The new face of self managed super funds – and they don’t want advice

Self managed super funds are attracting a new generation of investors who are younger and have less money. Picture: iStock

The self managed super fund sector is changing beyond recognition. Suddenly, SMSF operators are younger, they are commencing funds with a lot less in the bank and operating without using a financial adviser.

It’s a very different picture to the traditional profile of the flinty older investor who has millions squirrelled away in the nation’s best known tax protection shelter.

The data emerged this week in a new report from the Investment Trends group in conjunction with exchange traded fund powerhouse Vanguard, which is moving into super in a big way.

And for all the justified attention paid to the new super tax of 15 per cent on amounts over $3m being pushed in parliament by Finance Minister Stephen Jones, the median balance held in SMSFs across the board is $1m – that’s just one-third of the total at which the new tax kicks in.

Moreover, though the wider SMSF sector was definitely struggling some years ago when the number of new funds commenced each year fell by one-third between 2016 and 2019. They are back in vogue with 29,000 started in the year to December 2023, up from 26,000 a year earlier.

“It’s growing incrementally which is just fine, that is the ideal situation for the sector – we don’t want unexpected dramas,” says KPMG’s head of SMSF and estate planning Julie Dolan, who was my guest on the Money Puzzle Podcast this week.

A key takeaway from this survey of 1500 SMSFs is that independent investors running their own super money are more worried about superannuation rules changing than anything else – and that includes a sharemarket crash.

On the other hand, they are the least likely group to worry about running out of money. That’s probably because they are in control of their own fund which remains beyond all else the outstanding attraction of managing a SMSF.

Who’s involved?

The most startling development in terms of demographics is that investors are willing to start younger with less money. The average age of SMSF commencement is now 47 – if that sounds a little mature, consider that it used to be 55 only 10 years ago and 63 two decades ago.

Overall, existing SMSF investors will skew older, but this is to be expected. Nonetheless, the key future indicator – ‘commencement age’ – is dropping fast and there is no reason why it should not get even younger in the years ahead.

The other big change is that SMSF operators don’t use financial advisers. This is not quite the same as not needing advice but the figures speak for themselves.

With 2.2 members in the typical fund, the total population involved in SMSF activity is a little over 1.1 million.

However, the number of SMSF operators using advisers has nosedived by 35 per cent in seven years. Where it used to be about half and half once upon a time, the majority of SMSF funds – 475,000 out of the total 615,000 – ‘do not use a financial adviser’.

Instead, they use an accountant to guide them when they have issues that an accountant has the qualifications to answer.

For what it’s worth, among the key reasons for not using the advisers were fees – they cost at least $3500 a year – and ‘poor previous experience with advisers’.

Where is SMSF money going?

The important development in SMSF asset allocation is that the obsession with cash and shares is easing, even if cash rates are now very attractive.

There has clearly been a shift into ETFs where the allocation has more than doubled to 8 per cent of assets. All the same, it’s worth pointing out that SMSFs appear to be remaining faithful to stock picking active managed funds where the allocation remains unchanged for years at 9 per cent.

In terms of asset allocation the outstanding attraction of SMSFs remains the ability to have direct property in the fund – this is something that big super will never be able to match.

Property investment – mainly residential – is about 9 per cent of all holdings and then ‘direct’ commercial property is 7 per cent, making 16 per cent of all SMSF assets property-related.

Separately, the ability of a small-business owner to have a company HQ building in their super fund remains another powerful facility within SMSFs.

Just before the budget was released rumours flew through the advisory system – yet again – that there would be a clampdown on letting SMSFs borrow for property investment. As it turned out, it never came to pass, but until the government commits that you can borrow for property in an SMSF, those rumours will bubble up regularly.

Should you have an SMSF? It depends on the amount of funds you have in order to justify your annual fees. It also depends greatly on both your investment ability and your willingness to fill out forms (because the regulation of funds and their investments escalates endlessly).

There are financial advisers who suggest you need $1m to have a SMSF and there are those who say you can start for $200,000. Perhaps the number to use is the ‘actual’ number, which the hard data from this survey indicates is $330,000.

James Kirby presents the twice weekly Money Puzzle Podcast