Self Managed Super Funds - Lingering Concerns Amid Growing Demand
The last decade has seen staggering growth in Self-Managed Superannuation Funds (SMSF’s) in Australia (up 27% for the 4 years to 2013). These funds allow individuals to access favourable tax benefits and borrow for investment on the basis that these assets are vested until retirement.
Several factors contributed to the rise in SMSF accounts. Several large and publicised privatisations such as Telstra and the rise of online brokerage services made the stock-market more accessible to the average person. Large market crashes and periods of lacklustre performance fuelled investor discontent with paying investment management fees regardless of whether the manager delivered value or not.
A younger generation of investors, empowered by increasingly available market data and analysis tools want a greater say in how their investments are managed.
At the same time, the move away from an institutional investment manager towards a less sophisticated investor not schooled in mechanics of investment markets is important to recognise. Studies have shown that owners of SMSF’s tend to prefer domestic equities and property investments and shy away from fixed interest and international equities, perhaps perceiving these asset classes as too complex. This has implications for the realisation of long term financial goals and financial risk management. The SMSF investor often lacks the understanding of asset allocation necessary to build optimum portfolios that allocate exposure to different share classes just enough to diversify the portfolio and reduce risks as much as possible.
Banks are concerned that SMSF investors will borrow and direct increasing volumes into the Australian property market increasing the already high levels of property on banks’ balance sheets.
Since SMSF tend to be less sophisticated and educated in investment finance their portfolios tend to be skewed based on familiarity and those perceived as low risk. SMSF investors need to adopt a structured asset allocation approach based on an informed understanding of investment principles. Opportunities exist for established investment managers and SMSF service providers to assist SMSF investors with asset allocation and portfolio construction decisions, education and account administration and trade execution.
SMSF accounts give individuals a greater say in how their retirement savings are invested. But they need to understand the potential pitfalls of leverage and poor asset allocation over the long term.
