SMSFs running out of puff!
Once seen as perhaps the primary strategic problem facing superannuation funds, there is suddenly much less noise around SMSFs these days – news articles available to search on Google are down by 55% in just a year, and calls into the Tria/NMG office asking how to respond to the threat have all but dried up. All of which begs the question: have SMSFs stopped disrupting the industry or are they simply winning more quietly?
Today’s chart tells part of the story. Following rapid growth in market share from 2006-2012, rising from 22% to over 30%, SMSFs have continued to grow in absolute terms, but not as fast as the system as a whole – that is, they have given up market share to other segments.
So who has benefited the most?
Retail funds were the primary losers of market share in the years when SMSFs were winning the most and likewise as SMSFs have begun shedding share, retail funds have stopped losing out and stabilised at just above 25%.
Other evidence also points to a slowdown. Anecdotal evidence from multiple super funds points to a rapid increase in flows back from SMSFs in recent years, defying the conventional wisdom that a member lost to an SMSF was essentially lost forever. These industry funds may not have got to zero net outflow to SMSFs just yet, but the scale of the net position is greatly reduced, especially when compared to the compounding size of the funds.
A supporting indicator consistent with the anecdotal evidence – for the last two years for which data is available rollovers into SMSFs fell by 8% whilst rollovers out of SMSFs were up 43%.
So what can we expect next?
Relax, those of you building businesses to serve the needs of SMSFs need not throw out the business plans yet. The gold rush may be more or less over, but the installed base is huge (albeit leaking). It’s still the biggest segment of the market, and will keep growing for years to come.
But, the next problem for the industry will be less scrupulous market entrants – those that have seen the growth in SMSFs and see it as a treasure trove to be plundered. SMSFs are going mainstream.
And we have an app as well. The first robo advice service that opens an SMSF for you electronically and puts you in one of five (presumably passive) model portfolios according to your risk appetite. It’s not immediately clear to us why anyone needs an SMSF for such a simple offer, but nevertheless there is a ~50bp charge for investments on top of a $1k annual admin fee. And transaction fees. And, if you read long enough you discover management fees for underlying ETFs and managed funds are in addition as well. Sounds very expensive to us – and for what?
The main change here is that SMSF customer acquisition strategies are shifting from being focussed on the ‘whales’ who genuinely want control over their portfolios, to people who don’t know any better and can be lured into what is ultimately an expensive solution for a simple problem. There is a real potential for mis-selling from firms that – because of their small size – might have a much higher regulatory risk appetite than traditional market participants, simply because they don’t have much to lose.
Nevertheless, at this point it’s not clear whether these new offers will be successful and so we might be able to enjoy an unexpected respite from flows to SMSFs. But don’t let this opportunity pass you by. Like a mining boom, these situations come up infrequently; when they do it’s critical they are recognised and capitalised upon.
So keep an eye on the new entrants, large and small. Learn what works, what fails and why. Understand why members went to SMSFs in the first place and what’s driving some of them back into collective funds. We can expect the larger funds to be quietly thoughtful until they have the answer – and then overwhelm the market with resources, brand and capability to win.
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