Why the interest in index funds?

An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the S&P/ASX 200 index. An index fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their nominated benchmark index regardless of the state of the markets[1].

An index investment fund seeks to deliver a similar return, less fees, as the index it has chosen to benchmark. In its simplest form, an index fund purchases the same shares in the same proportions as its index. For example, an S&P/ASX 200 index fund will hold shares in Australia’s 200 largest companies. An MSCI BRIC index fund will invest in major companies in Brazil, Russia, India, and China. Index funds cover shares, commodities, precious metals, and other asset classes.

With a vast range of indices to choose from, index funds are a useful tool for investors seeking access to both broader and more narrowly focused segments of global investment markets.

The alternative to index (or passive) investing is to either pick individual shares or invest in an active fund. Through stock picking and active trading, active fund managers seek to outperform their selected indices.

Both index and active funds may be listed, in which case units are traded on a stock exchange in much the same way as shares. Or they may be unlisted, with investors buying and redeeming units directly with the fund manager.

What are the advantages of index funds?

There are several reasons why index funds have become so popular:

  • Lower fees. Without expensive investment analysts picking shares, and with relatively low levels of buying and selling, it costs less to run an index fund.
  • More tax efficient. Active funds have higher turnover rates of their underlying shares, which triggers more capital gains tax events. Tax paid along the way can reduce the total capital pool on which compound interest can work its magic.
  • Better returns. Many studies have shown that, on average, index funds do better than active funds. In part that’s because of the lower fees and tax efficiency, but it also reflects how difficult it is to pick winners in the share market.

What are the disadvantages of index funds[2]?

Index funds do have some downsides:

  • No outperformance. Some active managers do have good records of beating the market. However, it’s difficult to identify who these are in advance.
  • More risk in a falling market. Index fund managers don’t use stop-losses, hedging, or shorting to protect their portfolios when things head south. Index funds follow the market down, as well as up.
  • Lack of choice. You invest in the assets that make up the index, even if that includes companies you don’t approve of, perhaps due to poor records on environmental or social responsibility.
  • They’re boring. Many people enjoy backing their investment hunches, either through direct stock picking or selecting specialist managed funds. That fun isn’t available to the pure index investor.

How can index funds be accessed?

Index funds can be held directly, just like any managed fund. Many investment platforms include unlisted index funds on their investment menus and may also provide access to listed index funds. Public offer superannuation funds that provide a wide range of investment options will usually have index funds on their lists.

What’s right for you?

At one extreme there will always be determined DIY stock pickers with no interest in managed funds of any variety. On the other hand, there are investors for whom index funds provide all the tools they need to construct well-diversified, low cost investment solutions.

Between them is a large group of investors who use index funds to build the foundation of their portfolio, while looking to add some icing to the cake via active funds or share selection.

There are many ways in which index funds may be used to help you reach your investment goals. To find out more, talk to your Lifespan Financial Planning authorised financial planner.

[1] https://www.investopedia.com/terms/i/indexfund.asp

[2] 5 reasons to avoid index funds: https://www.investopedia.com/articles/stocks/09/reasons-to-avoid-index-funds.asp

Index Funds vs. Actively-Managed Funds: https://www.thebalance.com/index-funds-vs-actively-managed-funds-2466445

What is money really?

That $50 note in your pocket. What’s it worth? “$50,” you say, probably thinking it’s a dumb question. But is it really? Or a sheet of plastic and a bit of ink that likely cost the note printer less than a cent? Your $50 note only has value because the government declares that it does.

This lack of intrinsic value means your $50 note, and the balances of bank accounts that represent most money in circulation, might better be described as currency rather than ‘real money’. For the majority of us, most of the time this distinction is of no great importance, but there are times when it matters a great deal.

Over the past few thousand years, all sorts of items have been used as currency, from shells and cocoa beans to soap and cigarettes. But to be considered real money, several key criteria need to be met. The most important are that it is:

  • Recognised as a medium of exchange and accepted by most people within an economy.
  • Portable, having a high value relative to its weight and size.
  • Divisible into smaller amounts.
  • Resistant to counterfeiting.
  • A store of value over long timeframes.
  • Of intrinsic value, i.e. not reliant on anything else for its value.

Throughout history, gold and silver have come closest to meeting these and other criteria, though nowadays you’ll have difficulty paying for your groceries with gold Krugerrands. Also, you’ll want to keep your gold and silver in a safe place, and it was people seeking to do just that which gave rise to paper money and our current system of bank-created money.

What started as a good idea…

Centuries ago, goldsmiths would take in gold and silver for safekeeping and issue the owners receipts, or notes, confirming the amount of gold held. The depositors soon discovered that these notes could be used for payment in place of the physical gold, making them an early form of paper currency. But the goldsmiths noticed something else. It was rare for anyone to redeem all their notes at once. They saw the opportunity to issue notes as a loan that borrowers paid back over time, with interest. And, because the redemption of the gold was relatively rare, they could create loans worth many times the value of the gold they held. Provided borrowers paid back their loans on time and only a small proportion of owners wanted their gold back at any given time, all was well, and goldsmiths transformed into bankers.

But this didn’t always work out. An economic shock might see everyone wanting their gold back, and if the bank couldn’t deliver the full amount that was demanded, it went broke. To help prevent this, many countries created central banks, with some governments even acting as lender-of-last-resort.

While government control and the rules around banking have evolved over time, private banks are still the source of most currency created today using a process that is much the same as that used by goldsmiths of old. However, gold no longer plays a part. Most countries did away with the gold standard during the 20th century.

Banks may be better regulated than they were in the past, but that doesn’t prevent crises happening from time to time. Reckless selling of mortgages to people who had no hope of repaying them, then bundling them up in complex financial instruments that multiplied debt was the cause of the sub-prime lending scandal that sparked the Global Financial Crisis.

When things get real

In economically stable times it’s easy to think of currency and real money as the same thing. However, a couple of examples reveal the difference between the two.

One is when a government starts printing money to pay for its programs. Inflation usually results, and the value of the currency can plummet. In the case of hyperinflation, paper money and bank deposits can quickly become worthless as happened in Germany in the 1920s.

And banks still go bust, as Lehman Brothers proved in 2008.

In Australia, depositors are protected by a government guarantee, but this is limited to $250,000 per person per Authorised Deposit-taking Institution (ADI).

In both situations ‘real’ money such as gold retains its intrinsic value. All else being equal, if a unit of currency halves in value due to inflation, the price of gold will double. And provided gold is stored securely, it can’t be consumed by the debts of a mismanaged bank.

The difference between currency and real money and the issue of intrinsic value has implications for other investments. If you would like to learn more, talk to your Lifespan Financial Planning authorised financial adviser.

Lifespan Invest digital investing and education solution to address the ‘advice gap’

Lifespan is pleased to annnounce the launch of our digital investing solution, Lifespan Invest, as a means of reaching the mass market of Australians priced out of receiving personal advice.

Consumers who sign up will not receive personal advice but can elect to have their investment portfolio professionally managed for them, and will obtain access to a regular feed of financial literacy and educational content in the form of engaging articles and videos, helping them to lead more successful and fulfilling financial lives.

Lifespan Financial Planning CEO, Eugene Ardino, said the company was proud to be taking proactive steps via a digital solution to seek to address the needs of Australians who would like professional assistance.

“In an ideal world, every Australian would be able to afford a personal financial adviser, however, the reality is that delivering personal advice has become increasingly expensive over recent years, inevitably excluding more and more people. Yes, the Government can take steps to reduce much of this cost by streamlining regulatory requirements – and we are extremely supportive of the Quality of Advice Review currently underway – however, the industry needs to also utilise robust and compliant new technologies to help address the growing “advice gap”.

“Our advisers are now able to offer an alternative digital solution for those whose circumstances are such that they do not need to go through the more expensive personal advice process. When they do need that service, our advisers will be there for them”, Mr Ardino explained.

The Problem – and its Solution

Mr Ardino called on the rest of the financial advice industry to look to new technologies to enable them to reach and help mainstream Australia.

“The press is doing a great job in highlighting the size of the problem – thousands of advisers continue to exit the industry every year, and as a result, it is estimated another 100,000 Australians over the past year were “orphaned”, that is, had their advice relationship terminated. The problem is clear – but equally, there are now digital solutions to this problem, and it’s up to the industry to embrace these new technologies”.

The Lifespan Invest solution is provided via a partnership with Melbourne-based fintech platform, OpenInvest.

OpenInvest CEO and co-founder Andrew Varlamos said the company was excited to be partnering with an award-winning dealer group in Lifespan Financial Planning.

“The team at Lifespan understand that everyone is better off when they can access expert and professional help and are now – via OpenInvest technology – able to reach a much larger audience with their expertise. The current advice gap will only be solved by a combination of scalable technology and progressive financial advice firms such as Lifespan working in partnership”, Mr. Varlamos said.

Financial Wellbeing

Mr Ardino echoed the theme that being able to access trusted financial expertise helps people to lead more successful and happier lives.

“For a variety of reasons, increasing numbers of people are experiencing financial stress and uncertainty. And because the banks have all exited financial advice – unless you’re extremely wealthy – it leaves an even larger vacuum that unfortunately has been filled with a spate of gimmicky trading apps that encourage people, especially young people, to gamble via share trading or crypto. Not only does this pose excessive risk of financial loss, but it also comes with inevitable mental anxiety and stress.

“There’s sensible investing and there’s speculating, and we see it as our role to help Australians invest the right way – via managed, multi-asset class diversified portfolios. By doing so, they are more likely to reach their financial goals, and also achieve a greater sense of financial self-confidence and wellbeing,” Mr Ardino explained.

Find out more about Lifespan Invest here.

2021 A Year in Review

Taking a look back at the highlights of 2021 for Lifespan Financial Planning, and the industry. 

We are nearly there. With 2021 rapidly coming to a close, it is worth reflecting on the challenges that we all faced this year, but also keep in mind, the hope that we all should have for the future of our emerging profession. This time last year, we couldn’t wait until the year had come to a close, believing that 2021 had to have much more in store for us than just legislative overwhelm and continued challenges in delivering advice affordability. Unfortunately, it probably didn’t live up to the hype!

But there were definitely some highlights for Lifespan Financial Planning, as showcased in this fabulous showreel.

You can also click here for this article, Reflections on 2021 by Eugene Ardino, as published in the Financial Standard.

ifa Excellence Awards 2021 Dealer Group of the Year

ifa Excellence Awards 2021 Dealer Group of the Year

We’re delighted to announce that the Lifespan group (Head Office and adviser network) won three awards in the recent 2021 IFA Excellence Awards, including the coveted Dealer Group of the Year

Lifespan CEO, Eugene Ardino was announced Dealer Group Executive of the Year, for the third consecutive year. Eugene commented, “I regard this as a recognition of everything the Lifespan team and community have achieved over the past year. To win this award in such a challenging year is humbling”. We are acutely aware that over the past 12 months the industry has suffered serious contraction, as many adviser groups and advisers have struggled to cope with both regulatory change and the unique difficulties presented by the pandemic. Thankfully, Lifespan has been able to adapt quickly and successfully to navigate these challenges, and continue to support our advisers.

More importantly, we had a strong presence as a group in finalist nominations for these awards, being represented across 13 categories. This demonstrates the quality of advice firms that we have in our network. We would like to congratulate the following Lifespan advisers on both their success last night, but also for being recognised as finalists. We are really proud of our Lifespan adviser community, and of Prashant, Sheshan, Kris, and Daniel for achieving this well-deserved recognition!

Congratulations to Kris Meuwissen, Wealtheon, being awarded Client Servicing Individual of the Year. You can catch Kris chatting with Michael Gershkov about ‘Building a thriving advice practice of the future‘ in a recent Lifespan Live podcast (Season 2, Episode 2). 

What an amazing result! 

Congratulations to all of the finalists and winners at the awards last night. It was an exciting opportunity to be able to attend the ceremony in person and connect and celebrate with everyone on the night. You can find details of all the winners and finalists here.

Winners of CoreData 2021 Licensee of the Year

With huge thanks to the fabulous Lifespan adviser community and team, we’re honoured to announce Lifespan Financial Planning as winners of the 2021 Core Data Licensee of the Year Award, in addition to the Large-Tier Licensee of the Year and Eugene Ardino, as winner of the Licensee Leadership Award.

The CoreData 2021 Licensee of the Year Awards are based on the opinions and views of financial advisers themselves. The Awards reflect advisers’ satisfaction with their licensees.  CoreData’s Licensee Research forms the basis of the awards, and it takes the form of an online survey of about 100 questions, covering myriad aspects of licensee offers and licensee leadership. 

In 2021 a total of 675 advisers from more than 50 licensees completed the research, generating around 70,000 data points. The depth of this research allows CoreData to contact detailed analysis of adviser satisfaction and to calculate overall satisfaction scores. As CoreData reported, in 2021 it was clear that factors beyond the functional licensing role of the licensee made the difference to adviser satisfaction. 

Licensee leadership was a closer focus of attention in the 2021 awards. There are now more than a dozen aspects of the quality, suitability and competence of leadership included in the Licensee Research, and how advisers responded to these questions for the basis of the Licensee Leadership award.

CoreData has traditionally classified licensees according to ownership: institutionally branded, institutionally affiliated, and independently owned. But the changing make-up of the licensee industry led to a change in 2021 to a classification approach based on the size of licensee:

  • Top Tier: A licensee that is part of a group or parent entity that has 500 or more authorised representatives in total authorised on its licences.
  • Large Tier: A licensee that is part of a group or parent entity that has between 100 and 499 advisers in total authorised on its licences.
  • Medium Tier: A licensee that is part of a group or parent entity that has 10 to 100 advisers in total authorised on its licences.
  • Small Tier: A licensee that is part of a group or parent entity that has two to nine advisers in total authorised on its licences.
  • Single: Licensees that have a sole authorised representative.

2021 CoreData Licensee of the Year Awards

2021 Licensee of the Year
Winner: Lifespan Financial Planning
Large-Tier Licensee of the Year Winner: Lifespan Financial Planning
Licensee Leadership Award Winner: Eugene Ardino – Lifespan Financial Planning

Challenges and opportunities for financial advisers in 2021

Challenges and opportunities for financial advisers

After a year of challenge, advisers might be hesitant to acknowledge that 2021 might prove to be more of a mirage rather than the promised land of calm that many had hoped for.

In 2020, advisers were asked to bear perhaps more than their fair share of challenges. Extreme market movements, ongoing regulatory pressure and uncertainty, and the need to quickly adapt to distanced client servicing as anxieties mounted over the market’s volatility, placed advisers in an almost impossible position.

Yet despite all of 2020’s trials and tribulations, the financial planning community triumphed. Advisers continue to do their many varied jobs, and now find themselves on the cusp of a year which they hope will provide some much-needed relief.

However, 2021 looms as a time in which advisers will again find themselves challenged by circumstances beyond their control, but not their capabilities. As ever, with great challenges come great opportunities.

Challenges

For advisers, the next 12 months will in large part be typified by a handful of ongoing challenges, particularly the difficulties associated with meeting the sector’s educational requirements and the provision of life insurance advice.

As advisers attempt to guide their clients through the economic recovery from COVID-19, the additional effort necessary to meet the education requirements is likely to push many dedicated practitioners out of the industry.

A lot of advisers are taking it personally. I don’t blame them. Having decades of experience and still needing to prove your worth with additional study – which may not be relevant to your specialisation – would be frustrating. As a result, we’re seeing an enormous amount of knowledge and capability exit the industry, robbing us of a generation of mentors to those just entering the profession.

Some of our industry’s most experienced hands are finding the hurdle just too high to jump, forcing years of nuanced understanding of portfolio construction out of the pool of advisers serving Australians.

For advisers who have made the decision to stick it out, 2021 will see them spend a large portion of their personal time on additional education, rather than with their families.

In the wake of the Royal Commission, the other major challenge for advisers in 2021 will be the provision of life insurance advice as commissions dry up. Younger clients with families and mortgages can’t afford to pay for life insurance premiums out of their own pockets, and many are turning to their superannuation balance as a funding mechanism. As we know, this has a profoundly negative impact on clients’ long-term balances, which means that it isn’t a sustainable exercise. But with clients not willing to pay out of their own pocket, it begs the question: how do we avoid a mass underinsurance problem?

My fear is that we are exacerbating an already sizeable issue. According to Rice Warner, Australia’s underinsurance gap is growing[1], and by cutting commissions in half – and close to zero – the only people who will be able to attain insurance advice will be those with the will and capacity to be able to pay for it. The reality of life is, people aren’t naturally interested in insurance, the case has to be made for its benefits.

Advisers can restructure their business to ensure that they only service clients who can afford to pay a fee, but the real loser at the end of the day is the Australian consumer and their dependents.

Opportunities

On the flip side, challenges often present opportunities. In 2020, advisers took the challenges before them and found ways to streamline their businesses and service clients more effectively, using adversity as an opportunity to re-orient their business around more efficient investment products such as managed discretionary accounts.

In much the same way, the challenges facing advisers in 2021 may yet prove to be significant opportunities for growth.

For instance, while it is true that overall the educational requirements are pushing many experienced advisers out of the profession, those who remain are the first in line to add orphaned clients to their book.

As a result, advisers will soon have a choice of clients to take on, which will ensure they serve those who are suitable for the advice they offer.

Recently released research[2] shows about four out of 10 Australians will seek financial advice over the next 12 months. While some of these opportunities may be small – and related to COVID-19 – some may be engagements with clients who hold a significant superannuation balance and are new to financial planning.

Currently, around 20 percent of Australians are advised in some fashion. By tapping into the 40 percent of the population who plan to seek advice, the breadth of opportunity to service clients widens by a significant margin, particularly in light of the industry’s shrinking pool of advisers.

As the industry professionalises, the new entrants to its ranks will come highly qualified, and hopefully with a greater skillset from the beginning of their careers. As a result, the public perception of advisers should improve to that of a professional consultant engaged to assist people in their financial affairs, in much the same way that a doctor is respected for the positive influence they can have on a person’s health.

With the market for advice shifting, 2021 may prove to be another strong opportunity for advisers to take some time to reshape their business model, examining their cost and time spent per client. Many advisers don’t spend time putting their business under the microscope in this way because of the mixed income stream model many have grown accustomed to.

In a user pays, fee-for-service world, it is crucial for advisers to understand how they can maximise the efficiency of their practice, including finding the right technological solutions to both suit and highlight the advice they give their clients.

While 2021 will bring its own unique set of challenges to advisers, the year ahead is also a valuable opportunity for those remaining in the industry to set themselves up for future success. Far from being concerned by the challenges in the year ahead, advisers should be energised by the opportunities for the sector – and their practice – to grow. Perhaps, after years of struggle, the coming year might finally bring some relief.


[1] Underinsurance in Australia 2020 – https://www.ricewarner.com/new-research-shows-a-larger-underinsurance-gap/

[2] CoreData Q4 2020 Trust in Financial Services survey

25 years and beyond with Lifespan Financial Planning

For more than 25 years Lifespan Financial Planning has helped advisers and their clients build a better future for themselves. This is the story of Lifespan’s first quarter of a century, and its plan to grow into the future.

When John Ardino started Lifespan Financial Planning in 1994, he wanted to be independent of the big institutions which dominated the wealth management industry.

“The catalyst was the desire to have my own advice firm and to service advisers and accountants who wanted to enter the field. I wanted to control my own destiny,” he says.

At the time, financial advisers would provide their clients with financial plans governed by what the Lifespan Chairman says were “fairly rudimentary” disclosure rules, instead of the robust and heavily regulated statements of advice handed to clients today.

For Lifespan Chief Executive Eugene Ardino, John’s son, the firm’s birth meant everybody in the family needed to do their part as the business got off the ground.

“I remember the family conversation, being told that we all needed to tighten our belts because we were starting a business, and I was probably old enough to understand it,” he says.

“Perhaps it was a few years later but I also remember helping out with some photocopying as Dad wrote Lifespan’s first compliance manual.”

As the firm grew and its initial band of a handful of advisers quickly became hundreds, the support team also needed to expand.

“There was a need for us suddenly to do marketing, which I’ve never been great at. I actually remember the kids helping me with emails and databases and stuffing letters into envelopes,” he says.

“But we needed help with other things like software and brokerage management. So, we brought people in. One of the first people we recruited was a brokerage manager who in fact only left us just recently.”

Eugene says that even now the firm is still experiencing growing pains, pointing to the planning industry’s constant change and the increasing influence of technology-based solutions.

But as the industry has changed, so too has Lifespan, John explains.

“We have far more servicing staff now. For many years we had about 20 staff, but the team is now substantially larger in order to deal with the many additional compliance requirements and the need to monitor compliance and advice documentation,” he says.

“For many years we might have only checked 1000 to 1500 plans a year, now we’re doing between 7000 and 8000 plans in a 12-month period. Some days we have 30 to 40 new Statements of Advice to check, so the number of in-house compliance and technical staff that are monitoring and checking plans and files has escalated dramatically in the last few years.”

For John, that increased compliance staffing is one of the major differences between Lifespan and other licensee groups.

“Some people don’t like compliance, and that’s a reason why some advisers don’t join us. But the way I look at it is that most advisers would rather be with a dealer group that ensures every adviser in the group maintains the best standards and quality,” he says.

“Our number of clients now reaches into the tens of thousands and our ability to attract these wonderfully substantial, highly committed practices that employ quality staff and look for the best available technology is very pleasing.”

For Eugene, rolling out the firm’s constantly growing Managed Discretionary Account (MDA) service in 2011 has proved key to the business’ success and serves as a key milestone.

“That helped the business transform,” he says.

The MDA service now manages more than $500 million in client funds and recently joined the Australian retail platform with the largest annual net flow[1], BT Panorama.

In a year that for many advisers was in part typified by market volatility, Eugene says Lifespan has received extremely positive feedback for its MDA service, which helped advisers by ensuring their investment decisions were more quickly implemented across the entirety of their client base to protect portfolios or take advantage of buying opportunities.

He adds that he was “quite proud” of the firm’s 20th annual conference in Darwin in 2018 and has revelled in seeing some of Lifespan’s adviser businesses grow into very successful, award-winning firms, such as Finnacle, CBD Risk Management and Endorphin Wealth Management, who all took out IFA Excellence Awards in 2020.

“It’s nice to have been able to share in that journey with some of our advisers,” he adds.

John says it’s Lifespan’s strong reputation as a trustworthy and straightforward dealer group that should take much of the credit for its continued growth despite the financial planning industry’s ongoing contraction.

“At the end of the day, we’ve still got advisers that have been with us for 25 years. I believe that our growth is explained by the quality and experience of our people, our realistic approach and the respect we have for our advisers and their professionalism and independence,” John says.

Eugene adds that Lifespan’s team has strong connections with its adviser group, which has helped ensure advisers stay with the firm for the long haul.

“Having the right governance and compliance frameworks in place and attracting the right advisers who fit our culture has been key for us. There’s a clear expectation when people join, so they know what they’re going to get from us and our client-centric, pro-compliance culture. There aren’t too many surprises and we treat our advisers like family,” Eugene says.

He adds that maintaining those core values of integrity and a human touch will be key to the firm’s success over the next 25 years.

“But also, we need to continue to evolve and be aware of all the things that need to be done to adapt with the industry and our clients as their lives change,” he says.

Eugene adds that the ability to have scale and the firm’s privately-owned structure – which he says is important to advisers – will figure heavily.

“With the cost of advice continuing to go up and the level of compliance continuing to increase, having scale and good technology to be able to offset some of those increases is really important,” he adds.

John points out that Lifespan has successfully managed to avoid the issues which have derailed larger advice organisations, such as numerous complaints and professional indemnity claims which cause PI excess and total costs to skyrocket. The firm has already announced that its recently renewed PI insurance agreement didn’t cause it to increase its PI levy for advisers, unlike others in the market.

In an industry of constant change, Eugene says technology will be key for Lifespan’s ongoing success.

“Technology is going to be a very important part of the puzzle that all businesses need to get right, so enhancing our information technology systems is key. But so too is the ongoing improvement of our managed discretionary account solution, because that is a great way that advisers can add efficiencies to their business, and continue to achieve great outcomes for their clients and themselves,” he says.

“We want to continue to grow but maintain our soul and ability to really be a caring organisation that listens to its staff, advisers and service providers, and fosters an environment for great outcomes.”


[1] Plan For Life, Platform Wrap Report March 2020 data (net flow comparison performed excluding corporate super and on an individual platform basis) for the 12 months to March 2020. BT Panorama had the largest rolling annual net flow.

Eugene Ardino
Eugene Serravalle

IFA Excellence Awards 2020

There is no doubt that 2020 has been challenging, however at Lifespan we have continued to grow and support quality advice businesses, and this was recognised last Thursday night, with Eugene Ardino, Lifespan Financial Planning Chief Executive winning the Dealer Group Executive of the Year at the IFA Excellence Awards 2020. This is the second year in a row that we have won this award. This award was recognition of everything that Lifespan has achieved over the past year. We were also a finalist for the Dealer Group of the Year Award for the second year running.

Demonstrating the quality of the Lifespan adviser network, three Lifespan practices were also winners on the night. Congratulations to Finnacle – Transformation – Company of the Year, Lyndon Holland from CBD Risk Management, Client Outcome of the Year, and Glenn Malkiewicz, Endorphin Wealth Management awarded Goals-Based Adviser of the Year.

What an amazing result!

Trustees of SMSFs need to be on guard as ASIC monitoring continues

The number of Australians establishing SMSFs has been rising consistently since an amendment to the Superannuation Industry (Supervision) Act 1993 in 1999 allowed for SMSFs to be controlled by trustees rather than the federal government.

The Australian Prudential Regulation Authority’s recent statistics on SMSF funds showed there were 595,840 SMSFs operating in Australia, holding $712 billion in assets. The recent revelations from the banking royal commission around the lack of transparency of retail funds’ investments and their tendency to focus on profit rather than the interests of members is likely to only drive more people to set up their own funds.

But how well equipped are SMSF trustees to be managing their own retirement investments?

As part of further investigations in recent years, the Australian Securities and Investments Commission (ASIC) conducted an online survey of 457 SMSF members who had set up their own fund in the preceding five years. The results were published in two reports, “Report 575: SMSFs: Improving the quality of advice and member experiences” and “Report 576: Member experiences with self-managed superannuation funds”. The reports make for sobering reading.

The main reason for setting up an SMSF is greater control over investment decisions. According to ASIC, around one-third of SMSF trustees are naïve about what is required to run their own fund and the benefits of diversification.

In one case, an SMSF member, believing the property market was “over-inflated” and the stock market was too “risky”, held 100 per cent of their SMSF balance in cash with a view to investing in property “in maybe three or four years”.

Survey respondents reported misalignment of their expectations and actual experiences as SMSF members in a number of key areas, including:

  • costs to set up and run an SMSF,
  • time spent on administering an SMSF,
  • the unexpected complexity of running an SMSF, and
  • member understanding of SMSFs and their legal responsibilities as SMSF trustees.

 Costs of setting up and running an SMSF

Individuals looking to set up an SMSF need to factor in all costs to establish and run their SMSF including amounts to cover any initial and/or ongoing advice, as well as establishment costs, including the appointment of the trustee and registration of the fund.

Once established, there will also be the annual cost of running the fund, including accounting, auditing and reporting costs associated with ensuring the fund is compliant, and the ability for members to extract relevant information during any period of the financial year if needed.

What is the ideal starting balance for an SMSF?

At the heart of this question should be an examination of the client’s needs, goals and objectives: why does the client need an SMSF and would they be better served by a retail fund or even an industry fund?

Advisers should start with an exploration of the client’s ability to act as a responsible trustee. Do they understand their obligations as a trustee and do they have the time, interest and ability to ensure the fund is adequately serviced and remains compliant?

Cash-flow analysis, on both the fund’s proposed underlying investment assets and the overall fund itself (particularly where direct property may be part of the fund’s investment strategy), will also influence the suggested starting balance.

Time to spend on SMSF administration

The time required to manage and administer an SMSF will often depend on what type of investor the client is and how active they are when managing their SMSF investment portfolio. Having said that, 38 per cent of respondents in the ASIC survey said running an SMSF was more time consuming than they expected.

All SMSF trustees will need to undertake some level of regular investment research on their investment options. Hand in hand with this is the ongoing monitoring of the investment strategy and the performance of current and future investments. This may include the need to organise annual valuations of assets such as direct property investments.

Trustees also need to be mindful of the need to meet their regular reporting obligations, ensure the fund remains compliant and keep abreast of changes in regulation or super laws that may affect trustee responsibilities.

They need to appreciate that they remain responsible, and will be held accountable, for the compliance of their SMSF at all times.

Dealing with the complexity of running an SMSF

The main arguments against SMSFs relate to the complexity of running the fund and in meeting compliance obligations.

Trustees can certainly outsource many aspects of running a fund, but are obligated to ensure the investments selected for the fund remain appropriate. The ASIC survey revealed 6 per cent of SMSF members had not made any investments since setting up their SMSFs, with the most common reason being they had not yet found the right property to buy.

The ATO can conduct a random audit of an SMSF at any time. The penalties for non- compliance are high and receiving a notice of non-compliance from the ATO usually has devastating tax consequences.

Understanding of SMSF concepts and legal responsibilities as a trustee

SMSF trustees are required to have a sufficient level of financial literacy to make investment decisions that are consistent with their fund’s investment strategy. However, ASIC’s advice review revealed 33 per cent of members did not know their SMSF was legally required to have an investment strategy. Even fewer than that (28 per cent) were aware SMSF trustees are required to consider the insurance needs of all members when drafting an investment strategy.

Clients should also be made aware they – not their financial adviser, accountant or lawyer –are legally responsible for their SMSF. A few simple questions during the initial interview will quickly determine whether a person has the requisite financial literacy to carry out the legal responsibilities of an SMSF trustee.

Just as important is recognising when clients no longer have the cognitive ability to function as an SMSF trustee. Assisting clients with succession planning and/or winding up their SMSF is crucial at this time.