With more Australians starting a SMSF, we look at the reasons for doing so and some of the key challenges.
A desire to have more control over investments is the key driver for almost 70% of the people who have established a self-managed super fund, according to the 2023 Vanguard/Investment Trends SMSF Report.
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.
Around 40% of those setting up an SMSF also have an expectation they can achieve better returns, and one-third believe they can make better investments than third-party super funds, the report has found.
Furthermore, they believe SMSFs provide greater transparency of investments and are more tax effective than third-party funds.
Around 25,700 SMSFs were established over 2022, with the average starting balance having risen from $220,000 in 2021 to $300,000.
The Australian Tax Office’s (ATO) latest self-managed super fund statistical report, released in May, shows the total number of SMSFs continued to increase over three months to 31 March 2023 after surpassing 600,000 for the first time at the end of 2022.
According to the ATO’s quarterly data, 5,732 SMSFs were established over the first three months of 2023 while 213 SMSFs were wound up. The total number of SMSFs increased from 600,698 to 606,217, and total member numbers rose from 1,126,890 in the December 2022 quarter to a record 1,136,234.
Unmet advice needs
The use of financial advisers by SMSFs has stagnated over the past three years, with only 27% of trustees indicating they had sought advice in the past year.
This is despite the finding that the bulk of trustees – both advised and non-advised – expressed the need for advice.
The Vanguard/Investment Trends SMSF Report found that number of SMSFs without a financial adviser and with unmet advice needs continues to increase at a rapid rate (270,000 in 2023, up from 235,000 in 2022).
Interestingly, the report highlights the emergence of key differences between advised and non-advised SMSFs when it comes to identifying their biggest areas of need.
Where advised SMSFs identified their biggest advice need as finding good buying opportunities, non-advised trustees pointed to a need for strategic advice and support to understand changes in regulation.
Other key unmet advice needs are around inheritance and estate planning, SMSF pension strategies, tax planning, contribution strategies, and identifying undervalued assets.
Only around half (52%) of the SMSF respondents noted they had heard about the recently released Quality of Advice Review (QAR) final report.
The QAR report contains more than a dozen recommendations designed to give Australians easier access to affordable financial advice, many of which will require changes to the Corporations Act. Among them are proposed changes to the definitions of financial advice, to who can provide advice, and the requirements around how advice can be delivered.
Of the respondents to the Vanguard/Investment Trends SMSF Report, 22% said they were aware of the review but were unsure what impact the recommendations would have.
A further 26% said they were aware of the review and believed the recommendations would either have no impact or a positive impact.
Nearly half of SMSF trustees conveyed concerns with the $3 million cap confirmed by the Federal 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.
SMSF management challenges
Respondents to the Vanguard/Investment Trends SMSF Report listed keeping track of changes in rules and regulations around super as their biggest challenge. Followed by choosing what to invest in.
Other key challenges noted were paperwork and administration, finding time to research investments, and completing/submitting end of year regulatory and tax returns.
Accounting fees and charges, the ability of other SMSF members to manage the SMSF if they were unable to, and building enough wealth to not outlive retirement savings, were also factors heavily cited by respondents.
Meanwhile, 31% of trustees under the age of 44 self-assessed their financial literacy as poor to average, and nearly half (48%) of female trustees surveyed indicated the same.
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.
Non-advised SMSFs open to seeking advice highlighted unclear cost, lack of trust in advisers or previous experience with financial advisers as barriers to doing so.