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Aligning SMSF investor needs to their asset allocation

Aligning SMSF investor needs to their asset allocation. Aligning SMSF investor needs to their asset allocation. SMSFs represent significant opportunity for advisers due to low awareness of legislation & investment issues

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Aligning SMSF investor needs to their asset allocation

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  1. Aligning SMSF investor needs to their asset allocation

  2. 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

  3. 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

  4. 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

  5. What SMSF investors are getting, is far from what they want - or need…

  6. Accumulation phase insights and strategies

  7. 60% 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 Australia’s Superannuation System. Table A: SMSF asset allocation percentage 2008. Australian Government 2009.

  8. 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 Australia’s Superannuation System. Table A: SMSF asset allocation percentage 2008. Australian Government 2009.

  9. High asset concentration in SMSFs 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 Australia’s Superannuation System. Table 21: 2008 asset allocation. Australian Government 2009.

  10. Review portfolio/risk-tolerance levels Divest under-performing or over-weight stocks Increase diversification through mgd funds/ETFs 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%

  11. Set maximum cash position for fund Reallocate contributions into other asset classes Take advantage of tactical opportunities 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%

  12. 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%

  13. Decumulation phase insights and strategies

  14. Decumulation phase Accumulation phase Overseasinvstmts0.7% Overseasinvstmts0.9% Misc3.0% Misc3.4% Mgd funds5.3% Mgd funds6.5% Aust shares35.8% Aust shares32.7% Trusts15.9% Trusts17.1% Direct property10% Direct property14.0% Fixed interest1.0% Fixed interest1.7% Cash26.8% Cash25.2% 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 Australia’s Superannuation System. Table 20 2008: SMSF Asset allocations by SMSFs in accumulation and decumulation. Australian Government 2009.

  15. …but needs significantly different Retirement date becomes ‘transition date’ Source: The fundamental differences in accumulation and decumulation, Richard K Fullmer, Senior Research Analyst, Russell Investments

  16. 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.

  17. 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

  18. 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

  19. Investment Strategy Conservative portfolio with tax aware income options L E Dynamic growth strategies with an income option. Dependent on investor risk tolerance/capital growth requirement and estate planning. Three distinct pools of capital The Essentialsbucket Funds the essential, tolerable lifestyle The Lifestylebucket Funds your desired lifestyle E The Estate bucket All the additional money you have Source: Don Ezra, Planning to Decumulate

  20. Asset allocation should be at the heart of an investor’s 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

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