To say that the issue of franking credits – or, more accurately, the Labor Party’s proposal to cancel cash refunds for excess dividend imputation credits – caused consternation across the investor landscape over recent months would be an understatement.
There has been an abundance of comments on the proposal and accountants were not alone in trying to prepare SMSF Trustees for the potential impact had the federal election panned out as so many expected and the proposal become policy.
As we know, there was a significant and quite public backlash to Labor’s plan. Some of those who would have been adversely affected put their case directly to Bill Shorten and Chris Bowen in the media, while the SMSF Association joined with other representative associations such as National Seniors Australia and led an organised campaign against the proposal.
So, it’s not surprising that the hundreds of thousands of SMSF investors receiving income via franking credits breathed a huge sigh of relief when the Coalition claimed victory.
Don’t exhale too hard, too soon
While many SMSF trustees will be feeling that they dodged a bullet, and now don’t need to think about making any dramatic changes to their portfolio to deal with the impact of a franking credit removal, its actually an excellent opportunity to think very hard about whether their portfolio is really fit for purpose.
This is because an over-reliance on franking credits has meant too many SMSFs have investment portfolios that are fundamentally dangerous. Rather than falling into a state of post-election apathy, SMSF trustees should give thanks to the Labor Party for bringing the issue to their attention and properly assess whether their portfolio needs fundamental changes, notwithstanding the election result.
The reason for this is that the data, and anecdotal evidence from accountants who administer large numbers of SMSFs, suggest that a significant percentage of self-directed SMSFs have an over-reliance on the ASX top 10 in their portfolios.
There are clearly two reasons for this. SMSF investors long ago fell in love with the steady franked dividends as an income stream, but they also understandably feel a degree of comfort investing in companies that they’re familiar with and always thought of as stable pillars of our economy.
But such overly concentrated portfolios highlight perfectly the dangers of insufficient diversification.
Many self-directed SMSFs are aware of the importance of diversification but just don’t know how to achieve it. For instance, in the June 2018 survey commissioned by ASIC (Report 576 'Member experiences with self-managed superannuation funds') two thirds (66%) of participants in the online survey indicated that their SMSF invested in only one type of asset' and 'members expressed interest in diversification, but showed limited understanding of what diversification meant in practice.'
The following table is instructive. It shows the top 10 shares held by SMSFs, according to the Class SMSF Benchmark Report (March 2019; based on their database of 160,000 SMSFs, so it’s representative).
We’ve added our own column at the far right, showing the performance of each stock over the past five years (excluding dividends).
|Rank||Security Code||Description||5-year performance (excluding dividends)|
|1||WBC||Westpac Banking Group||-19.0%|
|2||BHP||BHP Group Ltd||+4.4%|
|3||TLS||Telstra Corporation Ltd||-28.9%|
|4||NAB||National Australia Bank Ltd||-19.8%|
|5||CBA||Commonwealth Bank of Australia||-2.2%|
|6||ANZ||Australia & New Zealand Banking Group Ltd||-15.7%|
|8||WPL||Woodside Petroleum Ltd||-17.0%|
|9||WOW||Woolworths Group Ltd||-15.79%|
Figures as at 7th June 2019
You might be surprised to see that eight of those 10 stocks are worth less now than five years ago!
Keep in mind that the broader ASX 200 is up some 18 per cent over the same period, with other international markets even higher.
What does this tell us?
The world of investing is the real world
Even a cursory consideration of the data gives us plenty to mull over.
The most obvious take-away is that set-and-forget portfolios make no sense – even when they seem to work for an extended period – because it’s folly to pretend that we live in a static and stable world. That is, no-one should be surprised by what the table shows us.
The world we live in is a complex place. Political upheaval, management failings, regulatory shocks, aggressive competitors, demographic change and technology breakthroughs impact markets just as they impact people’s lives.
If clients are not managing their portfolio and making changes to take these things into account, they are not really investing, they are gambling. That’s a ‘strategy’ of hoping for the best, rather than planning for the best. It’s rolling the dice rather than playing chess.
As an SMSF is the primary means its trustees rely upon to give themselves a dignified retirement, and to provide for their dependents, the stakes are far too high to gamble (or even to describe the strategy with the word ‘hope’ in the sentence).
The franking credits ‘scare campaign’ ought to be the wake-up call many of Australia's self-directed SMSFs need.
The Role of the Accountant
One of the key challenges for accountants is to be able to help these clients who self-invest their money with ideas on how to mitigate the risks mentioned above, inherent in managing money, without stepping over the line and inadvertently offering financial advice. Of course, many accountants are now licensed to provide advice or else hire or refer to licensed advisers. But every accounting firm has some SMSF clients who for whatever reason don’t want to be in a formal financial advice relationship.
Accountants who think holistically about these self-directed clients, provide discussion points, pose the right questions, provide options and help clients make the right decisions in an informed manner, find it enhances and protects the relationships that they have worked hard to build.
Future-minded accountants looking to move from an activity-based relationship to a more holistic trusted adviser-based one can do so by supporting their clients with information and options, without falling foul of regulated financial advice rules.
A key question for the accountants to ask themselves would be: “Is it right to highlight risks inherent in managing your own investment portfolio without professional help?”.
Perhaps the prudent starting point would be to get clients to ask themselves:
- “Am I really managing my portfolio, making appropriate changes as required, and ensuring that it’s appropriately diversified?” and
- “Am I managing my portfolio to ensure that it remains suitable for my circumstances?”.
If they can’t answer “Yes” confidently to both of those questions, ask them to pose this one: “Do I need to find a professional who will manage my portfolio to ensure both of those things?”.
Accountants are best placed to bring solutions to the attention of their SMSF clients, in particular:
- How to find a trusted, licensed financial adviser; or
- Providing options on how clients can access professional asset managers online and choose one to manage their portfolio.
The big picture is that the vast majority of self-directed SMSFs need help and most of them readily acknowledge this. Technology is (finally) allowing self-directed investors to access competitively priced, fully diversified portfolios managed by top-tier investment management companies.
OpenInvest, a Class partner, has established an online marketplace to bring these investment managers together in the one place, with each providing engaging content to enable your clients to get to know each manager, empowering them to make their own choice as to which one they want to manage their portfolio.
We are helping accountants by providing tools, options, and a script, which can be used with clients, to help them provide factual information (not regulated financial advice), reinforcing the client/accountant relationship and, ultimately, by allowing your clients to choose an investment management company to help them, making it more likely your clients will enjoy a dignified and successful retirement.
OpenInvest, is a new end-to-end online solution for self-directed investors, including SMSF trustees. OpenInvest empowers investors to choose how their wealth is managed, providing direct access to portfolios managed by their choice of investment management firms and designed to meet the needs of investors seeking diversification, security, income, and growth.
You can access tools and options for your clients via the Accountants section of our website.
You can learn more about us at www.openinvest.com.au.
After all, clients shouldn’t be losing sleep or money, let alone losing sleep about losing money!
Co-founder and CEO