SMSF investment process is broken, but a good financial planner can fix it
... as they negotiate the transition from accumulation phase to retirement.
The 2014 SMSF Professionals’ Association of Australia (SPAA)/Russell Investments Intimate with Self-Managed Superannuation research, released yesterday, has identified a major opportunity for advisers to introduce some long-term strategic asset allocation and goal-setting advice to trustees.
Scott Fletcher, director of client investment strategies with Russell, says trustees’ inbuilt biases towards – and away from – certain asset classes means they are compromising the investment results they ultimately achieve.
“It’s one thing to have trustee-directed outcomes,“ Fletcher says.
“But it’s another thing to ask the question, ‘Does the trustee know best?’
“The survey gave us a lot of insight and a lot of information from which we can glean some of the gaps and opportunities to improve outcomes for trustees and to create opportunities for professional advisers to have input into that investment decision making framework.”
Well tested framework
Fletcher says there’s a well known and well tested framework for portfolio construction that exists among institutional investors. From an initial starting point it moves into a clear articulation of investment goals; then to the development of a strategy to achieve those goals; uses all available assets to create a portfolio to implement the strategy; has the flexibility to adapt and change to evolving circumstances; and then produces actual investment results that can be measured against the initial objectives, and the various steps adjusted accordingly.
“The initial starting point is critically important in determining if you’re actually going to get anywhere near achieving the outcome that you say you have, or how far short you’re going to be.
“Even though [trustees] rate themselves very highly in terms of [investment] knowledge, it’s based on the areas they know: ASX shares, and direct property. And that has direct implications for the sort of asset allocation that falls out of that.
“It seems from the data that trustees are moving from the starting point through to the construction stage, which is to say they’re moving from an initial set of biases through to implementation, and they’re bypassing the investment goals and the strategic portfolio construction phase.”
Fletcher says this supports another finding in the SPAA/Russell research that the service most highly valued by trustees is investment advice.
Opportunities for advisers
Fletcher says the big opportunities for advisers therefore to work with existing and potential clients in providing strategic asset allocation advice.
“It’s not just about which stocks and which sectors in an ASX portfolio; it’s about the broader issues around moving from accumulation phase through to transition phase to decumulation phase – and sequencing risk. Sequencing risk is going to be one of the critical risks that SMSF trustees are going to have to account for it’s a definite gap in the marketplace and a lot of the advice models that advisers are using at the moment are more suited to accumulation phase.”
Fletcher says the research has found that about 40 per cent of trustees have a clear idea of their investment goals.
“That effectively means that the other 60 per cent, the nature of the goals they have is vague, a moving feast, or they have no goals at all,” he says.
“There’s a definite opportunity there for the addition of strategic advice. And this is the bread and butter of financial advisers [who are] experts in goal setting and identification. It’s a natural thing to leverage that into an investment context, but in a total portfolio context, not just in the areas that [trustees] are familiar with.”
Fletcher says the practical upshot of a flawed investment process is the typical SMSF portfolio is over exposed to illiquid assets. Illiquidity and sequencing risk can collide with calamitous consequences.
“We know that 70 per cent of respondents in this survey identified de-risking [their portfolio] when moving to retirement as an issue,” he says.
Source: Professional Planner www.professionalplanner.com.au