SMSFs: when three’s a crowd

No one has been particularly surprised at the recent clash that has erupted between industry and retail super funds over the issue of choice, but the do-it-yourself (DIY) super sector has positively relished the furore, knowing it can avoid the debate altogether while still looking forward to increased business post-July 1. And with the abolition of the super surcharge, the economic and regulatory environment has never been so positive for self-managed super funds (SMSFs).

As David Ruddiman, SMSF specialist and managing director of Professional’s Choice Wealth Management, explains “Mal Brough has just handed us the goose that lays the golden egg”.

Impact of choice

Various surveys examining how many individuals will move funds suggest that around 5 to 8 per cent of people in employer-sponsored schemes will take their pension monies elsewhere.

A result that is within the expectations of most people working in the financial services industry, according to a snap poll of 140 individuals taken by Money Managemen t (see tables opposite).

And as Geoff Peck, head of product at BT Financial, points out: “It’s not going to all happen immediately. This is an area that most people haven’t contemplated before, so July 1 is really a kick-off date rather than an end point.”

However, what most industry pundits agree is that the individuals most likely to be engaged by the choice regime will also, in the majority, have the largest member accounts. And many suspect that these high-net-worth employees will opt for some type of DIY arrangement, either complete control with an SMSF, or degrees of responsibility using Australian Prudential Regulation Authority small funds, or wrap products alongside professional financial advice and an external trustee.

James Cotis, adviser with Logical Financial Management, says: “My view on choice is that I think it’s going to be a storm in a teacup. I know there’s been a lot of hoopla in the industry, but I don’t think there’s going to be too much movement.

“But where you will find movement is probably with upper echelons of management — directors or middle management even — who have got a bit of financial wherewithal, and reasonably high account balances. They will be thinking about making a change to an SMSF.”

Even the Australian Securities and Investments Commission (ASIC) has recognised the appeal of SMSFs, and launched new guidance in conjunction with the Australian Taxation Office, to ensure consumers understand what’s involved (see box opposite).

DIY danger

So are the large institutions, those responsible for managing corporate funds, and offering corporate super master trusts, at risk of losing sizable assets?

According to Cotis, fund managers and banking institutions are vulnerable.

“There may be only a dozen who move, but that might represent 80 per cent of the whole fund balance. So there’s potential exposure there,” he says.

Ruddiman adds: “I think they’ve got a significant amount to lose, because they are going to lose the upper end where it’s like money for jam for them.”

Obviously, the industry funds may suffer in the same way, as employees decide to strike out on their own.

As such, it is surprising that industry and retail funds are at such loggerheads, when pension fund assets are less likely to migrate from one to the other, but move out of pooled funds altogether into DIY super arrangements.

Ruddiman, who is also chair of the regulatory committee of the SMSF Professional Association of Australia comments: “It’s quite amazing that five years ago when we were talking to people in the industry, they didn’t see SMSFs as a threat at all.

“Suddenly now everyone is rushing to realign their products and service offerings with SMSFs. I just think a lot of it is fear.”

Still, while the big four institutions and their followers may be at risk in terms of shrinking employer funds and corporate master trusts, the fact that they tend to have a finger in all pies means they are fairly confident about the impact of choice on their business.

Peck explains: “BT is quite well-positioned in that we have a large proportion of the various parts of the super market. We are a fund manager, so a lot of our clients are industry funds and large corporate super funds. We have a corporate super offering, we have large retail offerings, and we have wraps for the DIY market.”

Brian Bissaker, general manager of product and investment services at Colonial First State (CFS), says: “We think there will be a number of people choosing SMSFs, but that will be from the corporate sector and possibly industry funds where there has been compulsion.”

In recognition of the increasing value of the DIY market, CFS has just launched a direct share trading service with Commsec that is available to advisers using the FirstChoice wrap service.

While Bissaker concedes that CFS may see larger accounts move from its corporate master trusts, he says “we are not doing anything special about it”.

According to Bissaker, the products are keenly-priced, offer automatic insurance cover, and already provide investment choice, so can compete easily with other super offerings in the market.

And choice is unlikely to prompt fee reductions in the corporate super space.

Peck explains: “It is already so competitive and the larger corporate super master trusts already compete with industry funds.

“The whole market is already driven to a very low cost base. Scale is the main game; it is the only way you can continue to be competitive no matter what part of the market you’re in. Nothing about choice changes that.”

Exit fees

On the retail super side, providers, whether they like to admit it or not, also have another retention weapon at their disposal — exit fees.

While all new products post-July 1 are likely to be offered exit-fee free in order to attract new members, pre-existing members of retail accounts, and in some cases corporate super master trusts, may find there is a large penalty if they wish to transfer their assets.

Cotis says: “Exit fees are going to be a potential sleeper. In years gone by, when people got into retail funds, there were big commissions paid up front to advisers. So for them to leave before the term, there are exit fees and penalties which need to be paid.

“It doesn’t happen much these days, at least I would like to think it doesn’t, so what’s going to happen is there are going to be people saying ‘I want to get out of this, but it’s going to cost me $20,000 to do it’. But that will be up to them I guess.”

The lure of SMSFs

Control is the main driver for SMSF creation, although tax benefits and estate planning options also play a significant part in their overall attractiveness to cash-rich investors.

But Bissaker says some of the advantages are overplayed.

“If you put 12 tax benefits down, eight of them apply to super funds generally.”

Another example relates to franking credits, which are used in SMSFs to reduce contributions tax.

“If you invest in the Australian shares portfolio of our fund, you get the full value of the franking credits coming through,” Bissaker says.

However, he admits that SMSFs may be a good option for those with issues around reasonable benefit limits (RBLs).

“You can also push the envelope. Because you’re the trustee and the member, you don’t have a fiduciary obligation to care about what happens to other members, so you can allocate monies to reserves and do all sorts of other things in an SMSF,” he adds.

But “the Government is trying to shut all those loopholes. If you’re 10 years out from retirement, or even five years, I wouldn’t bank on them being around”.

There is also some concern that individuals need more education on trustee responsibilities, with a recent survey by CPA Australia showing that 23 per cent of individuals with an SMSF were unaware that they held the role of trustee.

However, with an increasing number of SMSF specialists in the financial advice market, access to the necessary guidance is in no short supply.

While the buck will always stop with an individual as trustee, for the most part SMSF consultants can hold their client’s hand through the regulatory processes, such as preparation of trust deeds and auditing requirements.

DIY business

For advisers, SMSFs are certainly a lucrative business.

It is generally considered they are only viable for those with at least $200,000 in pension assets, and choice, as well as the removal of the super surcharge, is likely to encourage more people to set up their own schemes.

Cotis says: “Another thing that is going to spur it on is that fact that from July 1 you will be able to work and receive a non-commutable income stream from a pension fund. People are going to be looking at that and wondering how it fits in with an SMSF. And it actually fits in quite nicely.”

Ruddiman also says that a new generation of investors may be attracted to SMSFs — literally a new generation, as he believes the children of parents with an SMSF may be encouraged to join post-July 1.

He explains: “They may choose to aggregate their benefits in a pooled fashion with their folks. And that’s going to give them a significant cost advantage because their parents are already paying for the accounting, audit, compliance and other costs associated.

“So they can run a pooled investment strategy with their parents, while retaining their individual member account.”

So while the super war rages between industry and retail funds, SMSF advisers are quietly counting their pennies.

Ruddiman says: “There’s a lot of mud-throwing between the retail and the industry funds at the moment, and that’s a great opportunity for us in the SMSF industry, because we don’t have to get involved.”