The leader of the pack

The SMSF sector has experienced strong growth and provided great satisfaction for its members, but can it continue? selfmanagedsuper journalist Todd Wills takes stock of the industry’s successes, areas for improvement and future prospects.

SMSFs have come a long way. Over the past decade, 110,000 new SMSFs have been established, adding 200,000 members, and the value of the assets they hold has almost doubled to over $900 billion. In the past year alone, over 1600 new funds were established per month on average.

Originally described by former prime minister and treasurer Paul Keating as “an afterthought added to legislation as a replacement for defined benefit schemes”, SMSFs have evolved into a robust industry with its own growing ecosystem of professionals and practices. Recent evidence suggests the sector is not only thriving, but also setting benchmarks for retirement outcomes.

For instance, the “2024 Vanguard/ Investment Trends SMSF Report” indicates SMSF members are less worried about outliving their retirement savings compared to those in Australian Prudential Regulation Authority (APRA)-regulated funds. Similarly, Roy Morgan’s January 2024 “Superannuation Satisfaction Report” found SMSFs have the highest member satisfaction among all superannuation options, reaching a two-year high.

SMSF members appear to be entering retirement with more confidence compared to their counterparts in APRA-regulated funds. However, it’s worth considering why this is the case and whether it will always be so. This was a central focus of the thought leadership breakfast held on the first day of the 2024 SMSF Association National Conference in Brisbane in February.

A key theme emerging from the panel discussion, which included representatives from both the SMSF and APRA-regulated fund sectors, was that while SMSFs are currently performing strongly when it comes to member engagement, industry funds are also embarking on their own period of growth and are looking to step up the retirement income products they can offer to members.

There is clear competitive tension continuing between SMSFs and APRAregulated funds. Public offer funds must attract and retain members, especially those with larger superannuation balances, to maintain their economies of scale. Meanwhile, SMSFs must continue to justify the costs and effort that goes into managing them, particularly as industry funds enhance their market offerings.

Where SMSFs excel

While control and flexibility are widely acknowledged as key motivators for setting up SMSFs, this doesn’t tell the whole story of their appeal. Unique opportunities and the agility with which trustees can implement emerging strategies are other “powerful” factors behind their popularity, according to SMSF Association chief executive Peter Burgess.

“Self-managed super funds really put members in the driver’s seat and we shouldn’t underestimate how valuable that has been for many investors to be able to make their own decisions and have more investment flexibility,” Burgess explains.

“Historically, SMSFs have been a leader in innovation in the superannuation industry. I can remember the days when large funds didn’t even offer a pension option to their members and SMSFs were really leading the way back then in terms of offering retirement income products to members.

“There are certain strategies that we know can only be implemented in self-managed super funds. For example, think of contribution strategies or reserving strategies in the lead-up to 30 June where taxpayers are able to claim a double deduction in some situations.

“We know that SMSFs have the ability to invest in real property and to borrow to invest. There are estate planning strategies as well. The ability to have multiple pensions, to quarantine different tax components in those pensions and to have that all supported by one pool of assets, again, is something unique in SMSF land.

“SMSFs have led the way in the seamless approach to moving members from the accumulation to the pension phase without it being a capital gains tax event and they have certainly led the way when it comes to investment flexibility.”

He also touches on another key point discussed at the thought leadership breakfast: SMSFs have driven innovation in Australia’s superannuation system for some time, a view shared by Heffron managing director Meg Heffron. She notes it would be difficult to find a strategy or service used in industry funds today that wasn’t first employed in an SMSF.

“I think one of the reasons SMSFs lead the charge on innovation is because self-interest is a really powerful motivator. In an SMSF, you’ve often got only one or two members, therefore you can run it and do the things that make sense for that very small group of people,” Heffron observes.

“A really simple example of that is when there’s a new investment product, SMSFs will often be one of the first investors because they don’t have to get it on a menu. If the member or the trustee researches it and decides it’s a good investment, then they go for it.

“People like SMSFs because they’ve got control and flexibility, but I think SMSFs are about more than that. Every time you read a story about the poor widow who couldn’t get out her husband’s super when he died because it took ages for the fund to pay it out, that never happens in an SMSF.

“Yes you might be sitting there waiting for the insurance claim, but you can take the death benefit from the balance that’s already in there and you could take that tomorrow if you wanted.”

SMSFs also seem to have benefited from a broader shift in the superannuation system. Australians, regardless of their fund, are becoming more active with their super from a younger age. This shift can be attributed to several factors, including the maturity of the superannuation guarantee regime and the wealth of information available via social media and the internet.

For example, findings from the aforementioned Vanguard/Investment Trends report indicate members are now establishing SMSFs at an average age of 46, whereas in 2005, the average age for fund establishment was closer to 51.

“The genesis and motivation of people moving their super to a self-managed super fund is often for an investment opportunity – they think they could do it better – or small business owners wanting to buy a property for them to run their business from,” Cooper Partners Financial Services director Jemma Sanderson says.

“We’re also seeing more people at a younger age look to use SMSFs as a retirement savings vehicle. Previously there would certainly be more people closer to retirement age [establishing funds] as they’re a bit more engaged with their super, but we’re definitely seeing people becoming more engaged with their super earlier on.

“That engagement leads to them considering are they in the right fund. The one that was set up for them as a default many years ago when they started working and it’s been set and forget, has that actually been of benefit to them or not?”

Room for improvement

Clearly, there is much to admire about the achievements of SMSFs in their short history within the superannuation system, but the sector will continue to face challenges. Regulatory intervention, illegal early access of benefits and misconduct by trustees and practitioners will pose long-term problems for the industry. In the short term, the provision of financial advice, while not an issue exclusive to SMSFs, remains a significant concern.

“I think access to advice is one area that we need to improve. When you look at the research that’s come out recently in the Investment Trends report from Vanguard, it’s quite concerning that the number of SMSFs that are now seeking advice are at all-time lows. What we’re seeing coming out of this research is that people are turning to family, friends, colleagues and the internet to get information around SMSFs and that’s a concern,” Burgess observes.

“We’re seeing an increase in the amount of money taken out illegally and an increase in the number of individuals being disqualified, so we think it’s important that these individuals have access to advice.”

As Burgess highlights, a shared concern within the industry is ensuring the integrity of information available to both existing and prospective SMSF trustees as many are now getting their information from non-traditional sources.

The Vanguard/Investment Trends report revealed 40 per cent of SMSF trustees surveyed had established a fund after conducting internet research, whereas historically, accountants or advisers were the main influencers for establishing an SMSF.

“I think we’ll always have to do better at education. SMSFs by definition are about people who are engaged with their super and there’s a lot of information on the internet which lends itself to some education,” Heffron notes.

“However, I think much of the illegal early access that is happening is because people are not actually aware of how dangerous it is to take the money out of your SMSF. What we’re experiencing at the moment is the slight lag between information you need to set up an SMSF without the information you need to realise when you shouldn’t set one up.”

SMSF Alliance principal David Busoli echoes the concerns of Burgess and Heffron regarding the need to improve communication in the SMSF community and adds the issue will only be exacerbated by a shortage of specialist advisers within the industry.

“We’ve seen a significant reduction in SMSF adviser numbers, particularly since SMSF advisers were generally the more experienced, older part of the sector and they’re the ones that have been driven out. There’s not enough advisers who truly understand the benefits of SMSFs and the sector has some significant barriers to entry. There’s not a lot of people falling over to become financial advisers at the present time,” Busoli says.

“The sector has lost those incubators, the AMPs and the National Mutuals – they were large organisations that applied quite significant resources to bringing new people in and that benefited the sector as a whole as they spread throughout.

“Now that we’ve lost those, we’re really looking more to the industry funds, which is why the government has thought up this ‘qualified adviser’ tag to put on people who are trained out of industry funds. I can see they may be taking a little bit more of the lead in that regard.

“That concerns me a little because industry funds have a vested interest to play down the benefits of SMSFs. I think there’s certainly not going to be the focus there may have been previously on SMSF education.”

The road ahead

Another key takeaway from the panel discussion at the thought leadership breakfast was the potential for collaboration between SMSFs and industry funds to enhance the overall system. As noted earlier, SMSFs have been recognised as pioneers in innovation within the Australian superannuation landscape, but this may not always be the case.

“There are certainly plenty of areas that we can work together. One obvious example is around cybersecurity and the risk that the whole industry faces from scams. No doubt the large funds are investing a lot of money in cybersecurity and artificial intelligence and this is one area where I think the SMSF sector can learn from the larger fund sector,” Burgess notes.

“In the future, it’s going to be interesting because we know the larger funds are going to have a greater focus on the pension phase. We know the regulators and the government are expecting the large funds to do more in that space to come up with new retirement income products that address things like longevity risk, to be educating their members more on retirement income products and the things they should be doing in the lead-up to retirement.

“It’s inevitable we’re going to see the large funds investing a lot of money in their retirement income products. We may find they start to lead the way and then there will be things the SMSF sector can learn from some of the innovation that will occur in the large fund world around longevity risk and things like that.”

While there is a space for collaboration between the two sectors, they remain opposed and it’s clear SMSFs will need to evolve to keep pace with industry fund developments.

“What we are seeing is the bigger funds are becoming more competitive in the space that probably previously was more the SMSF realm. By that I mean they’ve got much wider investment options available,” Sanderson acknowledges.

“The industry funds are considering if someone gets to a certain superannuation balance, are they going to be moving their money into a self-managed fund. In order for that not to be a consideration, they need to be competitive in terms of the products and the investment options that they’ve got, as well as ensuring the ease at which people can transact if they want to change their investment options.

“Sometimes the investments that might be recommended by an adviser within a selfmanaged fund can actually be achieved in a non-SMSF space. If their financial adviser can get access to the same investment menu in a non-SMSF environment, then they might go down that path instead.”

One instance of APRA-regulated funds enhancing their commitment to providing products for SMSF trustees comes from industry super fund Hostplus. Hostplus introduced its Self-Managed Invest (SMI) product in 2019, enabling SMSF members to access to several of its investment options and therefore leverage the advantages of the fund’s scale, as Hostplus executive manager of intermediary distribution and growth Lisa Palmer highlights.

“We created our Self-Managed Invest offering because we recognised many of our assets, such as our property, infrastructure and venture capital investments, are typically beyond the reach of an SMSF investor. Our SMI product is designed to offer the choice and control many SMSF investors are looking for alongside the investment opportunities and diversification that come with a fund having the scale of Hostplus,” Palmer says.

“We have gathered feedback from investors in the past and while several factors typically influence their decision to invest in SMI, including our competitive fees and costs compared with other investment products, most have emphasised the importance of portfolio diversification. They particularly value access to unlisted assets and investments, and they appreciate Hostplus’s reputation as a longterm investor.”

Most signs suggest SMSFs are leading the pack where it matters – in member engagement and retirement outcomes –however, the ongoing evolution of industry and APRA-regulated funds will test the sector. While adaptability has traditionally been its strong suit the uncertainty lies in how long SMSFs can remain in front.