Liquidity and SMSFs

Infrastructure, bonds and illiquid investments the topics of the moment. Everyone has an opinion and many of those opinions are coloured quite heavily by which side of the fence you are on. 

It’s an interesting dichotomy that while our industry laments the ‘narrow’ range of investments utilised by the average self-managed super fund (SMSF), it isn’t particularly easy for SMSF trustees to expand their portfolios past Australian equities, term deposits, cash and the odd property without significant assistance from a financial adviser and a willingness to pay ongoing management fees. This as we all know, is simply not how most SMSF trustees want to run their portfolios.

This discussion is about broadening the scope of investments in your clients’ portfolios and meeting their expectations for ‘interesting’ investments, which is often why people get an SMSF in the first place.

It’s true that many SMSFs are missing out on the full range of investments open to them. However, I do think it’s important to acknowledge that SMSFs holding the majority of funds in shares and cash is not something to panic about, and instead should be seen as an opportunity to do better as an industry. Having 40% in Australian equities is a pretty reasonable as set allocation and not too far off the mark to maximise income in the long term. Finsia’s recent report1 ‘How safe are withdrawal rates in retirement’ suggests that a 50% stocks/ 45% bonds/ 5% bills and a withdrawal rate of 2.96 is the best bet for people who want their retirement savings to last as long as they do.

But let’s start with a review of how we got here. Ten years ago, illiquid funds were fairly mainstream. Fixed length funds were just part of doing business. Of course, they weren’t entirely welcome – they are difficult to administer on a platform, require additional explanation to clients and don’t really fit neatly with rebalancing (a mainstay of the ‘value add’ of platforms and business model of many advisers).

And then the GFC hit. Suddenly a whole bunch of funds that were previously liquid, became illiquid, because they simply couldn’t cope with the level of withdrawals demanded by nervous investors and for pension payments. I can only assume that investors who realised their SMSFs were going to breach the rules and knew they couldn’t do anything about it, became very wary of anything that wasn’t a completely liquid ASX-listed Australian share.

At the same time, there was an unrelated issue in that there were a number of assets that were, shall we say, not exactly true to label – ‘enhanced cash’ anyone? I believe that this clouded the ‘illiquid’ issue and generally made an already difficult situation even worse.

Since then, the mainstream advice, platform and product providers have generally steered clear. Everyone got burnt and no-one wanted to go there again, especially fund managers who are now generally not keen to offer illiquid funds to the retail and SMSF markets.

The truth is, Australian consumers are not getting access to the full range of investments and are missing out on infrastructure and other illiquid asset types. It’s one thing for us to shake our collective heads at the folly of SMSF investors only holding shares and cash, but we don’t exactly make it easy for them to expand their portfolio. And I don’t just mean access, I also refer to the level of fees that some providers think it’s reasonable to charge.

Before considering the way forward, it is worth covering some of the downsides of these investments. The most obvious is that investors can’t liquidate their investments in a hurry if they need the cash. It would seem prudent to ensure that the fund’s liquidity can be maintained even without any expected income from the illiquid investment.

Portability can also be an issue. It’s impera- tive that before an illiquid investment is recommended, you make sure that the client isn’t planning to move out of their SMSF before the end of the term or complicate matters by getting divorced. No-one wants to be responsible for keeping a client entangled with their ex- partner due to an investment recommendation!

Obviously the investment profile of the il- liquid investment needs careful consideration. You will need to ascertain how it will fit in the portfolio, if it is going to create issues if one member moves to pension phase before the other, the contingency plan if the expected income doesn’t eventuate, etc.

The good news is that there are options for infrastructure and other illiquid assets if you know where to look. Macquarie Wrap has 11 infrastructure funds, BT Funds Group has 16 across their various platforms and there are a number of providers who offer direct property, bonds and other asset classes. 

Let’s look at what might be done about it going forward. To my thinking, if we want to see SMSFs broaden the range of assets that they utilise, then we, as an industry, need to do something about it. Only 20% of SMSFs get product advice, so we can’t just leave it up to planners and licensed accountants to get the message out.

Firstly, I’d like to see more fund managers be- ing willing to have another go in this space. This will require a new way of thinking; attracting SMSFs is a different kettle of fish from dealing with institutional clients. Mainly, this means believing that (a) your average SMSF trustee is smart enough to understand the ins and outs of illiquid investments and (b) that they have enough money to make it worthwhile. I firmly believe that most SMSF trustees are intelligent, well-read individuals. While you might need to explain the basics, you’re talking to another business owner (albeit one who may not have worked in financial services for 20 years). If we want to succeed, we all need to make some fun- damental changes to the way we do things.

Secondly, I’d really like to see more balanced commentary of this topic. I probably have my rose coloured glasses on here, as it seems that since FoFA, there seems to be more ‘turf protecting’ than before.

And lastly, I’d like the way that some financial planners and accountants deal with their clients addressed. While many advisers are excellent at understanding that stated goals and risk tolerance are only the beginning of the conversa- tion, I do think more can be done to uncover the real goals of the individuals and to assist them to make quality investment decisions to help them reach those goals. I recently heard a horror story of advice given to two 30 year old fly-in fly-out (FIFO) engineers. The advice (in the Statement of Advice) was that they should invest in conservative investments (since they had conserva- tive risk profiles) and buy an investment property (since they were ‘comfortable’ with property). This couple is finding renovating their own house exceedingly difficult and stressful, so I simply can’t see how acquiring another property is good advice. And further, while they may be conservative in risk outlook, they both have 40 years to retirement, so they need coaching and education to understand the very real risk of their returns not meeting CPI, rather than blanket acceptance of the answer that the machine spits out. This same attitude needs to be addressed when it comes to liquidity. It’s up to the financial planner to work with the clients to support them to make quality decisions, not just go with the clients’ first (often uneducated) responses.

I look forward to the day when SMSF trustees across the board have properly diversified portfolios because the products are available, the advice is long term and educational, and industry commentators give a balanced view. I can always dream ...


1. industry-reports-retirement-risk-zone/how-safe- are-safe-withdrawal-rates-in-retirement-an- australian-perspective.pdf?sfvrsn=4

This article was first published in Financial Standard 11 August 2014 | Volume 12 Number 15.