The Pros and Cons of Financial Advice for your SMSF
The 2020 Vanguard/Investment Trends SMSF investor report found that 32% of Australia’s 600,000 SMSFs seek the assistance of a Financial Adviser, yet more than 50% of SMSF trustees report having unmet advice needs in relation to their SMSF.
If you are a trustee contemplating seeking advice, it's worth considering the pros and cons of engaging an adviser.
Top five benefits of seeking financial advice
1. Investment Strategy Development and Implementation
More than 75,000 of the SMSF trustees interviewed by Investment Trends in its 2020 survey said they needed their SMSF investment strategy reviewed.
ATO data supports this. The average SMSF has more than 25% of its capital in cash and is overweight Australian shares while lacking exposure to the key asset classes of bonds, international equities and global REITs. The result is an inefficient portfolio that lacks diversification.
An adviser can lend some of their formal training and education to assist with building and investment strategy that:
· Takes into account your preferences and then helps you to build a robust, rules-based investment strategy to help you prudently manage your portfolio.
- Finds the ‘Goldilocks’ asset allocation for your needs in terms of risk/return.
- Integrates your SMSF investments strategy into a broader, holistic plan that considers all of your wealth (not just the super).
Experienced, professional advisers will consider portfolio construction from both a ‘top down’ as well as a ‘bottom up’ perspective. They can use their deep understanding of Modern Portfolio Theory (MPT) to help you establish a robust investment strategy that can act as a ‘safe harbour’ and prevent you from falling into many common investment pitfalls.
2. Integrating your SMSF with your broader strategic plan
If you are looking for assistance for more than your SMSF’s investment strategy, a financial adviser can help you work through your broader financial situation to ensure it is adequate to meet your future objectives. This may involve an exploration of the following:
- Where your SMSF fits in your broader financial situation
- How much will you need in retirement
- How much of this needs to be funded by your SMSF
- Whether you can move more of your wealth into the concessionally taxed environment within your SMSF
- How much investment risk you can afford to take, and how much do you need to take to meet your retirement objectives
- What your testamentary intentions are and how they fit with your SMSF
3. Human Influence
An ongoing relationship with a financial adviser who understands your needs and objectives can be beneficial on a number of levels. A financial adviser can hold you to account and act as a sounding board for big decisions.
Moreover, if they’ve worked with you to develop your SMSF investment strategy they are well placed to ensure you stick to it through both the ups and the downs of the economic cycle when many of us fall victim to the common behavioural pitfalls. For example in times of market sell offs and rebounds.
4. Time Saving
The use of a financial adviser is an investment in freeing up time for yourself and dedicating resources to ensuring your portfolio is regularly rebalanced, monitored and its performance appropriately tracked.
Time is money as they say, and as you move through life and your priorities change, you might prefer to outsource the time consuming task of managing your portfolio and dedicate your time to pursuits that are more important to you.
5. Peace of Mind
Last but not least, the right financial adviser should provide you with peace of mind. This does not mean abdicating responsibility for the management of your SMSF.
However, working with a financial advisor should ease some of the worry associated with managing what might be your largest pool of capital. Knowing your investments are being managed by someone with expertise and experience can provide a great source of comfort.
Three things to consider
1. The Cost of Advice
When you seek unconflicted advice from a professional you should expect to pay for their skills and experience. The majority of advisers will charge a fixed fee for the development and implementation of your advice strategy. They may also charge a fixed or percentage based fee for the management of your SMSF portfolio.
The costs of delivering compliant financial advice is typically linked to the time it takes to develop, implement and manage the clients financial affairs and will be influenced by the level of financial complexity and assets a financial adviser has responsibility for.
An adviser will provide you with a detailed summary of the fees associated with seeking advice as part of your initial engagement.
2. The Adviser’s Business Model
Commissions for the sale of financial products were endemic in financial advice in the past. Recent changes to the Corporations Law have almost completely stamped out these practices. It is however, always worth understanding whether an adviser’s business model involves you investing in managed funds owned by the advice practice or not. This will help you understand the true cost of advice and the potential business model of the advice practice.
3. Relinquishing Responsibility
One of the biggest benefits of establishing and maintaining an SMSF is that it allows you the ability to control when, how and who you invest with. If you appoint a financial adviser to manage your portfolio you will likely relinquish some of this control. This may or may not be right for you and requires detailed consideration.
This list is by no means exhaustive. If you are thinking about reaching out for advice it is best to think first about what services you want. This will help you ask the right questions of prospective advisers before you engage them and hopefully lead to a mutually beneficial relationship.
Cathryn Gross
Partner & Principal Adviser
Minchin Moore Private Wealth Advisers
Cathryn has over 20 years’ experience in financial services and is an accredited Executive Coach.
In 2015, Cathryn established her own financial advice practice which she merged with Minchin Moore Private Wealth in 2019. She is now a Partner and key decision maker in that practice.
Before moving into financial advice, Cathryn worked in corporate finance and institutional sales roles at a global investment bank and large trading bank.
Cathryn has been a finalist in the AFA Rising Star Awards and sat on ASICs Financial Advisers Consultative Committee. In 2019 she was also named by Financial Standard as one of Australia’s top 50, most influential advisers.
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Five variations to a testamentary trust for you to consider
Michael Mackay 25 Oct 2020 06:43 (19 months ago)
Dear Cathryn,
I noticed in point 1 about the Cost of Advice under a percentage based fee for an advisor what would you consider a fair range for on going professional advice. IE: is it .25 to .50 % in other words one to half a percent of funds managed. Can you give any indication what it could be ? regards Michael Mackay
Cathryn Gross 15 Nov 2020 03:05 (18 months ago)
Hi MIchael,
My apologies for the slow turn around on this question. If your adviser is only being remunerated based on a percentage fee, thought needs to be given to the minumum cost of delivering compliant and tailored advice that is appropriate to your unique circumstances. This means the percentage based fee may vary depending on the complexity of advice and the funds under management. If we assume that your SMSF has $1,000,000 in assets and you were receiving advice just on your SMSF Investment strategy and management then a fair fee might be a minimum of 0.50% pa (approx $5,000 a year). If you are receiving more holistic advice than this, you might expect a higher percentage based fee, and if you had less in assets under management you might also expect a higher percentage based fee as the adviser would still need to cover the cost of delivering compliant tailored advice but would be having to meet those costs on a smaller asset balance.
Elma G. Wilkie 22 Oct 2020 04:24 (19 months ago)
My husband and I changed to a new financial advisor last year and lost $1,470.00 ( out of a portfolio of over $800,000).
If we lose the same amount this year we will be down to $500,000. At this rate we will not be able to have a financial advisor.
We would appreciate your opinion.
Cathryn Gross 22 Oct 2020 22:24 (19 months ago)
Hi Elma. I assume you are referring to losses in your SMSF in the year to 30th of June. COVID was a particularly volatile year in the global share markets which may have impacted your portfolios performance in the short term. The ASX 300 fell by more than 7% and Australian Listed Property by more than 20% in the year to 30 June . Since then share markets around the world have continued to recover, but Australian share markets are still lower than they were 12 months ago.
While i do not know what assets you have in your SMSF it is important to understand what percentage of your assets are in growth assets ( shares and property) and what percentage is in defensive assets ( bonds and cash) and why this split of assets was selected at the time advice was delivered. This might give you some comfort during times of volatility and help ensure you are not too focussed on short term returns. While Australian shares may have been down 7% in the year to 30th of June, over 30 years returns have averaged more thn 9%. You may also need to reconsider your asset allocation if the volatility leaves you feeling uncomfortable.