Aligning SMSF investor needs to their asset allocation

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Aligning SMSF investor needs to their asset
allocation
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Aligning SMSF investor needs to their asset
allocation

• SMSFs represent significant opportunity for
  advisers due to low awareness of legislation
  investment issues
• The Super System Review identified concerns
  relating to asset allocation of SMSFs
• Found SMSF investors have concentrated portfolios
• Many SMSFs maintain the same asset allocation
  strategy for accumulation decumulation periods,
  regardless of the change in investor needs

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A real opportunity

• 69 of SMSF trustees said they had a good
  understanding of their obligations
• Yet only 51 of SMSF investors said they were the
  trustee
• When asked if contribution limits apply to SMSF
  contributions, 37 were unsure and 30 said no
• 30 could not explain the sole purpose test
• 97 seek advice to set up an SMSF, but only 52
  seek advice on their investment strategy

Source SMSF insights, CPA, Nov 09
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What do SMSF clients want from their fund?
Q. What are your top 3 priorities when selecting
investments for your SMSF? (Multiple responses
permitted)
Source Investment Trends 2009 SMSF Investor
Report
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• What SMSF investors are getting, is far from
  what they want - or need

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• Accumulation phase insights and strategies

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60 of SMSF assets in Aust shares cash
Overseasinvstmts0.8
Misc3.3
Mgd funds5.8
Trusts16.5
Aust shares33.5
Direct property12.5
Cash26.4
Fixed interest1.3
Average asset allocation of SMSFs. Source A
Statistical Summary of Self-managed
superannuation funds. Review into the Governance,
Efficiency, Structure and Operations of
Australias Superannuation System. Table A SMSF
asset allocation percentage 2008. Australian
Government 2009.
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Very little exposure to overseas assets
Overseasinvstmts0.8
Misc3.3
Mgd funds5.8
Trusts16.5
Aust shares33.5
Direct property12.5
Cash26.4
Fixed interest1.3
Average asset allocation of SMSFs. Source A
Statistical Summary of Self-managed
superannuation funds. Review into the Governance,
Efficiency, Structure and Operations of
Australias Superannuation System. Table A SMSF
asset allocation percentage 2008. Australian
Government 2009.
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High asset concentration in SMSFs
Asset concentration Proportion of SMSFs
100 20
90 34
80 47
70 61
60 76
50 91
An asset concentration of 100 indicates all
assets are held within a particular asset class
A Statistical Summary of Self-managed
superannuation funds. Review into the Governance,
Efficiency, Structure and Operations of
Australias Superannuation System. Table 21 2008
asset allocation. Australian Government 2009.
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Accumulation How to get from A to B
A. SMSF asset allocation
Overseasinvstmts0.9
Misc3.4
Mgd funds5.3
Aust shares32.7
Trusts15.9
Direct property14.0
Fixed interest1.0
Cash26.8
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Accumulation How to get from A to B
A. SMSF asset allocation
Overseasinvstmts0.9
Misc3.4
Mgd funds5.3
Aust shares32.7
Trusts15.9
Direct property14.0
Fixed interest1.0
Cash26.8
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Accumulation How to get from A to B
Explain benefits of overseas exposure Well-managed
, diversified funds options include Russell
Global Opps, Emerging Markets
A. SMSF asset allocation
Overseasinvstmts0.9
Misc3.4
Mgd funds5.3
Aust shares32.7
Trusts15.9
Direct property14.0
Fixed interest1.0
Cash26.8
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• Decumulation phase insights and strategies

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AA in accumulation decumulation similar
Asset allocation of accumulation members and
pension members in SMSFs. Source A Statistical
Summary of Self-managed superannuation funds.
Review into the Governance, Efficiency, Structure
and Operations of Australias Superannuation
System. Table 20 2008 SMSF Asset allocations by
SMSFs in accumulation and decumulation.
Australian Government 2009.
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but needs significantly different
Attribute Accumulation Decumulation
Time horizon Known, controllable Unknown, uncontrollable
Investment goal Future wealth Ongoing cashflowFuture wealth/bequest
Risk measure Variability in wealth Sustainability of cash flowsVariability in wealth
Cashflow Steady contributions Steady withdrawals
Timing of returns Dollar cost averaging generally beneficial Returns in early years have greater effect than later years
Inflation Seek growth in excess of inflation Protect purchasing power
Retirement date becomes transition date
Source The fundamental differences in
accumulation and decumulation, Richard K Fullmer,
Senior Research Analyst, Russell Investments
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The advantages of staying invested in retirement
the 10/30/60 rule
Assumes investment return at 7.8 p.a., salary
growth of 4.75 p.a. and income stream indexed at
3 p.a. Calculations assume 40 years of
employment then payments for 25 years in
retirement. Based on analysis by Matt Smith,
Russell Investments.
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When do investors become decumulators

• Cash flow is more important than wealth
• Low opportunity/desire to earn income from work
• High reliance on savings to fund living costs
• Drawdown rate on assets is higher
• Cash flow needs to last for longer period
• Assets primarily for retirement expenditure

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Framework to simplify investment strategy
decisions

• Deal with unknown time horizon
• Balance conflicting objectives
• Adequate, sustainable income vs desire to leave
  bequest
• Keep pace with inflation
• Adapt to changing circumstances
• Market falls reducing assets
• Market gains fuelling expectations
• Unexpected expenditures

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Three distinct pools of capital
The Essentials bucket Funds the essential,
tolerable lifestyle
The Lifestyle bucket Funds your desired lifestyle
E
The Estate bucket All the additional money you
have
Source Don Ezra, Planning to Decumulate
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Asset allocation should be at the heart of an
investors SMSF needs

• Discuss life stages, transition date, goals
  needs
• Critically asses existing asset allocation
• Determine steps to redistribute assets
• Discuss benefits of professionally managed funds