More Aussies take control with SMSFs

As SMSFs hit record highs, non-banks and brokers are helping Australians take charge of their retirement investments, signalling a major shift in retirement planning strategies

THE POPULARITY of self-managed super funds continues to grow unabated. With quarterly establishments of SMSFs hitting levels not seen in about a decade, and the number of wind-ups dwindling, both the total number of funds and total members reached record highs in the December 2023 quarter, according to Australian Taxation Office data. For those in financial circles, these trends signify something of a generational shift in how Australians are preparing for their retirement. “It was once the norm for Aussies to invest money in retail super funds and pay people to manage their investments, such as shares or investment trusts. However, many are now moving away from retail or industry super funds and managing their own portfolios,” says Adrian Fisher, head of distribution and product at RedZed. Just as do-it-yourself share trading platforms have changed the game for stock market investors, so have SMSFs allowed super fund holders to take more control over what assets their funds are invested in. The breakdown of these investments shows the bulk going to traditional bonds, listed shares, property trusts, term deposits and cash. However, over the past five years, shares have grown in popularity and comparatively fewer funds have been stashed in term deposits and cash. This suggests that people are looking for better returns than they can get, even with the higher interest rates available in the last year or two.

Non-banks are reporting robust activity in property, limited recourse borrowing arrangements (LRBAs) and other niche areas. “We have seen strong demand for higher-quality commercial warehouses and residential dwellings,” says Matthew Heinnen, group manager for commercial at Liberty. “We can see smart investors are really focused on balancing rental yield and capital growth.” ATO statistics show that residential property makes up approximately half the proportion of commercial property held in SMSFs. Historically, this is a long-standing split. “Unlike residential SMSF LRBA transactions, commercial SMSF

With high interest rates meaning more Australians are having difficulty in servicing loans, some of those being shut out of traditional channels of the property market are turning to SMSFs. “The current environment has also forced many Australians to press pause on their property dreams because high interest rates have reduced borrowing power,” Fisher says. “People are looking for different avenues to acquire property, and some are considering investing in property using their SMSFs to get onto the property ladder, albeit within the confines of superannuation laws.” SMSFs offer a range of advantages here. Thinktank, for example, provides a wide variety of structural options such as tenants in common, in specie transactions and unit trust arrangements.

Asset

Value of SMSF investments by asset allocation

LRBAs allow an associated party, such as a member’s own business, to be a tenant of the commercial property being purchased, with rent paid at a market rate,” says Wright. “Consequently, we expect this portion of the asset class to remain strong as it makes a great deal of sense for business proprietors to own the premises they operate from and build wealth rather than pay rent.” Even so, Thinktank is now seeing a fairly even split between commercial and residential property-secured SMSF lending solutions, suggesting more funds may be heading towards residential than previously. “It will be interesting to see if future ATO reporting shows an increase in residential property relative to commercial,” says Wright. The overall growth of SMSFs and the increased control exercised by members are also leading to the inclusion of more niche areas in asset allocations.

“Savvy investors are also using their SMSFs to buy various collections like coin or wine, ETFs [exchange traded funds], cryptocurrencies, artwork, and shares in private businesses,” says Fisher. Non-banks can perhaps expect more activity in these areas once inflation is brought under better control. SMSF interest in cash and term deposits has fallen despite current high rates; this implies that when the Reserve Bank of Australia finally does begin cutting, there will be less incentive for SMSFs to park money in the bank. “We anticipate asset allocations will continue to diversify,” says Fisher.

RedZed has been liberating the ambitions of self-employed Aussies since 2006. We offer flexible residential, commercial and SMSF finance solutions to sole traders and small business owners, and we keep the loan process simple, fast and fair. We know that the self-employed pathway isn’t always straightforward, which is why we’re passionate about supporting and empowering those who have the courage and ambition to build something of their own. Throughout our 17-year history, we have loaned over $8.9 billion to more than 20,000 self-employed Australians, and we remain committed to helping our self-employed customers achieve their personal and business goals.

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As a leading Australian non-bank lender, Liberty offers innovative solutions at competitive prices to support customers with greater choice. Over the past 25 years, this free-thinking approach to loan solutions has seen more than 700,000 customers get financial across a wide range of home, car, personal and business loans, as well as SMSF lending and insurance products. Liberty remains the only non-bank lender with an investment-grade credit rating offering custom and prime solutions to help more people get financial.

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“Our ability to utilise projected concessional and non-concessional contributions for servicing is particularly beneficial for newly established funds or those seeking higher LVRs or loan amounts,” says Wright. “Despite the run of rate rises, the SMSF sector remains robust as investors seek alternative options to step onto, or up, the property ladder.”

Thinktank is an independent non-bank financial institution specialising in the provision of commercial-property mortgage finance up to $4 million and residential-property mortgage finance up to $2 million in the Australian self-employed, PAYG and SME sectors. Since 2006, Thinktank has provided over $6.5 billion of commercial, residential and SMSF lending solutions, which have enabled thousands of borrowers to achieve their goals of acquisition, refinancing and equity release. Thinktank offers a range of lending solutions, including Full Doc, Mid Doc (alternative income verification), Quick Doc and SMSF loans.

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“More Australians have been taking advantage of exercising greater control over their own financial affairs, especially in a time when superannuation returns generally may not necessarily be meeting investment expectations”

Belinda Wright, Thinktank

Gold Colored Piggy Bank Sitting over A Bar Graph. Retirement Investments

In Partnership with

“Our observation is that more and more Australians have been taking advantage of exercising greater control over their own financial affairs, especially in a time when superannuation returns generally may not necessarily be meeting investment expectations,” says Belinda Wright, head of partnerships and distribution at Thinktank. The growth of SMSFs stands out against a shaky economic landscape characterised by inflation, rising interest rates, weak consumer sentiment and stalled business activity.

Some non-bank products in this area offer unique features. Wright says Thinktank’s “SMSF Reset & Refinance [R&R] option can help brokers deliver great outcomes for clients wishing to realign their existing borrowing arrangements with another lender. “Our streamlined credit process simplifies individual refinances, while our exclusive reduced-fee package caters specifically to clients refinancing multiple SMSF loans.” Another SMSF focus for some non-banks is on products that help the self-employed. Many lenders in the space only accommodate PAYG members whose employers make regular fortnightly or monthly super contributions on their behalf. But small business owners don’t pay themselves regularly or pay money into their super funds regularly. “That’s why RedZed takes a more flexible approach,” says Fisher. “We

“We’ve seen strong demand for higher-quality commercial warehouses and residential dwellings. We can see smart investors are really focused on balancing rental yield and capital growth”

Matthew Heinnen, Liberty

Industry experts

Adrian Fisher has over 35 years of banking and finance experience. He has held senior management roles in both bank and non-bank businesses and became a founding member of RedZed in 2006. He served as RedZed’s national sales manager for 15 years, before being appointed head of distribution and product in 2022.

RedZed

Adrian Fisher

Matthew Heinnen brings over 25 years’ experience to his role as group manager leading Liberty’s commercial lending business. His well-established background in financial operations and sales management has provided a wealth of industry knowledge. Heinnen prides himself on his ability to build strong relationships with business partners. An inspired and resilient leader, he has a strong interest in the learning and development of his entire team. Heinnen holds a Bachelor of Commerce majoring in finance and financial management services from Swinburne University of Technology.

Liberty

Matthew Heinnen

Belinda Wright is head of partnerships and distribution at Thinktank. She has over 20 years’ experience across various divisions of banking and finance. She is adept at driving growth in company revenue, cross-selling and improving team performance. Tenacious in building new business, Wright excels at collaboration and forging strong relationships with third party business partners.

Thinktank

Belinda Wright

Thinktank

Matthew Heinnen

Liberty

Adrian Fisher

RedZed

Industry experts

RedZed

Adrian Fisher

Liberty

Matthew Heinnen

Thinktank

Belinda Wright

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MFAA head credit adviser, Finsure Finance and Insurance

Christopher Lee

Non-banks see growing interest in property, LRBAs and more

Adrian Fisher

RedZed

Matthew Heinnen

Liberty

Belinda Wright

Thinktank

Belinda Wright

Liberty

Matthew Heinnen

RedZed

Adrian Fisher

Outlook for more SMSF growth, opportunities

Published 03 Jun 2024

“Savvy investors are also using their SMSFs to buy various collections like coin or wine, ETFs, cryptocurrencies, artwork, and shares in private businesses”

Adrian Fisher, RedZed

Value ($m), Sept 2023 qtr

Value ($m), Dec 2023 qtr

Listed trusts Unlisted trusts Insurance policy Other managed investments Cash and term deposits Debt securities Loans Listed shares Unlisted shares Limited recourse borrowing arrangements Non-residential real property Residential real property Collectables and personal use assets Other assets Cryptocurrency Overseas shares Overseas non-residential real property Overseas residential real property Overseas managed investments Other overseas assets Total Australian and overseas assets Borrowings Other liabilities Total net Australian and overseas assets

50,648 113,958 99 52,685 145,596 9,675 6,506 243,680 13,159 60,569 88,394 47,942 641 26,898 1,033 14,647 167 440 1,963 2,774 881,473 25,292 8,780 847,401

53,136 119,556 498 452,324 145,927 9,697 6,461 262,468 13,069 61,850 90,263 48,955 636 26,714 1,026 15,776 180 474 2,114 2,988 913,711 26,217 9,101 878,393

Source: Australian Taxation Office SMSF quarterly statistical report, Dec 2023

Dec 2023

TOTAL FUNDS INVESTED IN SMSFs HITTING HIGHS

Sep 2023

Jun 2023

Mar 2023

Dec 2022

Sep 2022

Jun 2022

Mar 2022

Dec 2021

Sep 2021

Jun 2021

Mar 2021

Dec 2020

Sep 2020

Jun 2020

Mar 2020

200,000

400,000

600,000

800,000

1,000,000

A different way to get onto the property ladder

Property is one of the bread-and-butter areas of SMSFs for many non-banks. “We have two SMSF products: one backed by residential property, such as houses, apartments and units, and the other backed by commercial property,” Fisher says. “We’ll lend up to 80% of the value of a residential property and up to 75% of the value of a commercial property.” Liberty’s SuperCredit product assists established SMSFs in investing in either residential or commercial property using their super. It has no minimum contribution requirements and offers LVRs of up to 80% of the property value. “We continue to apply a common-sense approach to understanding customer goals and always look for the most contemporary data to make insightful decisions,” says Heinnen. Another competitive area involves assisting SMSFs that were set up years before many non-banks entered the market. Non-banks can now help them restructure their loans to achieve a lower monthly repayment and better cash flow. The current interest rate environment provides a tailwind for this market. “Many older SMSF loans are now sitting on double-digit interest rates and are therefore being refinanced or renegotiated, creating new opportunities for brokers,” says Fisher. Others in the market are seeing similar momentum. “Despite the challenges, we have actually seen an increase in applications for SMSF LRBAs for both purchases and refinances,” says Wright.

Brokers can also seek out SMSF customers from their existing databases. “SMSF products give brokers an opportunity to re-engage with their self-employed clients and start a conversation,” Fisher says. “They can reach out to their existing alt-doc home loan clients in particular, who may have previously been unable to borrow using their SMSF due to rigid lender requirements.” Regular property owners, or those in the market for property, are also an option. “[Brokers] can explore opportunities with clients who own commercial or residential property or are looking to invest in property,” Wright says. “These clients might find numerous valuable advantages in structuring their assets within a SMSF, whether for long-term wealth creation or near-term asset protection.” Owners of small to medium-sized businesses are also increasingly looking to SMSFs to plan for their retirement, partly due to the tax advantages. Australians have a passion for property and a desire to take control of their investments, which will likely continue to drive the growth of SMSFs. There aren’t many markets where the pandemic proved to be only a minor hiccup, but SMSF fits the bill. “We expect to see the same growth in future,” says Heinnen.

look at what the borrower is paying into their fund over 12 months and what capacity they have to make additional contributions moving forward.” RedZed also accepts alt-doc income verification for proposed additional member contributions from self-employed members, allowing this large market the same SMSF investment opportunities as regular employees.

Key SMSF products and markets for non-banks

The value of assets managed by SMSFs is now a whopping $878.4 billion, according to the ATO.

Of a total of $3.7 trillion in superannuation assets, the latest APRA data shows that industry funds hold 34.4%, SMSFs 24.7%, retail funds 19.3% and public sector funds 18.9%. “The value of assets managed via SMSFs has already overtaken retail and public sector funds and is closing in on industry super funds,” says Fisher. The future looks bright for SMSFs as more Australians take the reins of their own super funds. While there is sometimes an outdated image of SMSFs being held by wealthy boomers, ATO data shows it’s more common for younger cohorts to be setting one up these days. “Anyone with a super balance of around $250k or more may have an SMSF or be preparing to open one in the coming years. This could very well be a client in their early to mid-30s,” says Fisher. Brokers who understand the market have a powerful opportunity at their fingertips. “Financial planners, accountants and your existing portfolio are a great place to start,” Heinnen says. “For brokers affiliated with accountants, financial planners or lawyers, establishing a mutually beneficial referral arrangement can provide added client flow.” As the market grows, more brokers are taking advantage of the training schemes many non-banks offer. “We have seen more brokers seeking accreditation and looking for extra training to help meet the market’s increasing demand for support,” he says.

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