(Updates with AMP’s purchase of Cavendish in ninth paragraph.)
Sept. 11 (Bloomberg) -- Playing a Saturday competition round at the eucalyptus-fringed Whittlesea Golf Club north of Melbourne, Gary Hunt told his three golfing partners that he’d been to a seminar on how to manage his own pension and was thinking of doing it.
Turns out, two of his fellow Australians -- a retired school teacher and the owner of a tree-cutting business -- already did -- as do almost a million others.
“Once you mention it to other people, they go, ‘Oh yeah, we do that,’” said Hunt, 59, the owner of a marketing firm. “So you start picking their brains, and they pick yours.”
Australian employers must contribute 9.25 percent of workers’ salaries to an authorized pension fund, driving growth of the country’s retirement savings system to A$1.6 trillion ($1.5 trillion). Savers, some dissatisfied with the fees charged by professional managers for the returns they deliver, have pumped A$506 billion into Self-Managed Superannuation Funds, or SMSFs, the largest piece of the pension pie. After mostly ignoring the do-it-yourselfers for the 20 years since SMSFs were started, major banks and financial institutions, including AMP Ltd., Commonwealth Bank of Australia and Westpac Banking Corp., are now seeking a slice of the fees the funds generate.
The value of assets managed by SMSFs will quadruple to A$2 trillion by 2030, according to an estimate from the Australian arm of consultants Deloitte Touche Tohmatsu Ltd. More than 200,000 SMSF investors say they need advice and are willing to pay for it, according to research released in July by Vanguard Investments Australia Ltd. and Investment Trends Pty.
AMP, the country’s biggest and oldest pension manager that oversees A$179 billion, aired prime-time television advertisements from March to July, offering to help go-it-alone pension savers with everything from investment strategies to ensuring they comply with regulations. AMP charges A$990 to prepare and file regulatory forms to set up an SMSF and monthly fees from A$165 to help investors navigate the regulatory dos and don’ts. Audits and investment-management products come at an additional cost.
“We certainly have very lofty targets to industrialize this market,” said AMP’s managing director of SMSF administration, Andrew Hamilton. “We’re not hiding the fact that we want to be the biggest in self-managed” funds.
Most do-it-yourself investors turn to neighborhood accountants spread out across the country of 23 million people to help them administer the funds, including filing tax returns and annual audits.
As of June 30, there were 509,362 SMSFs covering 963,852 Australians, according to the Australian Taxation Office. AMP, which bought SMSF administrator Cavendish Superannuation Pty in June 2012, handled 9,650 such accounts.
Australia’s do-it-yourself pensions are unique among developed nations. SMSF plan members -- each fund has between one and four -- not only choose their investments, they are responsible for custody of their assets and for keeping records. People who had pension funds previously overseen by a large manager can transfer the money to their SMSFs.
SMSFs can invest in a broad range of assets including stocks, bonds, cash deposits, property, artwork and even wine. Under certain circumstances, they can borrow money to invest in property and equities.
Apart from SMSFs, authorized retirement plans include funds established by labor unions or employer organizations, and retail funds offered by banks or investment companies. Employees can make limited voluntary contributions. Australians can’t withdraw employer-contributed money from pension funds, including SMSFs, until they are at least 55.
In the U.S., contributions are collected from workers’ paychecks and held by the government’s Social Security Administration. In addition, workers may have corporate pensions overseen by professional money managers, or private plans such as 401(k)s and individual retirement accounts. While Americans have some choice in picking the investments for their private pensions, plan sponsors choose the options, as well as the administrators that keep records and safeguard assets.
What sets Australia’s self-managed funds apart is that they can be established and run without any link to Australia’s major wealth-management firms.
“It is in the title -- self-managed,” said Nick Fortune, a former money-market broker who moved to Australia 10 years ago from the U.K. “It is something I can play with, that I have control of.”
“The fundamental difference here is that they are not offered by a provider,” said David Knox, a senior partner in Sydney at Mercer, the consulting firm of New York-based Marsh & McLennan Cos. “The individuals are the trustees or the fiduciaries.”
Some SMSFs use Australian financial institutions for basic services such as cash-management accounts and Internet-based share trading. Big firms are missing out on advisory and management fees, which average 1.2 percent of assets in pension funds offered by the country’s large money managers. SMSF expenses averaged 0.5 percent of assets in the year to June 30, 2011, the latest date for which data are available, according to the tax office.
Hunt, who manages the pension assets of his wife and daughter in the same fund, invests some money in shares through a brokerage and keeps the fund’s cash at a local credit union.
“I’ve never done worse than the stock market,” he said. “It has always been a little bit ahead.”
Australia’s benchmark S&P/ASX 200 Index is up 12 percent this year.
Self-managed pension holders cite control over decision- making and dissatisfaction with management fees charged by large pension managers as reasons for taking control of their own retirement savings. Many say that the fund managers where they previously held their retirement assets didn’t perform well during the global economic crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008, said Linda Elkins, executive general manager at Colonial First State, a unit of Commonwealth Bank and Australia’s fourth-largest pension manager.
In the four years to June 30, 2011, which encompassed the global crisis and years following, Australia’s large pension funds produced an average annual negative return of 0.7 percent, according to the tax office. SMSFs returned a positive 0.65 percent after fees and expenses. Data for SMSFs for the two subsequent years hasn’t been released.
Both Commonwealth Bank and Westpac -- the country’s two largest banks by market value -- in the past 12 months have established teams to tap SMSF money.
Commonwealth Bank is developing a website to educate SMSF holders about regulatory obligations and wants to use the site to offer other products. The bank on Sept. 3 said it would offer installment warrants aimed at SMSFs, allowing them to borrow to invest in shares of 28 Australian-listed companies and exchange traded funds.
Westpac bought advertising space in Australia’s business newspaper offering an SMSF specialist as a personal banker and is training staff to assist SMSF trustees, who are considered more investment-savvy than other Australians.
“As the momentum gains, people are having barbecue conversations” about setting up their own funds, said Chris Lumby, who coordinates Westpac’s offerings to SMSFs. “If we can be the SMSF’s cash hub, we believe we will have greater ability to cross sell other products, whether they be banking products or wealth products.”
National Australia Bank, the country’s largest lender by assets, began offering margin lending for SMSFs, allowing fund holders to borrow money to invest in shares. The bank, which owns wealth manager MLC Ltd., also established a website that, like Commonwealth Bank’s portal, seeks to help SMSF trustees navigate regulations and receive investment advice.
The bank is trying to bring “all the parts of the group to focus on this market,” said Peter Hogan, NAB’s national manager for SMSF advice. Aside from share trading, SMSFs also turn to banks for term deposits and loans.
Whetting the appetite of the country’s largest wealth managers are the higher account balances of SMSFs compared with other types of pension accounts.
These funds held A$480,400 on average as of June 2012, compared with A$22,900 to A$101,800 for the other types of pension accounts, according to the Australian Prudential Regulation Authority.
Also, more than 60 percent of self-managed fund holders are like Hunt -- over 55 and nearing an age when they will consider how best to start drawing an income from the pension assets they’ve accumulated.
“We know that there is an enormous buildup of pre- retirement assets in SMSFs,” said Colonial First State’s Elkins. As SMSF holders retire, stop accumulating funds and start drawing a pension “they’re going to face a series of investment challenges,” including producing income while maintaining capital security, she said.
By the middle of this year, SMSFs held the largest proportion of superannuation assets with a 31 percent share, followed by retail funds with 26 percent, industry funds with 20 percent and government-employee pensions with 16 percent, according to data from the regulator.
Self-managed funds in the three months through March had the largest proportion allocated to equities, followed by cash, term deposits and commercial property, according to the tax office.
Growth in SMSFs “challenges the mainstream, vanilla propositions of the institutional end of the market,” said Jeremy Cooper, who led a government review of Australia’s superannuation sector in 2009 and 2010. These institutions “may well be able to come up with products and services that are attractive to self-managed” funds. “Nearly everybody is looking for that kind of sweet spot.”
Australian Securities and Investment Commission, which regulates the advice that self-managed funds receive, has been tightening rules that could affect the country’s 12,500 accountants who advise and administer SMSFs. Last year the commission set up a task force to examine risks in the sector and found “concerning pockets of poor advice.”
This year the regulator required auditors of self-managed funds to register and pass a competency exam by July 1. SMSF investors must undergo an annual audit to ensure they comply with laws, usually performed by accountants. They also must file a separate tax form and keep detailed records, including why a particular investment was chosen.
About half of the new clients that seek assistance from financial advisers Dixon Advisory and Superannuation Services Ltd. are existing SMSF investors looking for better advice, up from a third a year ago, said Steve Netting, an executive director at Dixon.
Some accountants that audit SMSFs may have decided to no longer offer the service given the registration requirements, said Liz Westover, head of superannuation at the Institute of Chartered Accountants Australia.
“Wherever you look across the sector, there’s almost nobody who has big market share,” Cooper said. “Apply traditional logic about what happens in industries and you would expect a massive amount of consolidation and big players gobbling up market share.”
Would Hunt, the golfer, return to Australia’s finance powerhouses for help managing his own pension?
“Nope,” he said. “Once bitten, twice shy.”
--Editors: Sheridan Prasso, Andreea Papuc