Sizing up the market

“It’s the same as it always has been,” says Adam Gee, head of consulting at SuperRatings.

“The demand stems from two main areas. Firstly, it’s cost driven, so generally if you have a balance in excess of that half a million dollar mark, it’s cheaper to run an SMSF than be involved with a retail fund.”

A typical ‘retail’ fund can cost close to one per cent of the fund to run, which in smaller sized funds is negligible. However, trustees can get the audit and administration done for a self-managed super fund (SMSF) for about $2,000-$3,000 dollars a year, which is closer to 0.4 or 0.5 per cent.

“So fees are one of the main reasons, the other reason being the ability to control the investment,” says Mr Gee.

The SMSF Professionals’ Association of Australia (SPAA), in conjunction with Macquarie Group, have undertaken extensive research of the SMSF sector.

While the number of active self-managed funds was up 7.3 per cent to 503,320 in March 2013, it’s the 15.8 per cent jump in total assets that is staggering.

In just one year, the total assets jumped from $428.3 billion to $496 billion in March 2013.

Most funds have two trustees, with a total of 958,095 members involved.

According to the research from SPAA and Macquarie, one in five Australian adults say they will have an SMSF at some stage of their lives, equivalent to more than 3.3 million people – 8.1 per cent of these will be started in the next three years.

More than a quarter of all SMSFs were opened within the last three years, while around 10 per cent of the adult population have an SMSF that is at least three years old.

Trustees have been allowed to borrow within their funds from 2007, which has seen investing in property through SMSFs become a booming market.

Since 2006, SMSF property assets have grown by 230 per cent to $73 billion, with investors aged 50-54 most likely to have used their SMSF to gear into a property.

And according to figures from SuperRatings, the number of SMSF terminations is quickly declining.

In 2008, there were 6,018 closed funds. This number increased in 2009 and peaked at 14,699 in 2010. However, in 2012, just 994 accounts were closed, despite there being 100,000 more accounts.

A media spectacle

Financial planners have been reporting increased numbers of enquiries about SMSFs ever since a series of warnings sparked a media circus around the self-managed super fund space.

“The fact the media is talking about it so much has meant everyone is asking about it,” says Liam Shorte, SMSF adviser at Verante Financial Planning, adding that the number of enquiries about buying property in an
SMSF has doubled in the past six weeks.

Dylan Crowe, managing director of property advisory firm Superannuation Property, says the warnings have prompted investors to find out more about the practice.

“The warnings have highlighted to investors that if other people are investing in property through an SMSF, they want to know about it,” says Mr Crowe.

Director of technical and professional standards for SPAA Graeme Colley agrees that the media coverage is exposing more people to the concept of self-managing. However, he claims he didn’t expect it to cause a surge in numbers.

“Tthere may be an increase, but the only time we ever saw a spike in the number of SMSFs was in 2007, when the government closed the gates, so to speak,” he says.

“At the moment, we’re seeing about 2,500 funds a month set up – that’s been constant right through.”

The Reserve Bank has concerns that the broader economy may be affected if too many SMSFs are unnecessarily set up, while the Australian Securities and Investments Commission (ASIC) took the investigation further by looking at the SMSFs that had less than $150,000.

The Australian Taxation Office (ATO) is responsible for the technical operation of the fund and making sure the trustees are operating according to the law.

The future

With more affluent Australians looking at self-managing their robust superannuation funds, a point of market saturation could occur in the future, according to Mr Colley.

“We have about 500,000 funds all up, which represent a little over a million people in total,” he says.

“When you work that out with the types of people who would have an SMSF, you’re looking at self-employed people, sole traders, those sorts of more affluent people. Eventually, we’ll get to a stage where everyone who is better off will have one, and the rate of growth will taper off slightly.”

Mr Gee agrees, adding that retail funds have realised they’re missing out.

“Our view is that we will remain with this consistent level of growth in the sector, but there is the potential that it may start to decline because we’re going to get to a point of saturation where every man and his dog has one. The other thing is that the industry and retail funds are trying to stop that growth,” he says.

Despite their foray into the higher end of the market, both experts agree they remain more expensive for high net-worth Australians.

“They can’t compete on price, so they’re trying to give people the element of control in the retail fund,” says Mr Gee.