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SMSFundamentals: Financial Advisers Add Diversity

SMSFundamentals | Jun 06 2013

SMSFundamentals is an ongoing feature series dedicated to providing SMSFs (smurfs) with valuable news, investment ideas and services, in line with SMSF requirements and obligations.

For an introduction and story archive please visit FNArena's SMSFundamentals website.


This story was first published on May 30 for subscribers but is now open to general readership.


By Greg Peel

SMSFs are the largest category of Australian superannuation representing 31.5% of the market and over $490bn in funds invested. The rise of SMSFs over the past decade reflects a distrust of the big fund manager names in the country and a rejection of their fees and charges which erode super returns. Similarly, SMSFs have shied away from financial advisers seen to be connected to large fund managers through commission backhanders.

Yet for many SMSFs, the maze that is financial market investment is too dangerous a place for the inexperienced investor to go it alone, hence advice is being sought from a newly evolved breed of truly independent financial planners. The importance of financial planning is further enhanced by the need to navigate the minefield of tax implications and ever-shifting government legislation.

Having completed a major study of service providers to SMSFs, conducted over April-May, CoreData has found distinctions between the portfolio allocations of advised trustees and their go-it-alone peers. In short, all trustees have benefited from high returns on term deposits and most still hold shares as their largest allocation. But as interest rates fall and new investment avenues are sought, advised trustees are exhibiting a greater diversification of asset classes.

The following table breaks down current portfolio allocations into asset classes, with the blue bars representing all SMSF portfolios and the grey bar representing the cohort of SMSFs accessing financial advice.
 


As we can see, equity investment still dominates allocations but cash and term deposits come in second. The difference is that those being advised are less weighted to equities, and to cash, and more weighted to property and fixed income. The implication here is that all SMSFs have sought a balance between the safety of cash and the yield available in stocks, but advised SMSFs have spread their investments further across other asset classes to enhance this risk/reward ratio.

Of particular note is the class of international equities, for which advised SMSFs have almost double the allocation of all SMSFs. When it comes to international equities, trustees prefer to turn to fund managers, while the majority of trustees make their own domestic stock choices.

“One consistency between SMSF Trustees as a whole and advised SMSF Trustees has been the high allocations to cash and term deposits within SMSFs (versus the larger super funds),” notes CoreData senior consultant, Angus Dennis. “This high allocation has been an effective technique for SMSFs to reduce their volatility while maintaining returns through the historic competitive returns of both cash and term deposits in Australia. Now though a changing market environment is leading to a review of this strategy.

“The recent reduction in cash rates to record levels by the RBA, appears to be giving SMSF Trustees and their advisers cause to consider shifting some funds to other sectors. The interest in shifting from cash and term deposits is more evident in the group of advised SMSF Trustees, although all SMSF Trustees are also considering moves”.

CoreData surveyed not only current portfolio allocations, but allocation intentions among all trustees. The following table outlines those intentions, with advised SMSFs on the left and all SMSFs on the right. Red bars represent percentage intended decreases in each asset class, blue bars no change, and green bars intended increases.

 

Again we can see some noticeable differences. Almost as many total trustees are happy with their allocation in Australian equities as there are advised trustees looking to increase their allocation. What the data are not telling us here, however, is what type of stocks are being invested in or are intended to be invested in, with the obvious split being “defensive” or “yield” stocks, which have had a very good run, and “cyclical” or “growth” stocks, which are yet to run.

What is very clear is that advised trustees are much keener to further exit cash and deposits as interest rates fall, with a much greater inclination to shift into property and “alternative” investments.

It is no stretch to presume that the total group of SMSFs is more inclined to stick with “simpler” assets, such as shares and deposits, given the large number of trustees choosing not to seek professional advice and a reasonable assumption of inexperience. Those trustees spreading their investment dollars across a wider range of asset classes no doubt reflect a greater “knowledge” of financial market opportunities, with that knowledge being sourced from investment professionals as well as reflecting knowledge through ongoing personal experience and research.

“In terms of investments generally,” says Angus Dennis, “it is evident that as the preference for financial control of SMSF Trustees rises so too does the investment skill of the SMSF Trustees. With control over investment still the number one (37% of Trustees) reason for starting an SMSF, service providers need to clearly bear in mind the investment skills of SMSF Trustees in their offering”.

Another notable factor to come out of the CoreData study was that of the role of insurance. In July 2010, 13% of trustees had shifted life insurance into their SMSF portfolio, while in this 2013 survey that number has risen to 27%.

“For SMSF Trustees the top reason for uptake of insurance stated was that it is more financially and tax efficient to have insurance within the SMSF,” Mr Dennis notes.


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