SMSF – Page 3 – Digital Finance Analytics (DFA) Blog

SMSFs Outstrip Retail Investors

CommSec analysis has found self managed super fund (SMSF) investors trade twice as often and hold more diverse portfolios than retail investors.

CommSec data has found that SMSFs place double the amount of equities trades on average compared to non-SMSF holders.

Marcus Evans, Head of SMSF Customers, Commonwealth Bank said: “SMSFs are very active in the equities space. Many people often view SMSF accounts as dormant with a lot of long-term investments, however CommSec data shows that this isn’t the case.”

In terms of portfolio make-up, SMSFs have a far more diversified portfolio, holding an average of 14 different securities in their portfolio, compared to just seven for the average equities investor.

“SMSF accounts tend to be far more diversified than those of retail investors, recognising that diversification is an important part of reducing risks and managing a robust portfolio over the long-term,” Mr Evans said.

An analysis of CommSec SMSF trading patterns for the week ending 28 August 2015, which included the biggest single day drop since the GFC, shows an increase in total trade volumes, with overall net buying among SMSFs.

“The increase in trading volumes favouring buying during recent volatility shows investors are constantly keeping an eye on the market and dispels the myth that SMSFs are conservative investors,” Mr Evans said.

In addition to portfolio diversification, SMSFs also hold equities across a broad range of industries, with more than 20 sectors represented. Bank holdings are the most popular equities, making up more than 30 per cent of SMSF holdings, followed by Materials (10 per cent), Telecommunications services (7.3 per cent), Diversified Financials (5.8 per cent) and Food & Staples (5.7 per cent).

“SMSFs are continuing to grow and diversify their portfolios, however equities comprise just one asset class. To have a truly diverse portfolio SMSFs need to look across asset classes for broad investment opportunities,” Mr Evans said.

Property Group Spruiking SMSF Property Punished

Following ASIC action, the Supreme Court of NSW found Park Trent Properties Group Pty Ltd (Park Trent) had been unlawfully carrying on a financial services business for over 5 years by providing advice to clients to purchase investment properties through a SMSF.

In his judgment, his Honour Acting Justice Sackville said it was in the public interest that Park Trent be restrained from carrying on a financial services business.

ASIC launched legal proceedings in November 2014 against Park Trent who, by the time of the trial in June 2015 had advised over 860 members of the public to establish and switch funds into an SMSF.

In handing down his judgment, his Honour observed that Park Trent’s business model depended on “persuading relatively unsophisticated investors of the virtues of using their superannuation accounts to purchase investment properties and to establish SMSFs… Investors were influenced to make important decisions concerning their superannuation strategy with little or no genuine consideration of whether the decision took proper account of their individual financial circumstances. Some suffered financial loss as a consequence.”

His Honour also referred to the role of Park Trent’s CEO, Ronald Cross and referred to his “willingness to ignore legal advice as to the nature of Park Trent’s statutory obligations.”

His Honour said that his decision “serves as a warning to others who conduct or propose to conduct businesses which seek to influence clients to establish SMSFs for investment purposes, without having the necessary licence to do so.”

ASIC Deputy Chairman Peter Kell said: ‘This outcome demonstrates the courts, ASIC and the public will not tolerate this type of unscrupulous behaviour.

‘Property spruikers who recommend people invest in property via SMSFs, or facilitate such an investment, and who do not have an Australian financial services licence are breaking the law.

ASIC’s message is that anyone recommending or facilitating SMSFs as a way of investing in property will need to have a licence and provide appropriate advice that prioritises the client’s interests.

‘It is important that advisers who deal with SMSFs are appropriately licenced because the important safeguards and standards that come with being licenced are in place for a sector which is of growing importance to more Australian investors.’

The parties have until 29 October 2015 to file submissions on the form of final orders.

Property Investment Via SMSF Still On The Rise

As we round out the household segmentation analysis contained in the recently released Property Imperative report, today we look at residential property investment via a self managed superannuation fund.

APRA reports that Self-Managed Superannuation funds held assets were $589 billion at June 2015, a fall from $600 billion in March 2015.

Throughout the survey we noted an interest in investing in residential property via a self-managed superannuation funds (SMSFs). It is feasible to invest if the property meets certain specific criteria. In August the Government said such leveraged investments had their support, although the FSI inquiry had suggested such leverage should be banned. The rationale for this earlier recommendation was to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly and fulfill the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle. Is this something which the Turnbull government might revisit?

Overall our survey showed that around 3.35% of households were holding residential property in SMSF, and a further 3% were actively considering it . Of these, 33% were motivated by the tax efficient nature of the investment, others were attracted by the prospect of appreciating prices (26%), the attractive finance offers available (15%), the potential for leverage (12%) and the prospect of better returns than from bank deposits (10%).

We explored where SMSF Trustees sourced advice to invest in property, 21% used a mortgage broker, 23% online information, 11% a Real Estate Agent, 14% Accountant, and 7% a Financial Planner. Financial Planners are significantly out of favour in the light of recent bank disclosures and ASIC publicity on poor advice.

The proportion of SMSF in property was on average 34%.

According to the fund level performance from APRA to June 2015, and DFA’s own research, Superannuation has become big business, with total assets now worth over $2 trillion (compare this with the $5.5 trillion in residential property in Australia), an increase of 9.9 % from last year.

SMSF of $200,000 or less not cost effective – ASIC

ASIC has released two information sheets to improve the quality of advice provided by advisers on self-managed superannuation funds (SMSFs). The information sheets deal with the cost-effectiveness of an SMSF, making clear ASIC’s view that an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests and that advice to establish one below that threshold is more likely to be scrutinised by ASIC. They are also intended to assist advisers comply with their conduct and disclosure obligations under the Corporations Act and outline what ASIC looks at when undertaking surveillance in this area. They specify the types of risks and costs that an adviser should consider, discuss and then disclose to clients when providing advice on establishing or switching to, an SMSF.

ASIC Deputy Chairman Peter Kell said, ‘Setting up an SMSF is a significant financial step for consumers and many factors can impact their decision. It is therefore important that consumers receive good quality advice that will assist them in making informed decisions about their retirement savings.

‘ASIC wants to ensure that only those investors for whom an SMSF is suitable are advised to establish an SMSF and that our expectations around the standards of advice are clear.

‘SMSFs are a key priority for ASIC and we will continue to target inappropriate advice about SMSFs in our surveillance work,’ Mr Kell said.

To that end, the information sheets provide ‘compliance tips’ which indicate the factors that ASIC is likely to look at more closely as part of our surveillance activities.

The information sheets are Information Sheet 205 Advice on self-managed superannuation funds: Disclosure of risks (INFO 205) and Information Sheet 206 Advice on self-managed superannuation funds: Disclosure of costs (INFO 206).

INFO 205 and INFO 206 follow a consultation paper released in 2013 (13-243MR) on proposals to impose specific disclosure obligations on advisers giving advice on SMSFs.

Super Tops $2 Trillion

APRA released their quarterly superannuation stats today. Superannuation assets totalled $2.0 trillion at the end of the March 2015 quarter, up by $115 billion from December. Self Managed Super Funds continued to power ahead, both in number of funds (up by 5,911 funds) and value (up $26.6 billion), though relative share fell slightly.

Over the 12 months from March 2014 there was a 14.3 per cent increase in total superannuation assets. The total value lifted $115 billion in the last 3 months.

Total assets in MySuper products totalled $420.2 billion at the end of the March 2015 quarter. Over the 12 months from March 2014 there was a 23.1 per cent increase in total assets in MySuper products.

There were $23.7 billion of contributions in the March 2015 quarter, up 4.4 per cent from the March 2014 quarter ($22.7 billion). Total contributions for the year ending March 2015 were $101.6 billion.

Outward benefit transfers exceeded inward benefit transfers by $641 million in the March 2015 quarter.

There were $14.4 billion in total benefit payments in the March 2015 quarter, an increase of 9.2 per cent from the March 2014 quarter ($13.2 billion). Total benefit payments for the year ending March 2015 were $57.5 billion.

Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $8.7 billion in the March 2015 quarter, a decrease of 1.4 per cent from the March 2014 quarter ($8.8 billion). Net contribution flows for the year ending March 2015 were $39.3 billion.

Looking at the splits, the trend growth was strong in industry, retail and SMSF.

Looking at SMSF, both asset values and number of funds show a steady rise.

However whilst 27% of all superannuation funds are now held in SMSF, this decreased by 1% from a year ago.

The annual industry-wide rate of return (ROR) for entities with more than four members for the year ending March 2015 was 13.0 per cent. The five year average annualised ROR to March 2015 was 8.0 per cent.

As at the end of the March 2015 quarter, 52 per cent of the $1.35 trillion investments for entities with at least four members were invested in equities; with 24 per cent in Australian listed equities, 22 per cent in international listed equities and 5 per cent in unlisted equities. Fixed income and cash investments accounted for 32 per cent of investments; 19 per cent in fixed income and 13 per cent in cash. Property and infrastructure accounted for 12 per cent of investments and 4 per cent were invested in other assets, including hedge funds and commodities.

ASIC Cancels Registrations of SMSF Auditors

ASIC has cancelled the registration of 440 Self-managed superannuation fund (SMSF) auditors who did not undertake or pass a competency exam necessary to retain their registration. ASIC has also disqualified two SMSF auditors whose application for registration had overstated the number of SMSF audit reports issued by them in the preceding 12 months, thereby avoiding the requirement to sit the competency exam. Of the 440 auditors whose registration was cancelled, 373 did not attempt the exam and 67 did not pass the exam. Auditors were given up to two attempts to pass the exam and ASIC extended the period to pass the exam to 31 August 2014.

Commissioner Greg Tanzer said, ‘As the SMSF sector continues to grow in popularity with Australian investors, it is critical that SMSF auditors play their key gatekeeping role. ASIC will continue to administer the registration process to assure Australians that SMSF auditors at least meet base standards of competency and expertise’.

SMSF auditors who have had their registrations cancelled can re-apply for registration if they have passed the competency exam in no more than two attempts over the preceding 12 months. ASIC Regulatory Guide 243 Registration of self-managed superannuation fund auditors contains more information on how to apply to be an SMSF auditor. ASIC and the Australian Taxation Office (ATO) work closely together as co-regulators of SMSF auditors. The ATO monitors SMSF auditor conduct and may refer matters to ASIC for possible disqualification or suspension of their registration.

SMSF trustees/ members can check whether their auditor is registered by searching ASIC’s SMSF auditor register at connectonline.asic.gov.au. If a member/trustee is concerned that their SMSF auditor is not registered, they can report this to ASIC through our website at www.asic.gov.au.

From 1 July 2013, the Superannuation Industry (Supervision) Act 1993 (the Act) required all auditors of SMSFs to be registered with ASIC. The objective was to ensure that all SMSF auditors met minimum competency requirements. New SMSF auditors are required to pass a competency exam in order to be registered. However, SMSF auditors who applied to be registered before 1 July 2013 and were a registered company auditor or had audited 20 or more SMSFs in the preceding 12 months were not required to sit the competency exam. ASIC approved 7,038 of the SMSF auditor registration applications received before 1 July 2013 with 1,421 of these being registered on the condition that they pass the exam by 1 July 2014. The SMSF auditors with an exam condition had audited less than 20 SMSFs in the 12 months prior to their application and were not registered company auditors.

Super Now Worth $1.87 Trillion – APRA

APRA just released their quarterly super statistics to September 2014. Superannuation assets totalled $1.87 trillion at the end of the September 2014 quarter. Over the 12 months to September 2014 this represents a 9.6 per cent increase. Total assets in MySuper products was $378.1 billion at the end of the September 2014 quarter. Over the 12 months to September 2014 this represents a 128.2 per cent increase.

Of these, $1.14 trillion are regulated by APRA and these grew by 2.2% since the previous quarter, whereas $ 557 million are self-managed super assets managed by the ATO and this grew by 0.2% since June 2014.

However, the number of SMSFs grew by 1.6% from the previous quarter, to stand at more than 539,000 funds.

Looking in more detail at the APRA regulated funds, with more than four members, there were $23.6 billion of contributions in the September 2014 quarter, up 7.2 per cent from the September 2013 quarter ($22.0 billion). Total contributions for the year ending September 2014 were $96.8 billion. Outward benefit transfers exceeded inward benefit transfers by $471 million in the September 2014 quarter. There were $15.1 billion in total benefit payments in the September 2014 quarter, an increase of 10.9 per cent from the September 2013 quarter ($13.7 billion). Total benefit payments for the year ending September 2014 were $57.1 billion. Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $8.0 billion in the September 2014 quarter, an increase of 9.6 per cent from the September 2013 quarter ($7.3 billion). Net contribution flows for the year ending September 2014 were $37.8 billion. Net contribution flows (contributions plus net benefit transfers less benefit payments) totalled $8.0 billion in the September 2014 quarter, an increase of 9.6 per cent from the September 2013 quarter ($7.3 billion). Net contribution flows for the year ending September 2014 were $37.8 billion. The graph below shows the composition of net contribution flows for each quarter from December 2008 to September 2014.

The annual industry-wide rate of return (ROR) for entities with more than four members for the year ending 30 September 2014 was 8.2 per cent. For the five-years to September 2014 the annualised geometric-average ROR was 6.9 per cent. The graph below shows the ROR for each quarter from December 2004 to September 2014. The rate of return (ROR) represents the net earnings on superannuation assets and measures the combined earnings of a superannuation fund’s assets across all its products and investment options.

As at the end of the September 2014 quarter, 51 per cent of the $1,219.7 million investments for entities with at least four members were invested in equities; 33 per cent of investments were invested in fixed income and cash investments; 12 per cent of investments were invested in property and infrastructure and 4 per cent were invested in other assets, including hedge funds, and commodities.

Note that small APRA funds (SAFs) and Single Member Approved Deposit funds (SMADFs) do not report quarterly to APRA. Therefore the quarterly assets of these funds are estimated based on the assets they report to APRA in their annual returns. This is done using a straight line growth methodology.

SMSF Property Investment Continues – DFA Survey

We updated our household surveys with the September data. Today we focus in on SMSF property transactions, which is a small, but rising factor in the market. We start by looking at the reason why trustees for SMSF’s are considering retail property. The strongest incentives are the tax efficient nature of the investment, and appreciating property values. Low rates also have part to play. I have excluded commercial property from the analysis.

We also asked where the trustees were getting advice from regarding retail property investment. Most interesting is a fall in advice from financial planners (maybe a reaction to FOFA, CBA etc?), and a rise in advice from real estate agents. Mortgage brokers also figure in the mix, alongside internet sources and own knowledge. We wonder how well qualified these sources are to provide the right advice, bearing in mind the long term nature of super.

Finally, we looked at changes in relative distribution of property in super funds, and of those who were investing in property (about 3% of all funds are investing in retail property, and another 3% are considering it). We see retail property making up quite a significant share of superannuation savings for some. The blue bar is last year, the orange bar is to September 2014.Others can decide if this a good or bad thing, but it does highlight the linkages between property and super, and demonstrates that if house prices fall, then some super funds will be impacted, just at the time house valves are also falling. The impact of the double whammy is potentially significant and concerning.