The growth of SMSFs

According to the Australian Taxation Office (ATO), most people who start self-managed funds say one of the main reasons they do so is to have more control over their super.

In fact, a common complaint levelled at industry and commercial funds is, ‘Why would I pay someone else to lose my money?’ This criticism often stems from the belief that the large super funds do not have a sufficient ‘connection’ with members.

Others will use an SMSF because it is the only way they can acquire certain assets – like property – through their super, and this is where mortgage brokers come in.

The number using their super to invest in property is also growing rapidly.

Recent data from real estate agency Raine & Horne indicate SMSFs represent up to 50 per cent of real estate sales in some areas of Sydney and the Hunter region.

Raine & Horne’s chief executive Angus Raine says since the laws were changed in 2007 to allow SMSFs to borrow funds to acquire residential property, this type of property transaction has become “increasingly popular”.

Australian Taxation Office data also show SMSFs included $10.83 billion worth of assets in residential property in June 2008, rising to $14.87 billion by March 2012.

“While this is a significant increase, according to the ATO, Australia’s 468,000 SMSFs hold around $416 billion worth of total investments, which means only 3.5 per cent is invested in residential real estate,” Mr Raine says.

“So, there is plenty of room for this sector to grow further still and I expect to see that happen.”

Mr Raine is not the only one who expects to see the number of Australians using SMSFs to invest in property rise dramatically in coming months.

Many lenders also expect the market to boom as more and more launch products directly targeted at SMSF investors.

PRODUCTS ON THE MARKET

Last year, Homeloans launched its ProSmart self-managed super fund loan in a bid to capitalise on the growing popularity of this type of product.

The move paid off, with Homeloans general manager Greg Mitchell claiming the new product had “exceeded all expectations”.

“As a mortgage solution provider, the new products we have introduced have been right for the market at the right time,” he says. “Despite a sluggish property market, we were pleased to be able to deliver financial results in line with expectations, and our strategy to expand and evolve to market demand is paying off.”

In November, AMP also entered the SMSF arena, launching its AMP SuperEdge SMSF product with a variable interest rate of 6.7 per cent.
AMP Bank chief operating officer Rob Slocombe says a growing number of SMSF trustees are looking to add bricks and mortar investments to their fund.

“People want diversity in their SMSF investments,” Mr Slocombe says – a concept with which Liberty Financial’s national sales manager, John Monacheff agrees.

Global uncertainty has meant property is now viewed more favourably than shares.

“Australians don’t feel comfortable investing their super in shares any more as they don’t have a guaranteed positive return,” he says. “Property is different. Regardless of what the market does, you can guarantee that property will always go up in price. It will always yield positive returns for investors, especially if they sit on the property for an extended period of time.

“Australians are gradually starting to understand that property is a sound investment, which is why we are seeing demand for self-managed super funds surge.

“I believe this sector will continue to go from strength to strength and, if brokers are savvy, they will get on board now.”

REAPING THE BENEFITS

For decades, Australians have invested in bricks and mortar as a way to secure their financial position in retirement.

“Even before institutionalised super came along, property has always formed part of the Australian retirement plan,” says Macquarie Bank’s head of mortgages product, James Casey.

“For a long time, people have owned investment properties outside of their super. Today, however, they are being given the opportunity to bring this property within their SMSF.”

Mr Casey believes this option suits many Australians because people want to feel as though they are doing something pro-actively about their financial future.

“Unlike shares, people can touch and feel properties. It is for this reason that buying a property within an SMSF has become so popular,” he says.

“Australians have always stood around at Sunday barbeques and talked about their property. You can see it and you can touch it. If you have a property, you can drive past it, it is real and it is yours and that comforts people because they want to be seen to be doing something about their financial future.”

For brokers, what this trend boils down to is not just plenty of business opportunities but also plenty of benefits, says Liberty Financial’s Mr Monacheff.

“I don’t even know where to start when discussing the benefits – there are so many,” he says. “Firstly, borrowers generally start thinking about their retirement when they are 50 or so. It is at this age they are likely to buy a property through their SMSF. If they do this, they then leave their property investment alone for 15 to 20 years until they are actually ready to retire.

“As such, brokers can generate solid trailing commissions from these types of loans.

“Of course, good commissions shouldn’t be the only incentive for brokers dealing in this space,” Mr Monacheff continues. “By working out a customer’s SMSF loan, a broker is given access to a lot of detailed information about the client – information they can go on to use to cross sell additional products.

“Often, brokers who write SMSF home loan products find they don’t just get an SMSF loan out of the transaction, but a car loan, business loan or another home loan.

“There is a great opportunity for brokers to talk to customers who may not be aware of this product. It’s really a great service that the broker is providing and, if done right, one that will create a great relationship between the broker and the customer.”

St George’s general manager, mortgage broking, Clive Kirkpatrick agrees and says brokers who write SMSF home loans tend to develop “very sticky” and “long lasting relationships” with their clients.

“But that isn’t the only benefit,” Mr Kirkpatrick says. “Just knowing that you have set your clients up in a sound and safe retirement plan is truly worth its weight in gold.”

This is a sentiment with which My Mortgage Freedom’s Anthony Alabakov agrees. “I really see SMSFs as a great value-add for my clients,” Mr Alabakov says. “It just serves to further enhance my overall proposition.”

Mr Alabakov himself has only recently begun working in the SMSF area, having actively written SMSF products for the past 12 months.

“I saw a real opportunity in this space,” he says. “If you look at the statistics floating around out there, the SMSF market is fast evolving. Data from the Australian Taxation Office shows that more than 3,000 SMSFs are set up every single month.

“People are seeing real value in managing their own super. Moreover, they are seeing real value in investing in property through their super. With the market – both local and global – in the state it is in, people feel safer investing in property rather than shares and I don’t expect this outlook to change any time soon.”

Mr Alabakov decided to test the SMSF waters precisely for this reason. In addition, he knew few brokers were actively involved in the area since they deemed it “too difficult” or “too much work”.

“A lot of my colleagues were afraid to write SMSF products because they felt they were too detailed,” he says. “Furthermore, I think many were afraid of giving advice as this contravenes the legislation we operate under.”

This, however, has not proven to be an issue for Mr Alabakov.

“If you know where the boundaries lie, you take care not to step over them,” he says. “I provide product advice, not strategic advice to my clients. Once you get the hang of it, these products really are not difficult to write.

“Brokers need to understand the structure and the policies associated with this type of product, but once you understand that, it really is like writing any other residential home loan.

“If brokers are considering tapping into the SMSF market, I would suggest they speak to their BDM, glean as much information from the banks and read up about the products online.”

FINDING THE CLIENTS

Of course, deciding to write SMSF products doesn’t guarantee business will quickly flow through the door. Brokers first need to find clients who may be considering using their SMSF to invest in property and, as with any new area, a database of existing clients is an excellent place to start.

“We all have a pretty extensive database of clients made up of first home buyers, investors and refinancers. I often find that investors who are of a certain age will look favourably at using their SMSF to invest in property,” Mr Alabakov says.

Macquarie’s James Casey says in addition to a broker’s database of clients, third party intermediaries should aim to set up referral partnerships with the two other professions that work within the SMSF area – accountants and financial planners.

“I can honestly not think of a single person who would have set up an SMSF without the help of an accountant,” he says.

“Accountants play a critical part in the SMSF space. I wouldn’t like to see a person with a DIY SMSF – that is a scary thought. While self-managed super funds are not difficult to set up, there is a lot of paperwork involved. In addition, there is a lot of legislation surrounding the SMSF space that Australians need to ensure they adhere to – which is where accountants come into play.

“And not only do accountants deal with SMSF clients, they are also more likely to refer any potential property transactions on to a broker as they are specialists in property deals.”

Mr Casey adds that brokers would also do well to set up a referral relationship with a financial planner since many people who decide to set up an SMSF first seek advice from their financial planner.

“Planners definitely are a first point of call for anyone interested in setting up their own SMSF,” he says. “Better yet, most financial planners are not interested in helping clients buy a property within the SMSF as they are not specialists in this area. So, they would be happy to refer the business to another professional.”

That said, Mr Casey believes brokers will one day overtake financial planners in the role they play in a client’s SMSF transaction.

Those who decide to set up their own SMSF are savvy investors capable of doing their own research, rendering financial planners redundant, he says. But of course, while they are capable of conducting their own preliminary research, they are unable to buy a property and settle a mortgage within their SMSF without professional help.

“We think there is a natural place for brokers in the SMSF market and those who jump on board now will reap the benefits in the long run,” he says.