“However, they are going to need strong client strategic and accountant relationship skills and what they probably need to do is partner with specialist providers that are able to assist them not only with their own clients but also with relationships they might have with their accountants.”

From a planner’s perspective, he says, “One door may have closed in the recent Federal Budget in relation to providing pension advice around RBLs [reaonable benfit limits], but new legislation has opened up many new areas, allowing diversification through service offerings”.

These service offerings for SMSFs include: structural planning, lifestyle objectives, asset allocation, taxation and income advice, as well as transitioning from personal tax liabilities to tax-free income from superannuation.

“It all comes back to what the client wants,” he says, “and more often than not clients are asking the planner to assist with the SMSF strategy, the structure, and in some instances even in relation to some of the product placement.

“On the other side of the fence is the client who effectively is self-directed and just wants a validation of their strategy, but not help with their investments, which they are quite comfortable in doing.”

Sadler said planners are generally well equipped to deal with the investment process, but what they do need to start looking at is what is happening in the marketplace and what that means in relation to their clients.

“If clients have assets outside super, for example, they might want to move those assets inside the super environment so they can tap into tax-free income from age 60 once someone retires.

“Planners need to be aware of this as it might have some ramifications to the way clients deal with them now and in the future,” he says.

New attitude

James Cotis, managing director of Logical Financial Management says up until recently, accountants have “viewed planners sceptically as glorified life insurance salesmen”, but this is changing, leading to opportunities for planners.

“As of recently, however, accountants are starting to see that there are planners out there that operate in a fee-for-service type arrangement rather than a commission basis, which tends to irk the accountant.”

Cotis says the planners that will succeed in forging alliances with accountants are those who are fee-based and those who are proactive in offering both strategic advice and portfolio management.

“It would be those practices that are constantly showing their clients things like IPOs [initial public offers], placements, those sorts of things, on a proactive basis.”

He says planners can also offer accountants services such as consolidated tax reporting, which essentially means they no longer have to sift through a shoebox full of information from the client at the end of every financial year.

“This is also good for the client because the client has real time access, because they can access it in the Internet and they know exactly what is going on in terms of CGT [capital gains tax], income tax of the fund, etc.

“Finally, it’s good for us advisers as well, because if we need to make strategic changes to their asset allocation we can do it in real time as well.”

He says consolidated tax reporting “gives a whole bunch of the efficiencies” to the traditional ‘shoebox’ scenario, which traditionally forces accountants to work on a SMSF up to nine months retrospectively.

“Even though the financial year ends in June 30, the clients don’t have to get audited accounts and returns in until the following March.”

He says one way to achieve these efficiencies is through a platform, a “good transparent platform that is cheap, be it a wholesale managed fund or direct shares”.

Professional Investment Services head of SMSF Peter Kelly says the “recommendation to establish a SMSF has been the domain of the accountant, and continues to be so as the traditional gatekeeper to the client”.

Kelly says that when FSRA was introduced there was a lot of concern among accountants, as initially this prevented them from recommending the establishment of a SMSF.

However, he says there was an amendment (section 7.129a) to the act that resulted in what became known as the accountants ‘carve-out’, which gave a ‘recognised’ accountant the ability to recommend a client establish a SMSF, without being licensed under FSRA.

“Quite clearly, when you look at the FSRA regulations,” he says, there are a “range of things that have been the traditional domain of the accountant that they can continue to provide advice on without being licensed”.

“These include taxation advice, administrative services, audits, and compliance advice in relation to complying with the FSRA regulation.”

However, there is a “difficulty for the accountant in the way the legislation is currently drafted if an accountant holds their own Australian Financial Services (AFS) Licence, or they act as an authorised representative of a AFS licensee,” he says.

“An accountant can’t prepare an investment strategy for the SMSF, can’t provide investment advice, and can’t advise on the amount of contributions somebody should be making.”

He says an accountant can “certainly advise a client — particularly if the client is an employer — that they have an obligation to make super guarantee contributions on behalf of their employees, but they can’t recommend that a client make additional contributions to a superannuation fund or to their SMSF.

“So, because of the blurring that has occurred between these roles, the position of the accountant has changed relative to SMSFs, and they can’t do perhaps all the things they previously could do.”

He emphasises that their role “hasn’t diminished though, and there is a great opportunity for accountants to work with planners to provide the full range of services that need to be given to the client”.

“There are some gaps in an accountant’s services now that can be picked up by planners, but the real opportunities will require accountants and planners to work together to provide clients with a full and comprehensive SMSF service.”

Chris Murray, SMSF specialist planner at (specialist provider) Monitor Money, agrees that accountants were traditionally the initial point of call for SMSFs, but said the FSRA changes in 2004 “moved the pendulum” over to financial planners because of the licensing requirements.

Murray says that under the provisions of the Corporations Act, SMSFs are “identified as investment products to a certain degree, which requires one to be a licensed planners to give advice on the running of the funds”.

He says there is “some resistance among accountants to becoming an authorised representative, one reason being that it’s too time-consuming to run off and get this qualification, particularly as they often don’t see SMSFs as a core business”.

As a result, these accountants are “either looking to dealer groups (to provide this service) or looking to create some sort of alliance where they can farm this out to a financial planner or SMSF specialist providers”.

“We have accountants as clients who are happy to do the accounts and auditing for SMSFs, but not the rest of it, such as making sure the deeds are up-to-date, and that contributions are done correctly.”

Another issue, he says, is that there have been so many legislative changes in superannuation in the past six years, the accountants aren’t keeping up to the required new compliance standard, which provides an opportunity for planners to provide relevant services.

Monitor Money, for example, generally “enters strategic alliances with accountants who provide a service for them to satisfy the compliance and regulatory end that they can’t manage as day-to-day accountants”.