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Risk averse DIY funds miss opportunities

Staff reporter |  19 February 2014  | 

RiskDIY funds have stayed heavily invested in cash, according to a report by the SMSF Professionals Association of Australia (SPAA) and Russell Investments. The report, entitled “Intimate with Self Managed Superannuation”, gives the lie to the claims that DIY super funds will distort the Australian property market. Low interest rates did not lead to a movement out of cash in 2013. In 2012, the allocation to cash was 33.9% and in 2013 this figure had only fallen to 31%. DIY investors did not benefit from the strong equity market in 2013. There was a slight decline from 37.1% to 36.1%, with residential property benefiting with a rise from 5.6% in 2012 to 9.9% in 2013.

What emerges is the need for diversification in DIY super funds. The report says there is a real opportunity for financial planners to educate trustees about "how risk as a concept is not related to asset classes along the risk curve but is also related to risk as an opportunity cost”. In other words, risk is not just the possibility that you will lose money, but also that you will miss the opportunity to make more money.

Needless to say, the financial advisers see an opportunity. From the press release:

Scott Fletcher, Director, Client Investment Strategies, Russell Investments says: “It is clear from the report that investment advice is most valued by SMSF trustees.


“It’s not all about picking stocks and sectors; SMSFs need to tap into strategic investment advice to help them achieve their desired goals and deal with complex issues such as sequencing risk, and the impact of this on retirement outcomes. There is a real opportunity for advisers to step up into this role.

“Like all investors, the preferences and biases of SMSF investors have a significant impact on their strategic asset allocation and their ability to link goals to outcomes. This is an underappreciated aspect of portfolio design that advisers can shed light on. Often, SMSF investors will jump straight to the vehicles they prefer to invest in, bypassing the all important goal-setting and asset allocation steps in the process.

“This will be a difficult challenge, however, as three in five trustees claim they have a “strong” or “very strong” knowledge of investments compared with non-trustees, with the majority (51.9%) using their own research process,” the report says.

The report found that there is a slowing of the startoing growth of SMSFs over the last five years. That is hardly surprising. Funds under management in DIY super funds are now larger than retail funds. The proportion of superannuants looking to establish an SMSF in the next five years has dropped from 12.3% from 17.3%. Over the longer term with 14.3% of the non trustees likely to set one up over the next five years.

Contribution caps and constant legislative change are considered disincentives, discouraging superannuants to invest in their future. The under investment is estimated at $16 billion annually because of these factors.

The report found that although people aged over 50 still comprised the largest number of SMSFs, the strong growth was in the younger demographics.

“It is the 41-50 age group that continues to be the largest source of demand, as cited by three-quarters of financial planners. This is followed closely by those in the 31-40 age group, where two out of three advisers are expecting greater demand from them.

“It is this younger demographic that has exhibited strong growth over the past three years. They are interested in the longer term and have a good understanding of the short-term issues versus the longer term opportunity."