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This month we look at the US investment giant setting its sights on Australian super, the launch of AFCA’s comparative reporting tool, ASIC flagging potential downsides of SMSFs, the risk of cyberattack for Australian financial institutions and the SMSF couples that are tracking well against lifestyle goals.
Vanguard could shake up Australia’s super sector
US funds management giant Vanguard has its sights set on Australia’s superannuation industry.
The US investment company that pioneered low-cost, low-risk index investing in the 70s, Vanguard is now the world’s biggest provider of mutual/managed funds and second largest provider of exchange traded funds (ETFs).
According to a recent report in the Australian Financial Review, Vanguard is “drawing up plans” to enter the superannuation side of asset management in Australia.
The report quotes Vanguard Australia’s Head of Market Strategy and Communications Robin Bowerman as saying, “It is an important strategic direction we are taking but it’s about repositioning Vanguard to be closer to the end investor.”
Australia’s superannuation industry is estimated to be worth around $3 trillion since compulsory contributions became law in 1992, making it the fourth largest pension market in the world.
If Vanguard brings its low-cost ETFs and managed funds into Australia’s super sector, financial analysts say it’s likely to result in a pricing competition between industry funds, which have recently benefited from positive coverage of their returns in the financial Royal Commission.
Vanguard’s total assets under management are currently estimated to be $6.8 trillion, but what makes the company so special is that it runs on a not-for-profit basis, with earnings typically being reinvested back into lower fees for its customers so it can maintain its reputation as a low-cost, high-quality provider.
AFCA’s new online tool compares consumer complaints
A new online tool lets consumers compare financial institutions side by side to see how they are handling complaints.
Launched this month by Australian Financial Complaints Authority (AFCA), the comparative reporting tool Datacube shares information about the number of complaints AFCA receives, how long it takes each member firm to resolve its issues, and the number of times financial firms don’t respond to complaints.
AFCA CEO David Locke says anyone can use the tool to review the performance of their financial firms and compare it to others in the market. “The AFCA Datacube provides a much deeper level of detail about the issues and products that consumers and small businesses are complaining to us about,” Mr Locke says.
“The level of detail that consumers can see about each firm will also support the work of policy makers and researchers.”
Like all ombudsmen schemes, AFCA is required to publish data on the complaints they handle, but Mr Locke says the Datacube presents the data in a way that’s more accessible and understandable.
“We want to allow both consumers and our members access to the most recent data possible and are working to release the next update to this tool in January 2020,” he says.
The ACFA Datacube can be viewed at data.afca.org.au.
ASIC warns SMSFs are not for everyone
The Australian Securities and Investments Commission (ASIC) warns consumers to be aware of the potential downsides of self-managed superannuation funds (SMSFs) in its newly released fact sheet, Self-managed super funds: Are they for you?
In the fact sheet, ASIC identifies eight red flag situations it says would make it extremely unlikely for an investor to benefit from using SMSFs to safeguard their retirement dollars.
ASIC Commissioner Danielle Press says consumers are well aware of potential benefits of using SMSFs but unaware of the considerable risks. “SMSFs may be an attractive option for investors wanting more control over their superannuation investment strategy, but it requires real skill, care and diligence to manage your own superannuation,” says Ms Press.
“SMSFs are not for everyone simply because not everyone can meet the significant time, costs, risks and obligations associated with establishing and running one.”
Australian Tax Office figures show there were 599,678 SMSFs in Australia at 30 June 2019, holding nearly $748 billion in assets, making total assets held in SMSFs larger than those in either industry ($719 billion) or retail ($626 billion) funds.
The fact sheet has been blasted by some as being unbalanced and incorrect. BGL Corp, Australia’s leading developer of SMSF administration and corporate compliance software for the accounting industry, labels it as “Fake news”.
BGL claims data from 2018 for almost 180,000 SMSFs on its Simple Fund 360 platform tells a very different story and describes the figures quoted on the fact sheet as “simply rubbish”.
CEO of the SMSF Association John Maroney has also responded to ASIC’s claims, saying that while he agrees consumers need to speak to a financial adviser about whether an SMSF is right for them, he believes ASIC’s focus on the risks is unbalanced.
“For people who are prepared to take the time and effort to personally oversee their retirement savings, SMSFs can be very empowering,” Mr Maroney says.
“By this fact sheet’s focus on risks and use of inconsistent data sources, SMSFs are again portrayed negatively, especially those funds with balances of less than $500,000.”
We cover this in more detail in the SuperGuide article SMSFs: How long do they take to run, and how much do they cost?
Financial institutions vulnerable to cyberattack
APRA warns it’s only a matter of time before a bank, insurer or super fund is hit with a cyberattack bad enough to put it out of business.
Speaking at a cyber security forum in Sydney on 7 November, the regulator’s executive member Geoff Summerhayes said: “Australian financial institutions are among the top global targets for cyber criminals. Australia is targeted due to its relative wealth and take-up of digital technologies, while financial institutions are attractive to criminals seeking money or personal identifiable information on customers.”
While no APRA-regulated entity has yet suffered significant loss due to an information security breach, Mr Summerhayes says a significant cyberattack is “probably inevitable”.
“Cyber-risk is far from new but the level of threat it poses, and the extent to which business has become exposed to that threat, has drastically escalated over recent years,” he says.
Recent media coverage of the theft of nearly $2 million from Australian superannuation funds and share trading accounts by a group of online hackers was a timely reminder that there is no room for complacency as cyber-adversaries, regrettably sometimes backed by governments, grow in number and sophistication.
More than 2 in 5 are on track for $100,000 a year in retirement
Accurium’s latest SMSF Retirement Insights show 40% of 65-year-old couples with SMSF have saved enough in their funds to enjoy an aspirational lifestyle.
The company calculates SMSF couples would need $2 million in savings at retirement to be confident of affording a $100,000 per year retirement lifestyle. Single women would need $1.43 million and single men $1.34 million, due to the longer life expectancy for women.
Drawing on data from 65,000 SMSFs with balances in retirement phase, Accurium states that as at 30 June 2018, a typical 65-year-old SMSF couple had a combined balance of $1.49 million and achieved an imputed investment return over the 2018 financial year of 5.1%.
This is down on the 6.7% achieved in 2017, but close to the average investment return of 5.1% per year earned by typical 65-old-year SMSF households over the past five years. The median balance for single member SMSFs at age 65 in the study was $1.31 million.
To learn out more about the amount of super required by singles and couples of different ages to achieve a modest, comfortable or aspirational lifestyle in retirement, see SuperGuide article How much super do I need to retire?