State of Play
The SMSF Administration industry today is at best a "cottage" industry, characterised by:
- High fees, or Lower quoted Base fees, with hidden charges (kick backs), or additional per transaction fees
- Very Low levels of automation, when compared to Industry or Retail Superannuation Funds
- High levels of individual fund compliance, Superannuation funds audit at the "system" level
- No economies of scale, resulting in low levels of specialist SMSF skills, very little "real" understanding of the application of modern day system audits.
- 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. - 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. - 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::
- 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).. - 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?
- Is your data protected in the case of a disaster, i.e geo location replication.
- Is your data "always" encrypted at "rest" and encrypted in "transit".
- 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...
- 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.
