According to the Australian Tax Office (ATO) latest quarterly statistics for March this year, SMSFs now account for almost half a trillion of assets under managed and nearly one million members. This makes it the biggest sector by assets, exceeding each of the retail, industry, public sector and corporate super fund sectors (see chart). More worryingly for Australian Prudential Regulation Authority (APRA)- regulated funds is that since 2008 this sector has shown the strongest growth.

“We all know that the SMSF space is a rapidly growing sector, now it is accounting for about a third of superannuation assets,” Salvador Saiz, head of advice, wealth & super at CoreData tells us, adding, “given that the other players in the sector, the industry funds and the retail funds, are obviously all very much focused on this space.”

In terms of the SMSF investors, they tend to be in the late accumulation phase of retirement, aged 45 to 64 and over half have account balances over half a million dollars. The loss of these high account holders makes it particularly costly to APRA regulated funds.

“What we are seeing in part is the transfer of money out of the bigger superannuation funds to self managed funds... it seems to be quite substantial in the magnitudes of hundreds of millions of dollars every year,” Graeme Colley the director of education and professional standards at SPAA, the advocacy body for SMSFs tells us.

This growth, be it through individual contribution, organic growth or net flows from others funds is having a noticeable effect on the industry funds.

“I think it would be disingenuous to say it is not affecting us, it is affecting most funds, most industry funds to some degree,” Geoff Brooks, Equipsuper executive officer of strategic marketing and communications says.

Neither is the retail sector immune, with large flows from that segment.

“There is certainly movement from retail into self manage, and it is something as a group we need to be conscious of and be able to offer and provide services across both,” AMP’s SMSF administration managing director Andrew Hamilton tells us.

The industry and retail sectors have traditionally been in a lot more controlled, less engaged environment and have been slow to react to the SMSF rise.

“They have only really woken up to this in the last three or four years,” Mr Colley states.

Moreover, he adds, “They are seriously panicking about the bleeding of their funds, simply because the larger account balances that have been there have been cross subsiding all other members in the fund. That is one of the reasons that they are concerned because of the longevity of some of these funds.”

Although many funds, particularly the larger ones, believe they will always be viable as there will be low account holders and those who are not engaged with super, some do recognise they have been slow to adapt to the new SMSF landscape.

“The industry has been reactive rather than proactive, as this thing has grown,” Mr Brooks of Equipsuper says, adding, “We need to recognise you can’t swim against the way the market is going, you have to get with the tide and compete in the current.”

Comprehend to compete

However, in order for APRA-regulated funds to compete, they must understand this disparate and often disaggregated group.

The research firm CoreData, who has done a lot of profiling of behaviour of SMSF trustees, describe them as ‘controllers’ who want total control over their super, ‘coach seekers’ who are looking for more guidance or ‘outsourcers’ who really just want to leave it to an adviser or accountant. However, the common theme with SMSF trustees is ‘control’ over assets and ‘engagement’ over retirement planning.

Industry and retail sectors have been scrambling to provide options such as direct investment options that give members more control over their assets.

“We do have a direct investment option, which enables people to select their own shares and term deposits and ETFs. I guess it gives people who are after more control, that control and without the hassle of having to establish a separate entity,” CareSuper chief executive officer Julie Lander says.

Some are proposing going even further and developing a Pooled Superannuation Trust (PST), where SMSFs can actually be hosted within an industry fund.

“The PST is aimed to be an investment vehicle for an SMSF so it’s not stopping the person going to an SMSF, it is saying actually when you go to your SMSF, leave some of your money with us,” Alum Stevens, a senior consultant at RiceWarner explains.

The PST option, which so far is only being proposed by HOSTPLUS, has had a lukewarm reception by other funds.   

“I am bit confused about why they are doing that, because they said it is not for SMSFs, it is a sort of SMSF-lite type product,” Ms Lander of CareSuper states, adding, “also there are a lot of costs involved with having a PST for super; that is like having two funds in some ways.”

However, ‘control’ of assets is only one aspect why trustees set up SMSFs - more important is perhaps ‘engagement’ over retirement planning.

AMP, which is investing heavily in SMSF services for these potential trustees, believes this involvement of members in their retirement future is a good thing, but has surprised some parts of the market.

Nor does this involvement stay the same over time with members needs changing.

As Mr Brooks explains, retirees start out “just retired cashed up”, then move to drawing more income “when you starting to slow down”, to finally, “the end years when you have got increasing health costs.” He points out the super industry must have products and services to engage throughout those “retirement phases.”

In response to this and the growth of SMSFs, EquipSuper has launched a financial planning business about five years ago to aid its members through this transition.

A consensus does seem to be developing across the actors in the superannuation sector that a new relationship management structures needs to be developed.

“[Earlier] I was hearing some of the bigger funds saying that even though they recognise that they are losing money to SMSFs, they are thinking maybe I need to keep in contact with the people I have lost,” Mr Colley from SPAA says, adding, “So there is a little bit more engagement in fact that they are looking a bit more further afield than just their member base.”

Industry super, however, has some big hurdles to overcome to develop these more dynamic relationships.

“The thing is with industry super it has come out of a corporate superannuation environment where the key relationship is with the employer and fund, and that is still a very important relationship,” Mr Brooks points out, “But, the thing is we are moving into a world that increasingly looks like a retail world, there are more people exercising choice.”

This requires much more developed data-analytics and relationship management techniques.

“They really have to do research. They have to segment their membership database and actually ask the questions of their members and not just when they are 50-odd, when the member has spoken to their neighbour’s accountant,” Mr Saiz of CoreData tells us.

He adds, however, “Broadly speaking super funds haven’t had a conversation with members early enough in the piece to put someone off who has already got to them.”  

Mr Stevens of RiceWarner points out, there have been heavy investments particularly in the past five years amongst some funds in understanding their membership base, but does admit that these not for profit funds are not as developed as other financial outfits as “don’t have the same infrastructure in place yet.”  

In the longer term, industry funds must move beyond this traditional data-analytics from their employers and account records to behavioural type profiling.

“The industry has to improve segmentation work, and get beyond demographics, which is basically a carve-up by age or a carve-up by account balance, and start looking at psycho-graphics...and understanding members’ behaviour across generations,” Geoff Brooks of Equipsuper says.

He also concedes that as a sector “we are nowhere near that,” but believes at least if the industry understands that “then at least you can set your strategy accordingly.”

Sophistication, information and choice

Identifying these potential SMSF trustees is needed, but to retain them members, funds must improve the services they offer.

“I think that is a challenge that the industry funds, including us, we are going to have to grapple with at some stage, because as we move further into the future we are going to be starting to move to a generation of people who are used to paying for service,” Geoff Brooks of Equipsuper says.

Mr Brooks points out that these individuals are “far more selective in what they choose to look at and download” and “their demands are on-demand.”

This willingness to pay for financial advice from specialists is an area where the industry superannuation sector is at a particular competitive disadvantage.

“These are the sort of things the banks are somewhat better positioned to deliver at the moment than we are. The flying start they have got is certainly that integrated view of your financial life,” Mr Brooks says.

SMSFs, which have traditionally been run by the near retirees, have already shown sign of hitting this tech savvy Gen Y, with the 35 to 44 age brackets accounting now for around 10 per cent of the market.

“What we found over the last five years in particular is that age group from 35 up are now really starting to take considerable notice of their superannuation... . There is a lot more engagement at a younger age group,” AMP’s Mr Hamilton tells us, he adds, “The level of education in the investment space is also increasing.”

However, this opinion is not shared by everyone in this sector. “They [SMSF trustees] are a bit like punters [too], they will tell you about the shares that they bought went up price, but they don’t tell you about the ones that fell in price,” says CareSuper’s Julie Lander.

How industry funds will respond to provide for this demographic is unclear, but it will probably require a whole host of old and new superannuation actors working to provide increasingly tailored products and services.   

“We are doing our part to try and provide input to that part of the market, but it is so disaggregated and I don’t think there are any clear channels to tap into that segment. We certainly try to do our part through the dot.com website,” Grant Kennaway, head of fund research Asia Pacific at Morningstar Australia, said at a recent Morningstar investment conference.

Viable and appropriate

What seems to be lost in the discussions around SMSFs are the reasons they are set up.

They are established because trustees cannot find desirable alternatives within the APRA-regulated funds. Looked at in this light, the SMSF growth represents a current failure amongst the funds to provide the services to these individuals.

“I think we are all peddling very fast to develop strategies as to how we are going to deal with this increasing cohort of members in retirement phase. I think it is going to be an entirely different service model,” Mr Brooks says.

It is addressing this service model that will ultimately determine which vehicles members will chose for their retirement.

“I don’t think there is anything negative about putting these things out, put them on the table and let’s finds solutions to them, if you don’t put them on the table and identify what the issues are you can’t address them.”