SMSFs running out of puff!

Once the primary strategic problem facing the entire industry, there is 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 they 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.  AustralianSuper was recently quoted as having experienced a turnaround in its experience with SMSFs, turning a net outflow to SMSFs of $100m in 2012 (the year in which SMSFs peaked) to a net inflow position of $11m last year.  A phenomenal result and a potential leading indicator for the industry.

Another such indicator – for the last two years for which data is available, rollovers into SMSFs fell by 8% whilst rollovers out of SMSFs were up 43%.  Of course, not all funds are as fortunate as AustralianSuper, since the ‘system’ is still in net outflow to SMSFs, but these statistics show the experience is changing.

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.  It’s still the biggest segment of the market, and will keep growing (albeit at a lower rate) for years to come.

But, the next problem for the industry will be predatory market entrants – those that have seen the growth and have been looking for a way to extract maximum value from it.  And so, SMSFs are going mainstream. There are late-night TV ads featuring squirrels stating that there is no minimum size required for an SMSF – sign up now! They are for everyone – even squirrels (after all, squirrels are good savers).

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.

And if that’s the case, we can foresee AustralianSuper’s net inflow position from SMSFs improving further in years to come.