It has been well documented that self-managed superannuation funds (SMSF) have been the fastest-growing segment in the retirement savings sector for well over a year.
So rapid has been the growth of SMSFs that, based on the latest Australian Prudential Regulation Authority statistics as at March 2009, these types of funds now account for $327.8 billion in assets of a total of $1.03 trillion in assets held in superannuation at that time.
That translates into 32 per cent of the market, with its closest competitor being the declining retail superannuation sector, which still holds 28 per cent of the retirement savings pie.
With such sustained growth and with a large number of SMSF trustees being high net worth individuals, it is fast becoming a market segment advisers can no longer ignore and may turn out to be the most promising, profitable and viable opportunity for planners' practices heading into the future.
In addition, the position the government is taking on superannuation is potentially providing a further incentive for advisers to turn their attention to the SMSF space, according to SMSF Strategies principal Grant Abbott.
"Advisers may have ignored this space in the past because retail super has been pretty easy for them because this money is coming through and they're getting this trailing commission," Abbott says.
"In the long run I think this government is certainly directing everything towards industry-based funds and I think advisers are looking for a way of surviving."
Keeping all of these factors in mind, Abbott says there are two avenues financial planners are choosing to pursue to guarantee survival for their practices.
"It seems to me the older planners who came from life insurance have gone back to insurance and the others who may not have a good grounding in that area are going to self-managed," he says.
However, deciding to provide advice in the SMSF space is not necessarily as easy as it sounds because the sector itself bears a lot of unique characteristics. So how much can established advisers rely upon their existing skills when looking to service the SMSF space?
Relevance of conventional planning skills
While providing advice to SMSF clients is significantly different to more standard forms of financial planning, those already established in the industry do not have to totally disregard everything they have already learned and set up, according to Eureka Financial Planning principal and specialist SMSF adviser Andrew Jones.
"Your generalist financial planning core competency skills are relating to clients, understanding superannuation at a broad level, understanding investments at a broad level, understanding the key elements of a financial plan, and understanding risk management at a general sort of level. Those sorts of things bind a generalist to a specialist SMSF adviser," Jones says.
The SMSF planner then has to take these skills and further apply them on a much deeper and wider level, he says.
"For example, the first skill of an SMSF adviser is being able to read an SMSF trust deed. That means being able to identify issues within trust deeds and raise issues and be aware of what the ongoing needs of trustees are," Jones says.
Abbott agrees this is a good illustration of how different providing SMSF advice is compared to other financial advice.
"How many financial planners would read the trust deed of a retail fund that their clients are in? It's completely immaterial," he says.
"It is a completely different business model to the retail super level."
Getting started
There is no doubt advisers looking to get involved in the SMSF space will need to take on a different set of skills. However, where should they start to build their skill level up?
The SMSF sector is highly aligned with certain pieces of legislation, in particular the Superannuation Industry Supervision (SIS) Act. As such, a consensus view seems to be that beginning with a good understanding of the act is imperative.
RSM Bird Cameron manager of superannuation solutions Peter Nicol says when he began his involvement in the sector studying the SIS Actwas the first thing he did.
"I actually took the SIS legislation home and read through it. I grabbed it to see what the main things I'd heard the managers at work talking about were all about. So I just grabbed a copy of the act and flicked through it over a couple of weeks," Nicol says.
Self-Managed Super Fund Professionals' Association of Australia (SPAA) chief executive Andrea Slattery agrees the SIS Act is the logical place to start, but says advisers need to be mindful of how some of the other influential pieces of legislation play their part in the sector as well.
"Having a look at the SIS Act would be a good starter and I would see it as a compulsory starting point if I was going to provide advice," Slattery says.
"But you also need to look at the other areas of legislation too because you are dealing with trust law. So you've got the prudential issue of the SIS Act and then you've got the equitable trust law that you will need to provide advice under. You've also got the tax law if you are providing general tax advice or specific tax advice and you've got the corporations law if you are dealing with corporate trustees.
"We believe there are 33 pieces of legislation you need to understand and that really depends on which areas you will be covering."
Abbott says advisers exploring the possibilities of attracting SMSF clients should be fully prepared for the litigious nature of the sector.
"It is as close as you are going to get in the financial services arena to being a lawyer without being a lawyer per se," he says.
Getting underway as an adviser in the sector can be a challenging exercise and support in achieving the necessary steps can be invaluable.
To this end, SPAA has introduced a new program to make the transition easier to manage for advisers new to the space.
"We've got a new program where our specialist members are able to mentor people who are new. That mentor can provide some guidance as to how to get into the industry," Slattery says.
The need for specialisation
It is evident from the experience of people already servicing SMSF clients that providing financial advice to SMSF trustees requires a different skill set to that of the financial planning generalist.
Many advisers have decided to obtain an accreditation that allows them to hold themselves out as an SMSF specialist.
SPAA offers a specialist adviser program for its members. The program provides an accreditation that consists of a two-and-a-half-hour examination and a number of work experience requirements that also need to be satisfied.
HLB Mann Judd wealth management partner Michael Hutton has completed the qualification and says it is critical from a credibility perspective.
"It's good to have formal qualifications to back up your industry experience. From an adviser perspective it gives you an increased level of comfort that you do know what you're talking about," Hutton says.
As the sector continues to grow and with potentially more trustees looking to receive financial advice, Slattery is of the opinion that they will begin to look towards specialists only for their planning needs.
"I think going forward consumers will look for specialists. They need to be able to have some comfort that the advisers they seek know what they are doing," she says.
Jones describes attaining specialist status as an SMSF adviser as being a turning point in his financial planning career.
He also points out there is more significance to having such a designation than just enhancing the standing of the individual adviser within the industry.
"In this ever-litigious world we live in and with the strict liability provisions contained within the SIS Act, if you don't respect the level of sophistication and education that is required to give advice in the SMSF space then you are unknowingly bringing dealer groups into the liability pot," Jones says.
"They [the dealer group] may not have provided the advice that resulted in a loss but they would be considered as part of the fund as one of the advisers. I just think that's fraught with danger," he says.
Education
Education at several different levels is another crucial component in being a successful SMSF adviser.
Firstly, due to the large part legislation plays in the SMSF landscape and the ever-changing nature of the law, continued education from a professional development standpoint is extremely important.
In regard to this concept, Slattery says advisers need to understand how the education process works in conjunction with a specialist accreditation.
"We need to separate specialisation from education as people often get the two confused. You can personally look at achieving a level of competency as a professional, which is your accreditation, and you can actually undertake education that will allow you to achieve a level of knowledge and skill that allows you to practice," she says.
The type of education courses in which an adviser chooses to take part is another important consideration, Jones says.
"You need to sit down and look at how deep into the legislation each course goes because you don't want to cut across the basics. You really want to get deep into the legislation across all core competencies," he says.
"If the course you choose is a bit light on you might have to do another one to get that deeper knowledge. What you could look at is what sort of time frame the course is run over. So if you've got a day course then you know that's quite shallow.
"In my experience you really need a course that is run over at least a week or longer. You need a forum where you can learn and really test your knowledge."
Abbott agrees that educational programs that are too generalist will not give new advisers the level of understanding of the industry they really need.
"If you go to more of a generalist course it won't give you the level of confidence you need to operate effectively in the sector. You need to have that confidence that what you are proposing has some roots in the law in some way, shape or form," he says.
However, in the SMSF arena the adviser's education is not the only type of education that requires consideration. The current government has continually let it be known that it is looking very closely at the level of trustee knowledge in the SMSF sector.
Jones says this means successful SMSF advisers have to consciously develop ways to continue to educate their clients at all levels as one of their fundamental duties.
"Education is the elephant in the room with respect to SMSF trustees. It means the SMSF specialist should be providing education services," he says.
"You're not expecting SMSF trustees to become specialists themselves - that's overkill. But you do need to make sure they know the core provisions and regulations."
Abbott says most of the successful SMSF advisers he knows have a dedicated program to enhance the knowledge of their clients.
"That enhances the client's experience and puts the adviser on a bit of a pedestal as well," he says.
Support networks
Support networks play a more critical role in the SMSF advisory environment than in the general financial planning space.
For instance, providing advice for SMSF clients can mean facilitating the administration function of the fund as well as the audit. In most cases financial planners will not be able to provide these services on their own, in which case they will have to establish a network of other professionals outside of their own practices.
"While the SMSF adviser is a technical specialist they also rely on a range of other professional relationships and it's how that adviser manages those professional relationships that drives the final outcome for the clients," Jones says.
"For example, I know there are a lot of financial planners that will do the stock selection of the investment strategy themselves but we will outsource that and have brokers perform the execution as we feel they are better at it than financial planners."
As such, SMSF advisers must determine the services their practices will offer and which they will outsource and then find the right parties to provide the additional functions.
"They have to work out whether or not they want to bring the administration in house and there are a number of systems to help them do that. A lot of advisers like to do that so they can control that function," Abbott says.
"Alternatively, they might decide to offload it and give it to a large administration provider and accountant to do it. Other things to consider are whether or not you want to do the insurance of the fund in house.
"These are issues that an adviser servicing the traditional retail sector doesn't have to worry about, because for them it's all done for them at a dealer group level. Here you're actually starting to build a true advice business around a highly-specialised area and it's a different mindset."
However, this creates an additional complication for SMSF advisers. It means they have an additional series of professional services, such as accounting and legal services, of which they need to have a working knowledge, Nicol says.
"I think this type of knowledge is paramount. Conceptually you can't think of it as separate little things like there is the financial planning part, and then there's the accounting part, and the auditing part because it all leads towards one thing," he says.
Software and systems
With the provision of advice in the SMSF arena comes the need to potentially implement different types of software and systems to get the job done.
Again the emphasis here will not so much be on work flow that systems like Xplan and Coin can offer, but more on administration, compliance and record keeping for functions such as the yearly audit.
"It's almost like you have to run two businesses within one," Jones says.
"At Eureka we still run a general financial planning business as well as a specialist SMSF business and a specialist risk business. So we've actually got almost three businesses in one," he says.
"For an SMSF practice you have to find the right sort of platform, the right kind of accounting software, you need to find the right systems for your education delivery to keep it more regular, and systems to pick up your legislation updates.
"If you're supporting equities then you need architecture to support corporate actions, reporting will have to be a bit more comprehensive, and the investment research has to be a bit broader and deeper. So it is a different back-office delivery to your traditional financial planning practices."
Hutton advises that specialist SMSF software is imperative to satisfy the different reporting needs of the sector.
"They need specialist SMSF software from the start because I think the standard accounting programs don't stack up in terms of producing member statements and those sorts of things and there are different accounting obligations for SMSFs," he says.
Nicol feels there is a real need to get this aspect of the business right as it will allow advisers to provide more value for their SMSF clients.
"Never underestimate the power of technology. For example, I don't want to pay an accountant to debit and credit. I want to pay them to resolve problems," he says.
"We like to capture as much data as we can electronically. It means we're not spending so much time punching the numbers in and spending more time doing the consulting work and the other value-add activities like telling the clients about the strategies we can implement."
Advice delivery
Once all of the groundwork for a successful SMSF advice business has been laid, there is still one crucial element financial planners need to determine and that is the advice itself and what clients with an SMSF really want from an adviser.
Abbott says for SMSF clients it's all about one thing and that is proactivity.
"They want to be involved and they want to be told what's going on and all the latest ideas. They want advisers to go to them with these things," he says.
Due to this emphasis on proactivity, the delivery of advice has to have a reduced focus on investments in comparison to traditional financial planning.
"The advice has to be strategy based as opposed to investment based. That's been the very nature of the sector and that's why accountants have dominated the space in the past," Abbott says.
Nicol agrees about the need to be proactive and says to be really successful in the industry advisers have to be constantly looking at new opportunities for their clients.
He says advisers need to be able to assess and analyse the changes to the SMSF environment, such as legislative changes, and identify new opportunities for their clients from these situations.
"It's something that's probably underdone in the industry at the moment," Nicol says.
Advisers also need to be cognisant of the fact that a lot of SMSFs operate in effect as family superannuation funds and that again means the delivery of advice has to be different.
"It means the advice has to be tilted more towards the holistic family, whereas with non-SMSFs the advice is really more specific toward the individual because it is an individual account. In an SMSF you might have two or three member accounts, but it's about the family so you might have a pooled investment strategy or a pooled insurance strategy in those circumstances," he says.
Book of business
With so many elements to take into consideration in addition to the actual provision of advice, do advisers need to be conscious of the number of clients they service in order to build a really success SMSF practice?
Jones believes there is definitely a limit advisers need to be mindful of. He currently provides advice to around 40 or 50 SMSF clients and for Jones this is about the ideal number.
"There is a limit and it's because you really want to keep the advice personal. You want to keep the communication quite regular," he says.
"A general practitioner moving to become a specialist SMSF adviser will need an appreciation for the fact that a non-SMSF client might be comfortable with six-monthly or 12-monthly reviews, but at the SMSF level you're talking about communication every quarter and sometimes monthly," Jones says.
"The average SMSF client likes to take advantage of opportunities and that means more regular communication."
Abbott is also a big proponent of the theory that there is a limit to the number of SMSF clients an adviser can effectively look after.
"Let's face it - by its very nature because it's not commission-based and as an adviser you're not getting trailing commissions where you may be trying to pick up lots and lots of small clients, you can really only handle about 50 or 60 high net worth clients at any one time because it is quite a demanding process," he says.
To have the discipline to limit the number of clients in a book of business creates other issues advisers then have to address.
"Advisers have to make sure they clear themselves enough space. What I mean by that is a lot of successful SMSF advisers have sold a lot of their clients or they've brought someone on to look after those clients that don't fit in the space to give themselves more time spend in the sector," Abbott says.
"You're not going to be able to service the sector unless you at least give yourself some time to do so."
Hutton suggests that if advisers are looking to attract high net worth clients then the SMSF sector is the place to focus upon.
"Without doubt the concentration of SMSFs would be in the high net wealth space, so for advisers trying to deal with those sorts of clients the SMSF sector is something they really need to get their heads around," he says.
