The New breed of Accountants

The new breed of accountants

There’s a new breed of younger practitioners coming through that understand technology, and see the benefits, but a lot of it will be driven by the clients too.
We see these practices, picking up clients at the moment, from their current accountant, who doesn’t know Xero, doesn’t understand it and doesn’t want to understand it.

The client says: ‘I want to use Xero, it suits my business. 
But..if I have to print out my reports to give it to you, I don’t see the benefit'.
I need you to help me with the compliance stuff like BAS, Company Tax returns, and provide me timely advice on my business.'

They demand an Accountant who 'gets it'..

The Technology Revolution..

Cloud Technology is revolutionising how accountants work. The major driver of this change is elastic cloud computing, and storage; which is enabling not only companies, but their accountants with better and faster access to business intelligence that they can then use to advise clients. Cloud computing allows a company or a practice to access applications from an offsite cloud provider via the internet, rather than from company-owned and maintained hardware and software.
This provides 'software as a service', which in turn allows businesses to pick and choose best of breed software, bringing together online accounting, inventory, business intelligence, CRM, payroll, Jobs, Client billing, online Tax form processing, and many other packages.

Cloud computing has driven a proliferation of high quality software packages, available on a monthly or yearly subscription basis. This is particularly beneficial for businesses in the SME sector. Previously, the world class functionality available with some of this software was too expensive to be economic for SME’s, whereas today, the entry cost is very low, a typical accounting practice solution is currently sub $2000 per year, for a complete practice solution.

With the introduction of online accounting software, such as Xero,Quickbooks Online, SMSF365 and Simple Fund 360, ect..; accountants can now access client information on-line in real-time. This has made the accounts preparation process more timely and efficient, as well as opening up access to more up-to-date and detailed business information.

The benefits of having your financial statements prepared sooner are numerous. Whether it is managing cash flows, meeting banking covenants, understanding how a business has truly traded, or assisting with forecast preparations.

Less time taken preparing accounts also leaves an accountant with time to spend more time on understanding  the client business and providing insightful advice, enter the age of the Virtual CFO, for even small SME's. Access to the information online also means that this advice is based on real-time information. On-line access has the added benefit of encouraging greater collaboration between businesses and their advisors which in turn leads to better governance. It is well documented that good governance is crucial to the SME sector. So while there is still a need for great people on your board, that are willing to challenge and bring their experience to bear, technology is playing an increasingly important role in assisting more effective governance. 

But...

When we look at the typical suburban Accounting Practice, which are SME's, they are mostly "back in the dark ages". The concept of "eating ones own cooking" is a truism..

Many accounting practices, don't use online accounting services for their own practice client billing. In the rare case, when they do, this system is not linked or integrated with the Practice Management, or even their SMSF Administration system, so each exists as independent islands.. never to communicate or share data.

And yes each of these separate applications has their own fees..

The fact ... a typical suburban accounting practice, has many of the same drivers as their client companies.

The New Practice
The changes to the accounting landscape, by the arrival of cloud technology, cannot be underestimated. Cloud accounting, championed by a wide range of technology providers, does away with the old business model, and has the capability to make a range of existing accounting services obsolete, especially the low value services..
This change, is normal, and no different to the demise of the typist, travel agent, or corner shop in recent years.

The economics
With a Cloud based solution, the practice is purchasing the utilisation of a fully hosted and managed Practice Management service, via an online service provider. There is no software updates, no power outages, and no initial capital expenditure, and it’s all paid by a single yearly fee.

We have found the usual decision point for change, comes when a practice receives the quote for the "upgrade of existing servers", or the partner looks at the "current fees" being paid to older desktop Practice Management Software, which typically have not been updated in years.

A modern Cloud based Practice Management solution, can be as little as $2000 per year for up to 25 employees... this is probably less than the cost of electricity, to run the existing servers.

The costs
At the same time, the focus on costs is creating more outsourcing of work to locations around the world.
We are seeing a lot of  practices off-shoring work, especially SMSF related activities, to places like the Philippines, Malaysia, India. These countries are creating centres of excellence, with highly qualified staff and pushing the mundane work into even lower cost jurisdictions.

Over the last couple of years we have seen more of the higher value activity, such as SMSF compliance, also being pushed into those low cost jurisdictions. Previously it was processing work like invoicing, data entry, very much back office functions and data gathering, but we’re now seeing more value add, more strategic work, work that needs a better knowledge of accounting or tax rules.

We see this as an interim stage, the true Cloud Practice replaces routine work with automation, and concentrates its staff on high value add, activities like virtual CFO's ect..

The recent privacy laws on 'cross-border disclosure of personal information' while they do not prohibit outsourcing to overseas countries, simply make it a more onerous task, for any Australian Practice; as the Practice is now responsible for the client data if it is "disclosed" overseas.
See Does your data still call Australia Home

The Agile Practice
Because it is accessed online, the software is Mac or PC, mobile phone, tablets of almost any type compatible, well almost all.

There’s unlimited data storage, as the practice information is not held on the internal network. As a result, the business is not constrained to the storage, or memory on its desktop computer; as data is securely held in the cloud. And most importantly, it can be securely accessed from anywhere. This provides convenience and enhanced business agility. The only thing the firm, or any of its employees need is an internet connection, anywhere, anytime.

This approach gives a practice, the flexibility to adapt very quickly to the changing needs of an organisation, or the accounting market in general. We see a future that for some client companies,  it allows the Practice to better embed themselves into the client organisation, this is our vision of the next generation "in-sourced" accounting practice.

The level of compliance work, as a proportion of a practice business will reduce. What is holding many Australian firms back from the cloud are fears of security, with sensitive data moving out of a company’s local premise into "the cloud".  Many worry, with good reason, that the information might be accessed by un-authorised individuals. An example, is practices using insecure, USA located, free services to transfer client files...
This, in turn, creates great concern over practice governance, risk and controls.
Many of the more recent providers, are starting to ensure only authorised individuals can access data in the cloud, but many of these are located outside of Australia; Xero accounting and their WFM, is an obvious example. This is a bit like allowing anyone to logon to your internal system today, one needs to be sure your provider has a lot of Cloud operational experience, most of these providers did not even exist a few years ago. VillageMall has been providing Cloud based services since 1999..

To address these concerns, the leading software cloud providers, offer a practice" the option" of a cost effective 'Private Cloud' solution, where the practice retains ownership and control of the Cloud Practice, in a manner similar to their existing on-site services.

Today, there is simply no reason, that Client or Practice data, should leave the legal jurisdiction of Australia.

There is no compelling reason, that a Cloud solution, should require a fundamental change to your existing on-site compliance environment today, you simply don't need the hassles..

The barriers
One of the biggest hurdles to moving a Practice to the Cloud has been ATO tax form support, most cloud based practice solutions have been short of delivery in this area, it is "always next year".
But in 2014, this barrier has been removed by the Industry leading solution providers.

The old world Desktop Software Lockin
One would hope that a practice would move towards being "completely paperless", so that the many associated efficiencies can be realised, and also move to a subscription-based service offering.

Within the next few years, all practices will be able to jettison the license fees for there "old world" (read way to expensive...) software; they’re locked in at the moment. It’s all about timing the escape from the locking contracts, and additionally offers a practice the ability to move from one software support product to another more nimbly.

Compliance
There is a wide range of privacy,and compliance issues being faced by a practice.
At a minimum the following should be addressed by all Practice Management Solutions:

• Integrated, secure (100% Encrypted, and located in Australia) Records Management System.
• Registered against Taxation Ruling TR 2005/9 requirements
• Storage designed to meet Australian Privacy principle APP 8 (March 2014)
• Corporations Act in s286(1)
• X509 Signed Digital Timestamp, to meet legal filing date, and integrity requirements
• Implements an out-of-box "Standard Business Classification Scheme"

The Future practice
The key to the new cloud practice is the "automation" of  low value process intensive tasks..
At VillageMall, within our Practice Manager, we are getting close to a total automation of Activity Statements, via our unique Cloud SBR Tax modules.

The actual process..
1. Setup the client record with ABN and check Activity Statement
2. On the first week of each month, our Automation robot, will use the Practice Device Auskey, to pre-fill  the Client Activity Statement, from all of the clients enabled above, and the ATO has generated a AS for this period.
3. The automation robot will also create a Practice Job, using the Practice specific job template, and mark it as active, plus set the due date to match the data extracted from the ATO Activity Statement.
4. The Job is assigned to a staff member (manual bit)
5. Staff member reviews the ATO pre-filled form, and fills the form from the linked client Xero accounting package, yes just a single click (the high value bit)
6. Subject to authorisation, the Activity Statement can be submitted directly to the ATO in real-time.
7. Job is closed and Client invoice generated from job details, directly inside Practice Xero account.

It done..

Note, that Staff do not need to leave the Practice Manager application, everything comes to the staff member as they need it. Also they do not need access to the Practice Xero accounting system at all.


The Future is here Today..

See  Practice Manager for details.

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

The Accountants Practice, will it go the same way as Car manufacturing in 2017...

Australian Car manufacturing will disappear in 2017.
Typists are no more, online travel bookings are the norm, teller banking is going, or priced out of the mainstream..

Where will the typical, local accounting practice, be in 2017, or even next year?

Its seems like a life time ago, way back in 2005, that we released our Web Office fully integrated solution for Australian SME's.

At the same time net suite was just starting out, but very few would pay several $1k per year, and $10k, to $20k to setup a "total solution", which did not even do Australian payroll, sales force aimed at the least setup, with a small part of the net suite offering.

So here we are in 2014 almost 10 years latter, very few if any Practices have a best practice solution, most have a set of disjoint applications, on various platforms.

A few things we have learned over this period, about Accounting Practices..

• Most offer a range of client accounting services the most common being
  a) Company setup, BAS/IAS services
  b) Company Tax returns
  c) Tax Agent services, and advice.
  d) SMSF year end accounting, audit and tax returns.
• Of the over 480,000 funds almost 80% are held in Accounting Practices typically 20 to 50 funds.
• SMSF's make up only 20 to 40% of a typical Accounting practice client base.
• Most SMSF's do other business with their accountant.
• The majority of existing SMSF's were setup by an accountant.

The Specialist SMSF Admin Myth..

SMSF's are  still, a "cottage" industry, there are No economies of scale, few if any SMSF admin specialist firms make money, and they individually manage a very small proportion of the total SMSF funds..

One can count the number of MSSF admin firms with greater then 1,000 fund on ones hands.

AMP after consolidation of several admin firms is reported to have some 11,000 funds.

Why is this so?

Specialist SMSF admins miss the point, that an SMSF is just a part of the relationship they have with their local accountant.

While the Industry tries its best, to make SMSF's very "complex" and wave the ATO compliance "red flag", the reality for the majority of SMSF's are that they are very simple.

The typical fund, has a set of Managed Funds, some Australian Equity shares, Fixed Interest and perhaps some property or unlisted investments, which don't churn, the other significant group are fully in pension mode, also simple; with a a range of funds in between these.

So the problem is actually fairly straight forward, after all this is a "SELF" managed super fund business.

What about  Back Office Outsourcing?

There has been a steady growth in overseas suppliers of back office providers, but the largest of these has less than 15,000 funds..

I believe the future of BPO's is to "in-source" directly into an local Accountant Practice

What about Accounting Practice groups?
These tend to be  a set of  independent Practices, with little or no common systems, mainly though the lack of scale able system solutions in this space.

The SMSF Admin Software Myth..

The reality of any "non monopoly" market, is that there is a tendency to converge service offerings and price.

While there is a lot of hype at the moment between a few players, about how their solution is "far" better than anyone else..

The reality, is that all offer mostly the same solutions, the differences are very minor and tend towards personal preferences, rather than technical capabilities.

Debates about what is a cloud, and comparing very technical aspects like remote access to browsers access in a modern day environment is rather useless from an Accounting Practice perspective, it simply does not matter.

From an SMSF accounting software perspective, SMSF365, Class Super and BGL360 all are very similar, and to be honest almost impossible to make a case for one over the other at this basic level, all will meet the typical accounting requirements. Also Software prices are now tending to the norm of ~ $100 per fund per year as almost all software providers off a online service.

So what about the future of Accounting Practice Management?

Non SMSF accounting has become a commodity, Xero is an example of this.

But as SMSF's make up only a small percentage of a typical practice, the issue is not about SMSF accounting software, but rather about how it integrates in to the "Accounting Practice"..

Many practices have gone from the high cost specialist services, to the current set of "bolt" on applications.

The last thing a practice needs is yet another SMSF Software "island".. it all gets tooo hard..

The SMSF side of the business must integrate into the "business".

The typical Practice does not have a "big" problem to solve, a typical practice is quite small so the "fees" for a "Practice Management" solution should be "fit for purpose"..

Document Management?

Physical paper documents are like the dodo bird, they disappeared years ago..

All service providers supply electronic documents these days, Banks Telco's ect, it will cost you extra, to get paper. It has become socially unacceptable, bit like smoking, to store and distribute paper,and other than small set of very specific cases paper is not legally required.

Having said this, I did get a call the other day to say his SMSF Admin firm, had just sent him a "box" of color printed Fund documents; his comment was even the Invoice was printed in color!
The bit he really liked (sic) was pulling the documents apart and scanning the pages to a PDF file, for his own use, yes there was zero electronic documents. And yes trees are still being cut down in 2014.
It is archaic practices like these that killed off the Car industry.

Document management, at the practice level is almost non existent, at best it is a set of "folders" on a local server, at worst it is stored within public services located in the USA, i.e "dropbox" etc and yes, the client data is stored unprotected in these foreign data centers.
In almost all cases there is zero encryption applied, and a Practice often stores "sensitive" data for their clients. At a  minimum all stored documents "should be encrypted at rest" as even "local servers" are now connected to the internet. Once again simply best practice.

It will be interesting to see the effect of new Privacy Laws which come into practice in March 2014 regarding APP8 cross boarder controls over client data, and how some of the Accounting Practices will meet this requirement. APP8 also applies to use of foreign based Back Office service suppliers. Several cloud based service providers use very low cost "Rackspace" hosted in Texas in the USA

Enter SMSF365 Practice Manager
Give that we already have our own Web Office solutions, we decided to provide a complete Accounting Practice solution as part of our "SMSF365 Accounting Practice" service, and to provide it for no additional fee.

As most Accounting Practices are using Xero for many aspects of their practice, we decided to integrate SMSF365 with Xero workflow max, to allow a practice to get an immediate gain, and preserve their investment, mostly time and effort, and not require yet another "new" set of practice software.

This allow allows a fully integrated solution from day one, plus get immediate productivity gains.
An while we believe SMSF365 is the best cloud based SMSF software available, it simply does not matter, for the typically 20 to 50 SMSF funds within a typical Accounting Practice, and while we would love to have a single account with 100,000 funds this is simply not the reality of the Australian SMSF market.

As the only SMF sofware to support ATO SBR SMSF tax returns we are uniquely positioned with the addition of Xero integration to support a integrated Accounting Practice Solution.

The Next Step
Given that the practice now has a cost effective and simple to use solution, what next?
Xero accounting has quite reasonable fees, but Xero workflowmax is quite expensive..

Hence our strategy:

• Allow integration with existing Xero WFM clients, to preserve their investment.
• Integrate directly with Xero Accoutning: Inventory items, Invoice, and payments.
• Offer a simple version of WFM, using our Web Office feature set, included in the SMS365 base fee
• Extend our ATO SBR offerings to support non SMSF sevriecs, like company, BAS/IAS tax returns
• Develop a set of stanardised Job templates to suite SMSF Admin, and Financial Planning aspects of a Accounting practice..

See details at
http://www.villagemall.com.au/content/WebSuperFund/Service/smsf.htm

Conclusion
Unlike, Australian based Car manufacturing, there is a bright future for the Modern suburb based, Accounting Practice, providing a range of "trusted" services to their clients.
But like all industry segments, there is always a need to ensure world best practice, in every thing we do..

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

SMSF Administrators Going going... Gone..

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


Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

"Honey I shrunk the Kids"... Moment.

It's the 1st Jan 2014, a new year...

something's just creep up on you, no "big bang" just gradual change..

All my bank accounts are now on-line, I never go to a bank any more. don't even know who my bank manager is ?

But one of the most surprising  realisations is that all my Family Documents, and online accounts details are "every where"..

What if I had an accident or died, how would my family gat access to all those important family documents and access details..

Now my first though was my Wife will have everything, but we plan on travelling a lot more together in the future, so what about the kids ect, and where do we put all of the "Important Stuff".

A quick check shows we have stuff all over the place, and some stuff is only known to me..
Last year we moved most of our  infrastructure online, so stuff is now on my mobile, my work computer, in data centres, and the cloud..
every picture I take, is stored on my "Google drive" linked to my mobile phone..


So Where Does One securely Keep Important Family Documents?
While there are lots of online storage, none really come close to providing the secure means of allowing access to "trusted" people who is not yourself..

All rely on an account and access password details, once you give it away, then it is no longer secure.. and keeping track of these ever growing account details is an issue in itself..

The latter I solved with a secure password storage program we developed, based upon need, many years ago, when I founded a security company "Spyrus Australia" .. and still use today..

I use it because I know how it was developed, and it utilises some of the high assurance cryptographic technologies we developed for the Military, Governments and fortune 50 companies across the globe..


A Solution?

Let’s borrow an ancient yet incredibly useful idea: if it’s really important to get your facts right about something, be sure to have at least two or three witnesses. This is especially true concerning matters of life and death but it also comes up when protecting really valuable things.
By the 20th century, this “two-man rule” was implemented in hardware to protect nuclear missiles from being launched by a lone rogue person without proper authorization. The main vault at Fort Knox is locked by multiple combinations such that no single person is entrusted with all of them. On the Internet, the master key for protecting the new secure domain name system (DNSSEC) is split between among 7 people from 6 different countries such that at least 5 people are needed to reconstruct it in the event of an Internet catastrophe.
If this idea is good enough for protecting nuclear weapons, the Fort Knox vault, and one of the most critical security aspects on the Internet, it’s probably good enough for your Family Documents.

The Technologies..
One of the technologies we developed to protect the "Root" key in our Certification technologies was  a split key technique, which distributed parts to many individuals ( these were on secure smart cards), and the process of combining these parts back together.

One of the problems with very secure encryption, is that is it secure, and cannot be circumvented even by the people who developed it. Hence once your data is encrypted, one of the real issues is how to prevent  the loss of access to your data, the issue we needed to solve for the Root private key used in a global certification infrastructure.


The Family Document Service, is born..
We have developed a secure solution, which addresses the issues above, and provides secure storage, with a split key access scheme.

We plan to released in the first quarter 2014.

Complete piece of mind, for those Family Documents, from only $20 per account per year.

See http://my.familydocuments.biz for details..




Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Low interest and the "Cash" myth...

For those prepared to take on extra risk, exiting cash may make sense. But for the nearly or already retired, capital preservation is key. For many SMSF trustees, cash remains the preferred defensive asset. Rising competition among banks for consumer deposits means returns are still ahead of the most defensive asset – government bonds.

One of the more strange "finance profession" comments I have recently heard, is "Stay in Cash, you will slowly Fry. PMSL"1
- David Lunn, Director , LifeStyle Wealth Partners.

Fear uncertainty and doubt (FUD), combined with economic jargon slips many trustees into a comatose like state, and rightly so: finance professionals carve out a living making simple subjects seem complex. It’s the best way to convince you to part with your hard-earned money.  Throw away comments like the above, typically have a tendency to be very light on any facts, and often emotive, or personal in focus.

Inflation
So why do we care about inflation? Because it is meant to give us an indication of how the prices we pay for goods and services vary over time. Inflation is one measure of the cost of living. Hence, inflation suddenly becomes important to all savers. We need the savings we set aside for retirement to beat inflation. If we don’t, our nest egg will not keep pace with our lifestyle. And if we’re in retirement, we want our savings to generate returns that, as a minimum, meet or exceed inflation otherwise our purchasing power will shrink.

Since 1982, annual “core” or “underlying” inflation in Australia has averaged about 4 per cent. If we focus only on the period since 1993 when the Reserve Bank of Australia formally started targeting the inflation rate with its chief policy instrument, known as the “target cash rate”, inflation has averaged a touch under 3 per cent.

Hence an overall savings strategy should deliver returns greater than 3 per cent annually with the minimum possible risk.

A related issue is what sectors offer savers effective “inflation hedges”. In this context, there is a pervasive myth that fixed income is a bad inflation hedge. This is both right and wrong. Fixed-rate bonds that pay a set rate of income decline in value in periods when inflation is high and interest rates rise.
This is not hard to understand: if you buy a bond that returns 5 per cent annually for six years and interest rates on other bonds rise to 6 per cent, your bond’s price will fall until its yield makes investors indifferent between the two alternatives.

RBA cash rate and Inflation
This begs the question of whether the RBA’s target cash rate is a good inflation hedge?

The chart below shows the correlation between the RBA’s cash rate and core inflation since 1990. Given the RBA is officially mandated to manage inflation with its policy rate, one finds, the correlation between interest rates and inflation is a strong at around 73 per cent.

The Cash Myth?

Contrary to popular myth, cash is, therefore, an excellent inflation hedge.

But does it give you a “real” return above your cost of living?

If one received, say, 1 per cent annually above the RBA’s cash rate through smart investments in bank deposits, your “real” return after inflation would have averaged about 4 per cent over this period. 

An alternative Strategy

"If the objective is to produce a steady, tax-effective income stream, good quality shares with a long history of paying dividends are a real alternative to a term deposit.
Some current yields are very attractive and if you then add the franking credit, you are looking at a nice, tidy return,” he says.
He adds this strategy requires investors to be comfortable with short-term volatility as their capital will still vary. But by focusing on quality and targeting companies with high dividends, investors may also experience less volatility as typically many are defensive stocks".
- John Donald , Partner and Senior adviser , Ipac Western Australia

Peak Debt and the Effectiveness Monetary Policy

So why has monetary policy become ineffective?
The answer is deceptively simple.
Loose monetary policy is designed to encourage consumption and investment by making current period consumption and riskier assets more attractive, and has historically been an effective tool in this regard.
This is no longer the case because we have collectively reached ‘peak debt’ (at least in most western countries, including Australia).

Whether an individual, organisation or nation state, for any given level of income there is a maximum level of debt that can be accumulated without triggering a repricing of risk. Beyond ‘peak debt’ any further increase leads to a repricing of credit risk – the price that must be paid for that debt.

If you can’t increase income, you can’t increase the debt level. The monetary authorities are trying to send one signal about the pricing of credit, but at a national level the markets are sending exactly the opposite signal – the two just cancel each other out. (There is some increase in consumption because of the cash savings in interest cost, but at a national level this tends to be neutralised because one person’s interest expense is another person’s income).

This is the fundamental cause of Europe’s woes – countries like Greece, Spain and Portugal went past their ‘peak debt’ levels, and their creditors started to re-price their debt because doubts emerged about their credit-worthiness.

The RBA will continue to cut interest rates, but their efforts will be in vain, because many economists, suggest that we have already borrowed as much as we can for our current level of income, given the mining boom is over(and having spent much of the money on non-productive real estate assets, have little in the way of options for driving the improvements in productivity which are a fundamental pre-requisite for increasing the size of the Aussie pie).

Risk

The GFC is still fresh in many people’s minds of many and there are still concerns over the state of the European and US economies, so there is still a comfort factor in bank accounts and term deposits, even if returns may be lower, than some alternatives.

This article looks at cash with a view, that cash, correctly managed, can provide a reasonable return, plus an inflation hedge, with very low risk.

But as always, it is up to the individual SMSF trustee, to get the facts and make an informed decision.

“I can afford to be patient, but to make an acceptable return above inflation, I need to take some risk. Diversification is important because nobody can accurately forecast the future value of any investment.”
- David Murray, Senior Adviser, Credit Suisse

Notes

1. PMSL, is slang for Pissing MySelf Laughing..

Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Your SMSF in the Cloud, the Opportunities...

State of Play
The SMSF Administration industry today is at best a "cottage" industry, characterised by:

1. High fees, or Lower quoted Base fees, with hidden charges (kick backs), or additional per transaction fees
2. Very Low levels of automation, when compared to Industry or Retail Superannuation Funds
3. High levels of individual fund compliance, Superannuation funds audit at the "system" level
4. No economies of scale, resulting in low levels of specialist SMSF skills, very little "real" understanding of the application of modern day system audits.
5. Auditability
   a) Could not find a single accounting or SMSF administration platform in use today audited against ISAE 3402.
   b) Most of the feeds, such as brokers, contract notes, registries ect are also not audited. We see recent announced solution which "scrap" data from pdf file raw data, these are not originals or audited, but are being presenting as "true and accurate" data to auditors.
   c) Due to the rise in the variety,and volume of traded instruments, markets and currencies, by SMSF's; auditors have a difficult time auditing the level of complexity and interactions, which in many cases is hidden from the auditor.
   The old "get your bank to send me your bank statement" approach simply does not work, with modern information systems..
   Note in many cases this is not an auditor issue, but is mainly caused by the lack of audited, or even audit-able data available to SMSF auditors.
6. Trustee access to SMSF information  to make informed decisions
   Very few systems offer a daily "reconciled" set of data to trustees, even less offer "reconciled" daily fund and member positions. This is due to the very low levels of automation in the current systems,and the lack of "audited" data to perform daily reconciliations. Most systems don't even tell you if the reports are "reconciled", you just get a bunch of reports.
7. Trustees want the advantages of an SMSF (control, direct ownership and flexibility), but typically don't want the day to day compliance issues. Trustees want to concentrate on their Investments for retirement, or during retirement. The majority of trustees really don't want to care about data feeds contract notes, or the myriad of  SISS and ATO accounting issues..
   It is delusional to suggest the typical SMSF Trustee can be an expert in these areas above.  

It is truly a sorry state of affairs..

Cloud Computing

Cloud computing has become an overloaded term, which is used to mean almost anything..

I will use the NIST definition:
"Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction"
Read "It is a collection of computing and enabling resources, to realise "stuff" like SMSF Admin services when combined with Application Software.. "

What does this mean to the SMSF industry?
We are one of "the" pioneers of "Cloud Computing", way back in 1999; in those days it was called "ASP Providers" (this is now one of the cloud computing "service models" within the above NIST definition).

What we were trying to do, was to overcome the limitation of the current "desktop" accounting packages in use, in those days the pioneers were groups like MYOB and even BGL
It is simply economics, if you want to put a database on a clients desktop computer, it cannot be a $50k enterprise SQL server, it needs to be a very low cost standalone system. Now these same economics applies to almost all elements of the system. To this add the cost of software updates, and the "time lag" of releases to distributed clients.

An important aspect of cloud computing is "Elastic or on-demand processing", this allows me to dynamically scale the processing resources required to meet a specific load, this may be growing the Numbers of funds, or simply doing 100,000 tax returns overnight..
I don't have a fixed capital cost, I simply pay for what is used, and if I am smart about it, I will match this cost to an income stream..

The last advantage is not cloud in itself, but rather that one now has an "enterprise" solution, rather than a set of dis-joint uncontrolled desktop solutions.. This is the ASP or SAAS service model within Cloud computing.

The SAAS model allows for the first time things like an ISAE 3402 audit report to be performed each year for SMSF administration systems. This brings them in line with normal "enterprise" solutions "Google" the systems in Australia with ISAE 3402 reports, they are not desktop solutions. Its is simple economics..

SMSF Automation

It is simply not possible to 100% automate, 100% of the existing SMSF administration tasks today..
It is possible to 100% automate 99.9% of the volume of SMSF administration transaction, with full ISAE 3402 audibility back to the original raw audited source data, i.e unbroken audit chain into the SMSF tax return.

On a typical active investment fund, of the 500->1500 transaction each year, about 10 to 15 transactions will need to be manually entered into the system.. This gets very close to Industry and Retail Superannuation systems.

In an non "cottage" market, this should be reflected in a yearly wholesale SMSF fee with audit, in the sub $300 area, yes lower cost with increased compliance and overall quality.
I call this the "jetstar"(1) SMSF service..

This scale of fees are more than competitive with any Industry and Retail Superannuation Fund ( the Cloud is providing the same economies of scale and enterprise solutions as a Superannuation Fund), and open up the opportunities to the under 30's SMSF market(2), who are currently locked out of the high "minimum balance" SMSF word today..

Our own Cloud  based SMSF administration service, called SMSF365 exists today, and can achieve these objectives.. the "Cottage" SMSF Industry has the choice to merge, as required these capabilities to realise the benefits.. Like all could services they are on-demand, consume as little or as much as required.

And just like the real Jetstar, this approach may not be "the" solution for 100% of the market, my proposition is that just like Jetstar it is an option, always let  the client decide..
The "Qantas" model is going in only one direction "broke", even Virgin has acquired  their own jetstar "tiger" airways.
Just like airline travelers, trustees, accountants can work out what is right for them, and their clients.

I predict that within 5 years, there will only be Cloud based SMSF administration based solutions in existence, and most accounting firms with less than 20 SMSF funds will outsource their back office to a specialist "jetstar" SMSF admin firm..

It is an exciting time for the SMSF Industry.
Enjoy...

Charles Moore
CEO VillageMall Pty Ltd

Ok.. so there must be some downside,what are the risks?

Not all Cloud Services are created equal, just as not all existing SMSF admin services are the same.
Key questions, I recommend you receive answers for::

1. Is my data being sent out side of Australian jurisdiction ?
   If your SMSF data is being worked on by anyone outside of Australia (Indian, or other located  back office outsourcing is very common, an in all of these cases your data is going outside of Australia, don't listen to the waffle we are accessing your system in Australia)..
2. If a third party is working on your data, ask if they are SAS70 audited, this is most common standard and is mandated by all the Big players in the USA.. If not I then suggest you ask why not?
3. Is your data protected in the case of a disaster, i.e geo location  replication.
4. Is your data "always" encrypted at "rest" and encrypted in "transit".
5. Can I get my data in a form suitable to store under my control, meet ATO and other regulatory data retention requirements? Ideally this should be in a  vendor neutral format, an IBM 80 EBCDIC char punch card is not much use today.. or even Word Perfect files. I still miss those ctl K->D sequences...
6. Bottom line you need the information above, you may still make a decision to use the service, even with the risks, but this is an informed decision, your basic right..
   
   The issue... Your informed consent is required, before your data is sent overseas, after all it is your data.

For the details, take a look at  my blog  Does Your Data Still Call Australia Home

--- notes

1. "Jetstar" is the trade mark of Jetstar Airlines, and  is not related to or in any way connected with this blog..
2. The “2013 Active Management Report” found 46 per cent of recent SMSF investors were under the age of 30, while 44 per cent of the next wave of intending investors were also under 30. -


Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.

Plutus- Managed Investments for Retail SMSF Trustees

Finally.. after many years of R&D, the ultimate SMSF solution..

For the first time, a true alternative
to Retail and Industry Superannuation funds..

Features:

• Trustee directed, just select from a range of global, professionally managed Mandates
•  - just like a traditional managed fund, but you directly "own and control" the securities within the mandate.
• - mandate can include almost any global market, instrument type and currently 16 different currencies.
• - get rid of your existing, old school, Managed Funds with the typical 2% plus fees; even when your balance is going south!
• - get rid of trailing adviser, or SMSF admin kick backs; there are no free lunches..
• Build your own mandate, via ETF's to get Index coverage of the market, or individual stocks, who does not want to directly own Apple, Google or Coco Cola?
• We do all the portfolio construction, and re-balancing, all in your name.
• Integrated on-line 24*7 Global Trader, for those add-hoc trades, on any global market, anywhere, any currency (well almost)
• All investments, directly owned, and controlled by your SMSF, no unitized, pooled, or embedded tax issues.
• A Fully Manged solution, no "accounting", data feeds, or traditional old world cottage industry SMSF issues to worry about, we look after them for you.
• Select your mandate.. and we do the rest.
• On-line access, with daily reconciled accounts, includes Australian compliance and tax reporting for global mandates, available 24*7*365.
• Service includes a Managed SMSF Deed service, SISS and ATO compliance, reporting, auditing, actuary if needed, and online tax return submitted to the ATO. All done with our fully integrated SMSF365 service, via one of the leading SMSF administration, and audit firms in Australia.  
• Plutus, lets you concentrate on building Wealth,  for your retirement, and just like any Industry or Retail Superannuation fund, we do the rest for you.
• Plutus is SMSF wealth management, made easy for Retail Australian Trustees.

Ask about our "one-click" Plutus solution to move your existing Industry or Retail Superannuation account across to the next generation SMSF solution.

Get all the benefits of an Enterprise Retail/Industry Superannuation solution, but with direct control and ownership, of global securities, with none of the old world SMSF complexities or hassles.

Gen X/Y, ask about the Plutus online solution to start your, no hassle, wealth accumulation.

Take control, with direct ownership of your retirement Wealth!

Start 2013 on the right footing, open a Plutus account today.

Enjoy..
Charles Moore

Accounting Practices, retain your clients, stay out of the "with advice AFSL world" , but back office all SMSF drudgery to us.

Dealer Groups/Advisers, retain your clients, concentrate on providing professional Investment Advice on a fee for service basis, outsource all the portfolio and and SMSF drudgery, and compliance to us.

Retail or Industry Superannuation Funds, retain your clients, by offering an Enterprise SMSF solution out of the box. We take away the SMSF specific compliance pain, while providing a standardized enterprise solution, via our private label service.


PS: If you hear about "next generation SMSF", this appears to be the season for these,  then see their lists of features if  a lot of technology, accounting, data feeds, or even contract notes, or registry data, your are looking at an old world solution..
Time to compare to the truly next generation Plutus Managed SMSF Service..


Disclaimer The contents of this site should not be understood to be accounting, taxation or investment advice but rather as general product related educational information that may or may not meet your specific requirements.