Vanguard/Investment Trends 2023 Self Managed Super Fund Report

  • SMSF numbers remain strong due to historically low wind-ups with most trustees citing a strong preference to be involved in the investment selection process.
  • Quality of Advice Review (QAR) recommendations largely evade the sector however the $3m cap reforms raise concerns amongst trustees.
  • SMSFs’ use of financial advisers has stagnated over the past three years, and unmet advice needs continue to accumulate.

The overall number of Self-Managed Super Funds (SMSFs) has held steady over the past year, despite establishment rates decreasing slightly, due to historically low wind-ups. According to the latest Vanguard/Investment Trends SMSF Report published today, 2022 marked the lowest wind-down rate in over 10 years with approximately 9,000 closing their SMSFs in 2022, down from over 16,000 the previous year.

Conducted between February and March 2023, the annual report now in its 18th year representing the largest scale quantitative survey of Australian SMSF investors.

According to the latest report, the average age and wealth of newly established SMSFs have both increased over the past 12 months, with the average age now 45 up from 42, and the average balance at establishment now sitting at $300k, up from $220k the previous year.

The main reason for establishing an SMSF remains consistent with previous years - the desire for more control over investments - which was cited by nearly 70 per cent of new SMSFs.

Diving deeper, the survey revealed that this desire for control related to the need to be involved in investment decisions concerning their super contributions, whether that was the choice of specific investments or shares, or to directly influence the broader asset allocation decisions.

“At the heart of many SMSF trustees is their desire for control and autonomy. The research shows that trustees are increasingly interested in taking control of their investments as they seek greater transparency, flexibility, and the ability to tailor their investment strategy to their unique needs,” said Balaji Gopal, Head of Financial Adviser Services, Vanguard Australia.

Unmet advice needs and (self-assessed) lack of financial literacy on the rise

The use of financial advisers has stagnated over the past three years with only 27 per cent of trustees indicating they sought advice in the past year. This is despite the finding that the bulk of trustees - both advised and unadvised - expressed the need for advice. The number of SMSFs without a financial adviser and with unmet advice needs continues to increase at a rapid rate (270k in 2023, up from 235k in 2022).

Interestingly, the report highlights the emergence of key differences between advised and unadvised SMSFs when it comes to identifying their biggest areas of need. Where advised SMSFs identified their biggest advice need as finding good buying opportunities, unadvised trustees pointed to a need for strategic advice and support to understand changes in regulation.

Noting changes in regulation, half of all SMSF investors had heard about the QAR, but most held the view that recommendations either wouldn’t impact them (16%) or were unsure about the potential implications (22%). Advised investors appeared more informed, with 55% aware of the recommendations, compared to 47% of non-advised trustees.

One in five SMSFs who don’t yet use an adviser are open to seeking financial advice in the future, with female trustees in particular signalling a greater appetite to seek an adviser, in addition to those entering the transition-to-retirement phase.

Unadvised SMSFs open to seeking advice highlighted unclear cost, lack of trust in advisers or previous experience with financial advisers as barriers to doing so.

However, the survey found that 30% of trustees under the age of 44 self-assessed their financial literacy as poor to average, and nearly half (42%) of female trustees surveyed indicated the same.

“The value of advice is never more crucial than in times of market instability, similar to what we are currently experiencing. Advisers have the opportunity to offer a myriad of advantages to investors, from filling in the financial literacy gaps to meeting unmet advice needs,” said Mr. Gopal.

“Importantly, the right advice can deliver more than just a better investment outcome. It could be life-changing, whether that’s through providing clarity on complex financial matters, coaching amid challenging market conditions, or bringing peace of mind about retiring well,” said Mr. Gopal.

The survey also revealed that the vast majority of trustees are seeking more education on updates to rules and regulations in order to better manage their SMSF, in addition to understanding the common mistakes made by SMSFs and help with their investment strategy.

Unsurprisingly nearly half of SMSF trustees conveyed concerns with the $3 million cap confirmed by the Government in the recent federal budget, while one in four (24%) felt it was a positive development. Interestingly, negative views on the measure were not solely driven by self-interest with close to half of those who rejected the idea saying it was unlikely they would personally be affected.

Asset allocation trends

According to the report, one in five SMSFs acknowledge that the prevailing economic conditions have had a significant impact on their approach in selecting investments, while over a third of SMSFs indicated an increased allocation to cash and cash products. Meanwhile direct share investments saw the largest relative decline in most SMSF portfolios.

“With the current unsettled economic landscape of high interest rates and inflation, capital protection remains a priority for most SMSFs,” said Mr. Gopal

“It is typical to see increased allocation to defensive assets such as fixed income or cash products during uncertain times. With interest rates rising, the data suggests SMSFs are favouring assets that they see as low risk, with trustees now allocating 22% of their assets to cash products.”

“However we believe Australians saving for retirement should take a longer term view and avoid reacting to short term market conditions. It’s not unwise to have cash reserves in a portfolio but that should form part of a broader diversified and risk adjusted approach, rather than a tactical decision” he said.

Interesting, while diversification, time savings and access to active management remain the primary reasons for SMSFs choosing to invest in managed funds, a growing choice driver is the ability to access specific sectors.

“Investing in managed funds provides investors with a powerful tool to diversify their portfolio without the high costs and risks associated with buying individual shares,” said Mr. Gopal.

“However, it is important for investors to conduct thorough research into their investments, including costs, exposures, and risks, in addition to evaluating performance.

“By doing so, investors can make informed decisions to help them achieve long-term investment success.”

About the report

Vanguard has partnered with Investment Trends to release the SMSF Trustee report for over 10 years. The 2023 report surveyed over 2200 SMSF trustees and offers the most comprehensive analysis of this growing sector of the Australian superannuation system, with an ongoing objective of growing the industry’s understanding of this important segment of Australia’s superannuation industry.