This year marks the 25th anniversary of self-managed super funds (SMSFs) in Australia, a significant milestone for an industry established in 1999 to empower small businesses and the self-employed to manage their own superannuation.

Since 2016, the Class Annual Benchmark Report has been delivering insights on key trends and dynamics in the SMSF industry.

Over this period, SMSFs have broadened their appeal, extending to younger generations, Generation X and Millennials, who in recent years have led the way in new fund establishments.

The report will spotlight the challenges, changes and opportunities within the sector, offering a must-read guide for SMSF specialists. Technology will play a key role, driving productivity and efficiencies to ensure SMSF specialists can continue to support the increasing number of Australians using SMSFs.

Changing demographics of SMSF trustees

Historically regarded as a retirement savings solution for those with higher balances, or self-employed with a small business, accumulators and younger generations have increasingly been attracted to SMSFs.

In 2019, the Class Benchmark Report for the March quarter (back when it was a quarterly report) found that the average age of members establishing SMSFs was 48.9 years. By 2023, Generation X (ages 45-59) represented 52.7 per cent of new fund establishments, with Millennials (aged 28-43) following at 23.7 per cent.

The broadening of SMSF’s appeal provides a significant opportunity for SMSF specialists to grow their businesses and align their value propositions with the emerging client needs within the SMSF market.

Manual processes often used for SMSF administration will no longer suffice, and SMSF specialists will increasingly need to ensure they have the right technology to enable the growth and scalability of their business to service the needs of their clients.

Improved productivity will be required to ensure more Australians can get access to professional advice. Capabilities such as direct data feeds and automation will be important future efficiencies for SMSF specialists to harness to remain competitive.

The gender gap is closing, albeit slowly

According to the Australian Taxation Office’s SMSF Quarterly Statistical Report December 2023, women now represent 47 per cent of SMSF members compared to 53 per cent men.

Last year’s Benchmark Report found that women aged 25 years and under had 4.1 per cent higher balances than their male counterparts, demonstrating the benefit of putting effective strategies in place to save for retirement.

Interestingly, in 2017, the Class Benchmark Report found that women had higher single-member fund balances than men up until the age of 70, where men took the lead. It also noted that men preferred investments such as unlisted shares, unlisted trusts, non-residential real property and limited recourse borrowing arrangements, while women preferred investments such as debt securities, managed funds and domestic listed trusts. These distinct differences in investment appetites provide opportunities for SMSF specialists seeking to service client segments.

Such investment styles impact performance and the retirement balances of members over the long term. The 2021 report noted that while the gender gap had continued to reduce, with women’s balances growing from 79 per cent to 84 per cent of men’s balances, the gap between men and women’s SMSF balances continues today. As at 30 June 2023, female balances were 84.9 per cent of male’s balances, with the gap closing 0.8 per cent over the previous year.

The narrowing of the gender gap is an important priority and provides an opportunity for SMSF specialists, particularly when you consider the profile of SMSF members has changed – they are younger, more tech-savvy, more engaged and are looking for options that support them in their retirement and give them more choice and flexibility.

Contributions are impacted by market regulation

Regulatory change around contributions has had a profound impact on the SMSF industry.

The introduction of the 2017 Super Reform, which introduced a maximum of $1.6 million transfer balance for retirement phase, impacted almost a third of SMSF members. With 29 per cent of SMSFs two-member funds, their focus quickly turned to contribution-splitting strategies to remain under the cap.

Regulatory change has added complexity to the SMSF industry, highlighting the ongoing need for advice and for financial professionals to leverage back-end automation efficiencies so they can deliver the proactive advice their clients require.

The 2021 Class Benchmark Report found that, for the first time, contributions were more dispersed across the year rather than mostly taking place at the end of the financial year to make the most of contribution caps.

The report found: “This may reflect individuals working to get available capital into their SMSFs to capture the upside following market downturns in March 2020 or to allow them to get their capital into a secure vehicle to avoid market volatility from other potential investments.”

Changes in superannuation legislation has made it easier for people to make additional contributions, whether it is from the proceeds of selling a home or through taking advantage of the carry-forward unused concessional contributions.

Investment profiles within SMSFs

Over the past two and a half decades, SMSFs have provided members with a range of investment options, providing flexibility and choice.

As highlighted in the 2018 Class Benchmark Report, exchange-traded funds (ETF) have been particularly popular, with almost more than half of all ETF assets in 2018 held by SMSFs. By 2023, ETFs have continued to experience fast growth in popularity, with the proportion of Class SMSFs holding this asset class increasing by 42 per cent since FY2020–21 to 32.3 per cent.

While SMSFs have a strong appetite for low-cost investment options, members are also highly motivated to maximise the benefits of tax-free earnings in retirement phase.

Last year’s Benchmark Report showed that 88 per cent of Class members aged 64 years and over had moved their balances into pension phase, taking advantage of tax savings to maximise their benefits, compared to 49 per cent of APRA fund members (as at June 2022) who had their entire account in accumulation phase.

Going forward, the investment appetites of members will continue to be shaped by regulatory changes, particularly the proposed 1 July 2025 introduction of an additional 15 per cent tax to apply to investment returns earned by superannuation accounts with a balance greater than $3 million at the end of the financial year.

With 15,040 Class SMSFs (8.4 per cent) with at least one member balance over $3 million in super at December 2023, and approximately one in four of these funds invested in direct property, the proposed Div 296 tax continues to create challenges in the SMSF industry due to the lack of indexation and the taxation on unrealised gains.

Conclusion

Over the history of the industry, SMSFs have proven their appeal, adaptability and resilience.

During the COVID-19 pandemic, when the government allowed the early release of superannuation, only 1 per cent of SMSF trustees took up this offer, demonstrating their commitment to long-term investing and the power of having access to financial advice.

It is also clear that regulatory change and demographic trends have shaped our industry, and advice will need to play an even bigger role in the future. By leveraging technology and automation, SMSF specialists can help build the scale they need to deliver advice to more Australians.

The 2024 Class Benchmark Report will be released at the Class Ignite Conference, held at the Hilton Hotel in Sydney on 18 and 19 September 2024. Tickets are available – register now to secure your spot.

*Written by Tim Steele, CEO of Class, which is part of the HUB24 Group.