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SMSFundamentals: SMSFs Increasingly Attracted To SMAs

SMSFundamentals | May 18 2015

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 section on the website.

By Greg Peel

Do you understand how interest rates work, what effect inflation has on your investments and what diversification of risky assets actually means? If you’re reading this on the FNArena website then we might assume the answer is yes, although you may feel a little unclear about some technicalities. But a survey conducted by the University of Sydney Business School has found that less than half of all Australians can answer basic questions on these topics.

Yet everyone has super. And many are in or approaching retirement.

“What we see is that people who have poor skills in this area are much less likely to have prepared for their retirement,” said Professor Susan Thorpe of the Business School. “They are likely to have found these decisions difficult and alienating and they don’t want to think about it. People are dealing with increasingly complex decisions sometimes involving very large sums of money without understanding the basics such as compound interest. By any objective measure many lack vital financial skills”.

Professor Thorpe was recently appointed to an OECD research committee on financial literacy. The OECD was prompted into action on this matter in the wake of the GFC, which demonstrated the negative effects of “low levels of financial literacy for society at large, financial markets and households”. As a result, financial literacy has become a long-term policy priority in many countries.

ASIC is funding financial literacy programs in Australia.

Of course even those investors with reasonable financial literacy are still eager to retain the services of a financial adviser, whose job it is to lead the anxious through the minefield that is the investment markets. Global asset manager Legg Mason has conducted some research into just what investors across the globe are looking for from their adviser.

Unsurprisingly, investors in most countries nominate “performance” as the greatest benefit of working with a financial advisor. Indeed, 59% globally saw investment returns as the primary reason to seek professional advice. But funnily enough, not so Australians.

Of the Australian investors surveyed, the same percentage – 59% – nominated “creating a formal plan with their adviser to achieve their goals” as their most valued aspect of professional financial advice. Good old Aussies, eh? We don’t need to become tall poppies, we just want to feel at ease with the world.

“Australians are less focused on tracking the annual performance of the investments their adviser recommends as a measure of success,” said Legg Mason’s Global Head of Distribution marketing, Matt Schiffman, after the survey results were released. “For Australian investors, the experience of using an adviser is more about developing a long-term plan for financial independence.”

“As more Australians reach retirement, they are thinking about planning for a comfortable lifestyle 20 or 30 years into the future and how an adviser can help them get there.”

We may not be obsessed with riches but we are a bunch of pessimists, the survey found. Globally, 75% of respondents believe they will be able to maintain their current lifestyle later in life but in Australia, that figure is only half. Advisers do have a key role to play in helping investors feel more comfortable in their financial goals, Schiffman concludes.

Digging further into the survey results for Australia specifically, we might also conclude that we’re a bit nervous about this whole investment game, and really we would rather if someone could just take the anxiety out of our hands. Some 46% of investors nominated “avoiding costly mistakes” as another reason to seek professional advice and 43% cited “having someone to manage their entire portfolio”.

Which is probably why a report released by private wealth manager JBWere and research firm Investment Trends notes that Australian financial advisers are using SMAs for client investments at highest ever recorded levels.

To understand exactly what a separately managed account, or SMA, is, we might first consider the two extremes of superannuation investment.

At one extreme we have the totally passive option of putting all your super into whatever super fund your employer directs your obligation into, or, post retirement, whatever known-brand or television-advertised fund that you recognise. That super fund manager will invest your money and, periodically, let you know how your returns are going, but will not tell you what that fund’s investment portfolio consists of, lest you feel the urge to argue.

At the other extreme, you make all the investment decisions by yourself – maybe with a financial adviser on board, but at the end of the day your portfolio is one you have individually chosen. Cleary the whole point of Self-Managed Super Funds is to have this freedom, but with freedom comes an awful lot of work in choosing which stocks you’d like to own, for example, and then monitoring their performance and periodically adjusting the portfolio.

In between is an SMA. In Australia, your standard SMA is to date limited to stock market investment, and involves someone else with a level of experience and expertise beyond your own selecting a portfolio of stocks and then “managing” that portfolio, post initial selection, by selling and buying and adjusting and introducing new stocks while taking others out. I have put the word “managing” in inverted commas because it is not incumbent upon said manager to actually be invested his or herself. SMAs are most often based around “model” portfolios.

Those model portfolios will not simply be market-tracking, as you can get that from any common or garden fund manager. Nor will they necessarily mimic that which is available as exchange-traded funds (ETF) such as “high yield” or “small caps”. Those portfolios will be more individual, offering a balance of risk/return that may suit certain investors, such as super investors.

Importantly, while the SMA investor is committed to accepting the model portfolio as is, the constituents of that portfolio are published for all to see. If an investor is sufficiently happy with said portfolio, he or she can invest a chosen amount into the SMA and walk away to leave the model portfolio manager to make the decisions and the manager’s sponsoring broking house to carry out the trades and provide performance updates. At any time the investor can exit the investment if so desired. Typically a small management fee is charged, which accommodates broking and administration costs, and in some cases, but not always, a performance fee may also be taken by the manager.

The sudden surge in popularity is nevertheless not being driven by direct investor demand, but by financial advisor demand. As the super self-management industry grows, and investors increasingly look to tailor their investments to predetermined goals, the burden on advisers grows. If an adviser has to select, monitor and manage individual portfolios for all individual clients, the level of time and effort involved in each case is prohibitive.

However if the advisor can match a client’s investment goals with an existing SMA, then that advisor can pass on the onerous workload to the SMA manager.

“A growing number of clients are seeking the transparency of investing directly in shares,” noted Andrew Tracy, Executive Director and Manager of Financial Intermediaries at JBWere, “so for advisers this means monitoring individual stock activity and issuing statements of advice for multiple clients on a daily basis, all of which is not scalable as the business grows.

“SMAs provide an efficient solution for advisers with these types of clients, allowing them to outsource the day-to-day management aspects of maintaining an equity portfolio while maintaining the transparency and simplicity that clients value in direct share investments.”

Advisers have found SMAs particularly useful for SMSFs. The survey found 51% of advisers believe SMAs were more appropriate for SMSF clients than investing directly in equities. The most beneficial aspects of SMAs, in the opinion of surveyed advisers, are the ability to see what the underlying portfolio is actually made up of (46%), the reduced administrative burden vis a vis direct share investment (45%), and the efficient access SMAs provide to professional funds managers.

For those still in the workforce, SMAs remove the obligation to spend time and anxious energy after hours closely monitoring an investment portfolio. For those now retired, SMAs offer a chance to actually enjoy retirement. Shifting the responsibility of client investments onto SMAs is not a cop-out for advisers, as the transparency and flexibility of direct share investment is maintained.

Despite record SMA growth in Australia, it is still early days. The survey found 40% of advisers do not use SMAs simply because they do not know enough about them. Another 20% would like to use SMAs but found they were not available on investment platforms.

“Availability on platform remains a key issue that SMA providers are working through as an industry,” said Mr Tracy. “We’ve made significant progress on this in the past year, with eleven platforms adding SMAs to their offering, allowing 25% of planners to now have access to SMA’s on their primary platform. We expect adviser take-up to continue to improve during 2015 as a result.

“There is also a broader opportunity for SMA providers here around education – it’s clear that advisers view SMAs as an extremely valuable tool in client portfolios once they understand their benefits and begin to use them regularly. The challenge for providers is to keep up that process of education, both to planners and Australian investors as a whole.”

Those advisers who have come to appreciate the benefits of SMAs would like to see the SMA pool expanded. Lower entry point funds for smaller investors would be helpful, as would SMA diversification beyond Australian equities and into international equities, fixed income and hybrid products and multi-asset accounts.

“With the growth of SMSFs and an increasing cohort of investors demanding control, simplicity and transparency when it comes to their investment portfolio, we believe the time is right for SMAs to experience significant growth in the coming years,” said Mr Tracy.


FNArena manages an “All-Weather” model portfolio available as an SMA on the Praemium platform.

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