SMSFs – Distribution strategies for a strongly growing but elusive market segment
There is no denying the strong growth in the Self-Managed Super Fund (SMSF) segment in the Australian market. As an investor segment SMSF’s cannot be ignored. So how do fund managers target this sector? Before fund managers and other product providers can target this segment it is useful to understand how SMSF trustees behave and how they think about investing – what are their investing habits? This Insight has been written to try and tackle some of the issues in distribution to this important market segment
- In 1994 there were approx 80,000 SMSFs with $11 billion under management
- Skip to 2014 and there are now more than 500,000 SMSFs with $550 billion under management
- This accounts for the largest single slice of the Australian $1.6 trillion superannuation pool
- Approx 38% of assets held in Australian shares this means that the SMSFs are estimated to own more than 16% of the sharemarket
What has led to this growth?
What are the reasons that SMSFs have enjoyed such strong growth over the past 10 years? We have summarised below Gateway’s views:
- The internet
There is no doubt that developments in online trading and broking platforms have led to greater acceptance and the growth of SMSFs. These platforms are easy to operate and execute on, and provide all administration, portfolio monitoring and transaction capabilities in the one spot, and were not available 10 years ago. Investment Trends reports that 95% of SMSFs hold direct shares, and 81% of those have an online share trading account.
- Having choice and control
SMSFs by their nature means you are able to make all investment decisions yourself. In addition, many investors see a SMSF as an opportunity to learn about investments for themselves, something they may not have been able to do in the past. By having a SMSF you have complete control over your investments, even though it is a requirement that you must develop and maintain an appropriate investment objective and strategy.
Alternatively there are many financial planners that specialise in tailoring products to the individual needs of their client SMSF’s. These groups are providing an individualised service to the SMSF rather than a ‘mass’ approach of say an Industry Fund which still give the SMSF choice and control.
- Growth and acceptance of alternatives
Having control of your fund and investments means Trustees can invest in a range of assets perhaps with more variety than maybe offered by many financial planning groups. This not only includes bank deposits, direct property, and shares, managed funds and pooled investment trusts but also alternative investments such as hedge funds and even art investments. You are also able to switch or modify those investments as you see fit.
- Focus on fees and taxes
Mostly the cost of managing a SMSF does not increase as your investment grows. So the greater the account balance the more cost effective the SMSF is. Also, SMSF’s do not have the same prudential regulation and do not have to be licensed as an ‘institutional grade’ superannuation fund does. SMSFs can also provide tax concessions such as the deferral of lump sum tax in the pension phase but more importantly the opportunity to use franking credits from franked dividends to reduce the 15% tax rate applicable.
Russell Investments has also recently released a report in conjunction with the SMSF Professionals Association, entitled Intimate with ‘Self Managed Superannuation’.
Russell summarised that:
- SMSF intentions remain – the popularity and awareness of SMSFs is growing
- Professional referrals are important
- Demand from younger SMSF Trustees is growing – while those over the age of 50 still account for the greatest number of SMSFs, it is still the 41-50 year old age group which continues to be the largest source of demand. This is closely followed by those in the 31-40 year old age group, where two in three advisers are expecting greater demand from.
- Client contact is the key to engagement
The full report is available at http://www.russell.com/AU/financial-professionals/publications-and-tools/market-insights/smsf-study/
How do SMSFs invest?
A recent report by Credit Suisse Australia into the behaviour of SMSFs outlines the investment trends of SMSFs.
The graph below from the Report shows the composition of SMSF funds. The obvious takeout is the large overweights to Equities and Cash.
With regards to Equities (funds and direct) with the majority of SMSF trustees being near or at retirement age, the Credit Suisse report found that these investors are looking for equity investments that:
- Deliver high-dividend yields
- Provide a strong history of dividend growth
- Distribute franking credits
- Have a large market capitalisation; and
- Can be identified with (ie. brand recognition)
So what does this all mean? How can fund managers successfully target SMSFs?
The reality is that this segment cannot be ignored. Fund managers should be making every effort to try to include this segment in their distribution strategy. Many are self-directed and all are looking to invest! But it is important to recognise that many SMSFs and their Trustees still seek advice but finding their sources of advice may be different. The primary sources of advice are as follows:
- SMSF focussed financial planners
- Other investment advisers
- Publically available information
Below are Gateway’s tips for marketing to this sector:
- Target dealer groups and accounting practices that specialise in SMSFs – whilst SMSFs are self-directed the Trustees often seek financial advice to implement or help implement their investment strategy – there are plenty of these groups but they need to be properly identified and qualified.
- Ensure you are also accessible to direct investors via a well-designed website
- Provide information and education – not just product. These are often self-directed investors – if they are not using advisers, in most cases they would not have access to Research Reports so any information you can provide on your website which is informative and educational will be viewed as a plus. The Russell report said 27% of SMSF investors use Accountants as their primary source of advice in 2013 whatever you can provide to assist this decision making will be of benefit.
- Differentiate your offering– particularly the case in the highly competitive equity segment, you need to offer something different eg. a focus on yield, a high conviction approach, or absolute return. Most SMSFs have an overweight to Australian equities – they need to be offered something different.
- Position your products vs ETFs – with ETFs offering single-stock exposure to a wide range of asset classes – Australian and international shares, bonds, commodities and currencies – in one trade, as well as “style tilts” within shares there are many uses for ETFs and they are easy to execute for SMSFs as well as being cheap. Also, a recent initiative is mFund, which is the ability to now buy unlisted funds on the ASX in a single trade. It is important you emphasise your point of difference to these one stop solutions.
- Build and promote your brand – the Credit Suisse report found that familiarity and being able to identify with a name or brand is important. Investors want to know the companies and brands they are investing in – they don’t want to get it wrong as they will have no one to blame but themselves.
Many of these messages are relevant to all marketing by fund managers. Targeting the SMSF sector is about understanding SMSF needs and their sources of information. These can be summarised as:
1. SMSF investors need information
2. Information needs to be readily accessible – an online portal provides this and the imminent introduction of SuperStream requirements for SMSFs makes this more important
3. SMSF investors are typically heavily underweight bonds so will be engaged with alternatives to vanilla equity investments and cash that offer higher yields
4. SMSF investors take comfort with known brands