Missed opportunities by SMSF investors

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The health of the SMSF sector remains strong. In its latest March quarterly report into superannuation performance, APRA quotes SMSFs making up over 27% of all assets held in superannuation. This makes it the largest segment of the sector ahead of retail, industry and public sector funds.

The future also looks bright according to Investment Trends, as one in five (19%) of current super fund members surveyed in the 2018 SMSF Report have the intention of setting up an SMSF in the future.

Despite the number of SMSFs hitting an all-time high of 595,840 in March 2018, there are some developments participants in the space are starting to watch carefully.

According to the Australian Tax Office’s March 2018 statistical report on the sector, during 2017 there were 29,384 SMSFs established; the lowest annual amount in over 10 years. The new year hasn’t got off to a much better start with only 5,243 established in the March quarter. Once again, the lowest quarterly result in 10 years.

Compounding this was the fact that in 2017, 16,000 funds or 2.8% of the total SMSF population were wound up. While this was attributed to a procedural adjustment, the amount was higher than the sub-2% customarily observed.

The reasons attributed to the slowing trend in SMSF take-up rate have been extensive. Some are assigning it to improved performance from industry and retail funds. Others say that the recent superannuation reforms have made the establishment of an SMSF less attractive. Or it could just be that we are hitting the saturation point. However, a deeper look into the numbers indicate other factors may be at work.

In an SMSF for the right reasons

Over the years, the main reason investors chose to invest in an SMSF was to be in control of their investing outcomes. This fact was re-confirmed in the Investment Trends 2018 SMSF Investors survey where 62% of respondents cited having, ‘more control of their investments’ as the main reason for setting up an SMSF; almost double the next closest response.

Surprisingly, when we analyse the current asset allocation of SMSFs, we find one-quarter of all SMSF investments are in cash-like assets, with the vast majority in cash itself.  An intriguing result given that cash is not an asset to be invested in should you be looking to accumulate capital appreciation, let alone protect you from inflation, over the long-term.

Source: Australian Tax Office / Lincoln Stock Doctor

With so much allocated to a non-long term producing asset such as cash, one can gain an insight into the psyche of many SMSF trustees.  While they possessed the appetite to take control,  trustees are failing to execute control and are not actually making decisions.

It is true that many trustees are lured by the tax and costs savings an SMSF can offer. However, at Stock Doctor, our experience with SMSF trustees who seek assistance is that they don’t have the time, inclination or patience to make timely decisions themselves on an ongoing basis. The harsh reality many trustees fail to grasp is that when it comes to managing money, doing nothing is actually a decision. And the decision to do nothing with one’s investments over the past decade would have cost them significantly considering the strong performance of assets such as property and shares, both domestically and internationally.

Invest ‘on’ your SMSF

There is no excuse for missing out. Currently, an SMSF can claim a wide range of education expenses related to the management of the fund. Investing in education and appropriate investment tools to help trustees make  decisions is never a sunk cost.

The fact you can get your money back, plus with the added benefit of attaining knowledge that can help you master your investments, means that there is no reason why trustees can’t be more proactive in the management of their money.

In fact, just as it is mandated by law for a fund manager to prove their competence in the assets that they are investing in, the same should be the case for SMSF trustees and their ability to make proactive decisions. Evidence of ongoing education and a subscription to support services should be a requirement to ensure SMSF trustees are equipped with the knowledge their life savings deserve. The primary benefit of such a regime would be to get more SMSF trustees engaged in asset selection, utilising the full potential of this wonderful long-term investment vehicle to maximise their returns.

Published 24 July 2018
www.afr.com. | Financial Review

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