The 2013 year end, saw an extraordinary level of take-over activity in the Self Managed Super Fund (SMSF) administration space. The sector has long been regarded as a ‘cottage industry’ due to its high level of fragmentation, the majority are managed via accounting practices with less than 20 funds. This situation has persisted despite remarkably strong growth in fund numbers over the last decade. With even the largest of SMSF administration firms holding less than two per cent of the overall market, the potential for consolidation has become an increasingly hot topic, and many have begun to believe that a consolidation is overdue.
AMP’s Paul Sainsbury released a statement saying, “This is an exciting and attractive sector and it makes sense for AMP to look for growth opportunities in this market.” yet there has been underwhelming traction from AMP over the last few years. It is not apparent that AMP has achieved, via consolidation of existing SMSF admin firms,more total Fund numbers than specialist online firms like esuperfund. The 10,000 barrier seems to remain, even with outsourcing to foreign domiciled BPO's.
So far, Australia’s other major financial institutions have chosen to wait and see how AMP’s foray into the sector progresses before announcing their own intentions. Recently ANZ sold its own foray into this market (superconcepts[1]). This leaves a hand full of independent SMSF admin firms with typically less than 1500 funds, there is simply no economies of scale with this small number of funds, when compared to a typical Industry or Retail Superannuation provider.
However, there are various factors that suggest consolidation may become a major trend in the SMSF industry in the coming years. One of the biggest of these factors is the shift towards "in-sourcing", as apposed to the more traditional "outsourcing" used by many large corporates' world wide.
The majority of small to medium accounting businesses (these groups make up the lion-share of firms administering SMSFs) provide a wide range of accounting services and often only look after a small number of self managed funds. As a result, these firms frequently have trouble finding and retaining staff with the specialised skills required to administer an SMSF. In addition, their processes tend to be highly manual and inefficient causing unnecessary errors and delays.
While the recent trend has been for "AFSL Advisors", this push is not coming from trustees themselves, who traditionally use their accountant for much more than just SMSF's, in fact the majority of Australia's SMSF's have more linkage and ongoing synergy with their accountant then with any other professional group.
National Development Manager at SMSF Advice Limited presented part of an Investment Trends survey to the SMSF Professionals Association of Australia (SPAA) in June 2012 which indicated that 22 per cent of accountants planned to outsource their SMSF work if the licensing legislation was implemented as proposed.
Yet the problem with outsourcing, is one of relationship control,and transparency, this is especially important with the changes to the Privacy Act (APP8) cross border controls.
The fact still remains that accountants are one of the very few "Trusted" professional, their holistic relationship to their clients is their "bread and butter".
People go though the pain of an SMSF for "control" over their superannuation, all the other issues are secondary.. the whole concept of outsourcing is foreign to this prime objective.
We see the future of SMSFs as one of in-sourcing to the SMSF trustee, this is effectively what accountants have been doing for many years, the Trustee obtains professional services from their accountant as required.
But we see this as expanding to include a wide range of professional service providers, advisors, lawyers, auditors, actuaries ect..
The key is control is retained by the trustee, not outsource to some faceless back office in a foreign country..
From a technology point of view, the move towards consolidation and especially in-sourcing begs such questions as; ”What sort of platform solutions will the large-scale SMSF administration firms of the future require?”, and ”Will they actually have any control over these platforms?”.
Within the Retail and Industry Superannuation world, the platforms are provided by the "custodians", the superannuation providers, simply utilise these services, and in many cases, from multiple Custodians. Much like investment managers have a panel of brokers.
In 2014, we released a DIY version of our enterprise SMSF365 service, this was designed specifically for this next generation "in-sourced" world, focused around the Trustee.
Our enterprise SMSF365 Accounting Practice is still the focus point, but now Trustees can in-source just like large Superannuation providers do with custodians today, but for any "professional service" provider..
So back to the Accounting/SMSF admin practice...
As a firm grows, its portfolio of funds often becomes more diverse in terms of the investment types that have to be catered for. One of the key advantages of a self managed fund is the ability for members to invest in almost any asset type they choose – hence large administrators will require a solution that allows them to easily manage complex investment instruments such as futures and options, across global markets as well as assets that are held in foreign currencies. If an efficient solution for managing these complex investment types is not properly implemented, they can easily create a roadblock in the administration process and lead to a significant decline in efficiency.
Over the years we found it strange that all current software solutions, require accountants to perform external calculations within spreadsheets, and then journal the results into their accounting software, which universally has no concept of multiple currencies, let alone any of the FX translation rules. This process is very expensive, as one accountant recently stated, it cost us over $1200 to just process some 300 trades, the client does not understand how time consuming this is. Back in 2008 we developed Broker Portfolio Services, which is a back office solution, to perform all these tasks; in 2012 we fully integrated BPS into our enterprise SMSF365 service, spreadsheets are now a thing of the past..
In addition to a powerful investment management system, online communication between the accountant and an increasingly "mobile client" is an essential tool, vital to maintaining efficiency and ensuring fund compliance.
An administrator will often be presented with transactions which cannot be properly processed without further information from the client. Deferring the processing of these transactions to the end of the year not only reduces efficiency, but can also result in inadvertent breaches of contribution caps, pension draw down limits, and even lead to a breach of the terms of the Superannuation Industry Supervision Act.
Comprehensive online reporting and fully automated processing of trade related transactions combined with fully complaint (7/10 year retention) document management has the potential to drastically reduce processing delays and provide members with more timely information, allowing them to avoid any inadvertent breaches.
Ongoing growth in the self managed super fund sector seems assured as more and more Australians look to take control of their retirement savings.
What about outsourced SMSF Administration firms?
The reality is, that the typical accounting practice, is not going to grow from 20 to 10,000 funds anytime soon. We have a similar vision for accounting practices, as we have for Trustees, we see an in-sourced future for specialist SMSF Administration firms, operating in much the same was as custodians do today.
The difference is the platform is universal, owned by the Trustee, and not limited to a specific firm.
This matches our mantra of "Technology plus Knowledge" equals competitive advantage.
In-sourcing potentially provides a ‘best of both worlds’ solution for an industry based heavily on personal relationships between suburban accountants and their clients. In-sourcing ensures the relationship between the accountant and their client is retained, while allowing the administration work to be done professionally by a team of specialists. By limiting themselves purely to providing SMSF administration services, an in-sourcing firm can more easily streamline their operations and apply their focus to developing the most effective processes for delivering timely lodgement and reporting, the same applies with audit,actuary and investment advice. Outsourcing is going...going, the future is in-sourcing within existing trusted relationships, with full transparency,and control in the hands of the Trustee.
What about Trustee education?
In theory there is no difference, in practice, this area is slowly maturing as specialit sites spring up and new education specialists enter the SMSF market, it seems strange that we can get online education for our children, but not for SMSF trustees.
What about Financial Advisers?
While the trustees of some SMSFs also seek professional financial planning advice, the majority of SMSFs have no formal relationship with a financial planner. The in-sourcing model not only provides a platform for advisers (we don't change any fees for Adviser access accounts), it also supports the "Know your Client requirement of their AFSL, and additionally a fee for service model.
The potential impact of SMSFs on industry funds?
Industry funds have consistently been losing their ‘large account balance’ members to SMSFs in recent years and this trend looks likely to continue.
The resulting reduction in average member balances increases pressure on fees as the industry funds are forced to spread their members’ costs over a proportionately smaller pool of money. Industry funds are increasingly finding themselves forced to develop more flexible solutions for their members in an attempt to retain them and slow the loss of funds to SMSFs. The model outlined here allows industry funds to offer an integrated SMSF solution, within a traditional Enterprise space. Technology will be an integral enabler in this shift and will inevitably lead to further consolidation in the industry fund market. One of the main issues with retail and industry superannuation is their "legacy" infrastructure and non compatible Custodian platforms, change will happen slowly, if at all.
Do we eat our own cooking?
Yes, we offer a Virtual Private Cloud, this is an in-sourced version of our SMSF365 service, which an wholesale entity can 100% own and control.
What about pricing?
Pricing tends to be very chaotic, some have volume based pricing, some have base process then heaps of add on, bit like buying a $50 low cost airfare then paying $100 to put your bags on.
With cloud based elastic computing there are no real economies of scale, the fees grow proportional to resources used, which equates to the number of funds processed. Hence all fees should be known and fixed, this allows deterministic pricing for all in the chain. For SMSF365 there is a single $80 per fund per tax return year.. Simple...
The development of a new and more powerful generation of SMSF software platform, focused on the needs of Trustees, and yet tailored to the needs of growing accounting practices and back office administrators, will allow the industry to provide a more professional, comprehensive and timely service to members, at a lower cost.
This technology driven shift will open up the benefits of self managed funds to a much larger proportion of Australians, driving increased member engagement across the industry and allowing more people to take personal control of their retirement savings.
With over $2.6 Billion leaving the Superannuation industry for SMSF's last year alone, the time is right for a Trustee and their Accounting Practice to lead change to the SMSF world.
This is the way forward for SMSFs.
References
[1] Financial Observer 31 Oct 2013; http://www.financialobserver.com.au/articles/anz-sells-super-concepts
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