With even the largest of SMSF administration firms holding less than 2 per cent of the overall market, the potential for consolidation has become an increasingly hot topic among industry insiders, writes David Barrett from Bravura Solutions.
The last six months has seen 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, which has persisted despite remarkably strong growth in fund numbers over the last decade.
With even the largest of SMSF administration firms holding less than 2 per cent of the overall market, the potential for consolidation has become an increasingly hot topic among industry insiders, and many have begun to believe that a large-scale wave of consolidation is now overdue.
AMP appears to agree and has openly declared its intention to aggressively build market share and “industrialise” the administration of SMSFs.
To this end it has recently made a series of high-profile acquisitions and can now boast a list of well-known names such as Cavendish and Multiport, along with Andrew Bloore’s new venture SuperIQ.
In relation to the acquisitions, AMP’s Paul Sainsbury said it was an exciting and attractive sector, and it made sense for AMP to look for growth opportunities in this market.
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.
However there are various factors which suggest that consolidation may become a major trend in the SMSF industry in the coming years. One of the biggest of these factors is the shift toward outsourcing.
However, the vast majority of SMSFs are still administered by small-to-medium accounting businesses that also provide a wide range of other services and often only look after a small number of self managed funds.
As a result, these firms can have trouble finding and retaining staff with the specialised skills required to administer an SMSF.
In addition, their processes and systems are often highly manual and inefficient, causing unnecessary errors and delays.
In an address given by Australian Taxation Office Assistant Commissioner Stuart Forsyth in September this year, it was revealed that 26 per cent of SMSF tax returns are not being lodged on time.
This statistic suggests that a significant proportion of accountants are not only struggling to cope with the complex nature of the work involved in administering a fund, but that they have been unable to develop the necessary systems and processes to ensure that their funds’ annual compliance work is being completed on time.
To add to this existing burden, persistent industry lobbying and a growing focus on the importance of ensuring adequate supervision of the rapidly growing SMSF industry has led to a Government review of the arrangements regarding the so-called ‘accountants’ advice exemption’.
This exemption has provided accountants with the ability to recommend SMSFs to their clients without the need to meet the compliance and disclosure standards required of a licenced adviser.
This is set to change, with the Federal Government recently announcing legislation which will require all accountants wishing to give advice on SMSFs to hold a limited Australian financial services licence.
This increased responsibility is driving many accountants to consider outsourcing their SMSF work to an external specialist.
Kath Bowler, national development manager at SMSF Advice Limited, presented part of an Investment Trends survey to the SMSF Professionals’ Association of Australia (SPAA) in June this year which indicated that 22 per cent of accountants expect to outsource their SMSF administration work if the licensing legislation is implemented as proposed.
Outsourcing potentially provides a ‘best of both worlds’ solution for an industry based heavily on personal relationships between suburban accountants and their clients.
Outsourcing 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 outsourcing firm can more easily streamline its operations and apply its focus to developing the most effective processes for delivering timely lodgement and reporting.
However, from a technology point of view, the move towards consolidation and outsourcing begs such questions as: ‘What sort of software solutions will the large-scale SMSF administration firms of the future require?’, and ‘Will the products that are currently designed for small- to -medium sized firms be able to properly cater for the needs of an ‘industrialised’ sector?’.
A large administration firm needs to be able to take advantage of its size to achieve economies of scale so that it can operate more profitably and efficiently.
For instance, it requires a more ‘business-centric’ system that allows it to process common transactions in bulk across multiple funds, rather than a traditional ‘fund-centric’ system that generally only allows users to work on one fund at a time.
A large-scale operator also needs business-wide workflow and reporting tools that provide it with information about the progress of work across its entire client base.
For a firm that may be responsible for tens of thousands of funds, the ability to quickly pinpoint blockages in the processing cycle is critical to ensuring that agreed service standards are maintained and that fund returns are being lodged on time.
As a firm grows, its book 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 – so large administrators will require a software solution that allows them to easily manage complex investment instruments such as futures and options, as well as assets that are held in foreign currencies.
If an efficient solution for managing these complex investment types is not properly implemented, it can easily create a bottleneck in the administration process and lead to a significant decline in efficiency.
Comprehensive online reporting and the introduction of integrated transaction querying tools and document management have 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.
However, legislative change and the ever-increasing consumer demand for better service at a lower price are disrupting the traditional software model.
The development of a new and more powerful generation of SMSF administration software, tailored to the needs of large administrators, will allow the industry to provide a more 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.
David Barrett is the principal consultant at Bravura Solutions.
By David Barrett