Speaking on the Nest Egg podcast, Bell Direct director and chief executive Arnie Selvarajah said Aussie SMSFs are still heavily skewed towards domestic equities and it’s not “where we need to be as a sector”.
“Today I see that when the market goes down, most people buy. So, they've really understood now the opportunity from a moving market and the volatility in the market rather than being fearful of it,” he said.
“I think that's a good sign. I think that means that people are understanding the market a bit better, understanding and accepting the volatility and using that volatility to actually make good investment decisions.”
Mr Selvarajah also spoke to Nest Egg about:
· Why you need to set an objective for your SMSF;
· The difference between engaged and active management in retirement; and
· The importance of cutting down on time spent on SMSF administration.
Thanks Arnie, for sharing your insights with the Nest Egg podcast team!
You can stay up-to-date with what Arnie and Bell Direct are up to here.
David: Good day everyone, welcome to the Nest Egg podcast. David here. I was just talking to our guest today Arnie Selvarajah, around a few things that he's been spotting on the SMSF side of things, particularly what's been going on in investment trends. Arnie is the CEO and director for Bell Direct and, Arnie, welcome to the show.
Arnie: Thank you.
David: Arnie it's good to get you in because we were just talking before this a bit more about investor psychology, investor behaviour, so without going into too much detail yet, just give me a rundown of what Bell Direct do, who they are and the kind of synergy behind that.
Arnie: We're an online broker. We're probably one of the later entrants into the online broking space and as you would be aware, we have some very large competitors on either side of us. But one of the things that we've done differently is we've taken a view and an approach to the market around really understanding the client, really understanding what they need, when they need it, how they need it through the use of our own technology. We are hoping to deliver that and do deliver that in a different way.
David: Yeah. And I think one thing which I've been quite following across that path as well is the research you put into it as well. So there's a lot of critiquing, a lot of analysis that you see through that. So is that something which you see as a core component of the business? Is it something which is quite valuable for you as an online stockbroker?
Arnie: Well, there's two elements to that. Very early in the piece went and researched the 16 or 17 key attributes that investors look for and we mapped where every one of our competitors was ranked in those 16 or 17 categories. Then over the next two to three years went through and systematically made sure we were delivering best in market for each of those 17 categories. So you may or may not know we are rated number one in overall customer sat and have been for the last five years by InvestmenTrends purely because we're focused on those things that clients want.
David: That's good.
Arnie: The other side of it through the investment side, in our parentage is a company called Bell Potter Securities, which has been in broking for over 30 years. So having that backing and that support means that we also get access to a whole lot of information around investment decisions and stock research and stock recommendations. So we bring all of that. We have been able to bring stuff that you would only get if you're a customer of a full service broker to a customer of an online broker. So we think by bringing the usability and the technology and the tools to a level that's higher than our competitors, we also are bringing investment research and recommendations which are also different to our competitors. So we brought the two things together and what I think is a best of breed offer in the market place.
David: Yeah, it's good. It's good to have a strategy and I think you're probably used to having that being the director of the Northern Suburbs Basketball Association as well. So are you someone that sort of gets to play often or ... ?
Arnie: I still play. My body doesn't like that so much, but I still do play, but I coach as well and have coached for awhile. When you coach you, you've got to think about the strategy and the way you want to get to by quarter time, half time and at the end of the game. So it's not just doing what's in front of you. You've got to think ahead a little bit about what you're doing and where you want to get to.
David: One hundred percent. I think the one philosophy that I have, and I'm really a strong believer of is, whenever I speak to anyone who I want to do business with, I love it the fact that they'll talk to me about the points that are really interesting at day one, the ones that really are sort of the unique things, but for me it's about that pathway to get me to the end of that day one, you know what I mean?
David: How am I going to get to that day one that you're talking about today and how am I going to get to that through your expert analysis, your strategy that you've created for me and all that stuff? So it's good to see that that's on the forefront of the agenda.
So look, we want to dive into a bit more around SMSF investment behaviour that you've seen because a lot of that research is very useful across the board. So actually analyse what's going on and what you see is going on in the market. So I've got here that you've noticed that it's heavily skewed towards Australian domiciled equities and in fact are a review of over your 30,000 SMSF accounts is quite telling. So could you just give us a bit more of an insight as to what you're seeing here?
Arnie: Yeah, so maybe if you go back 10 years and talk a little bit about how SMSFs used to invest 10 years ago, it was even more heavily focused around the Australian market and I think diversification for SMSFs way back when would have been to have all four bank stocks, rather than thinking about different sectors. So we certainly have seen some improvement. We look at our own client data and as you mentioned, there's about 30,000 SMSFs who trade on our platform. We can see that one, there's a big difference between SMSFs who are self-directed to SMSFs who are advised. If we just take the self-directed SMSFs to start with, they have about 84 per cent of their portfolio invested in domestic equities. So that means they are Australian, domiciled direct equities.
Now, if we think about the global landscape, the Australian economy or the Australian share market makes up 2 per cent of the MSCI index and the MSCI index is the index of all global stocks. So we're very small proportion of the global picture, but locally we invest ... As I said, 84 per cent of our investments are in the Australian market, so it's not really representative of a globally diversified portfolio. What we are seeing, which is a big difference to the advice portfolio is that, in advice portfolio only about, I think it's actually 63 per cent of portfolios are in domestic equities.
So certainly in the advice world they've taken on the diversification push a lot more aggressively. The way they're doing that is through the use of ETFs through which they can access global markets and also through managed funds through what we call mFund, which is a way you can access managed funds through our platform. So certainly the advised SMSFs are lot more diversified then self-directed SMSFs.
In the self-directed SMSFs, they have about 7 per cent in ETFs and about 5 per cent in LICs. Listed investment companies is another way that you can access international exposure. It's kind of been stable over the last six months around those levels, but as I said earlier if you roll back 10 years, it's certainly an improvement from where we were, but I don't believe we're where we need to be either as a sector.
David: Yeah, for sure. And think that's an interesting point. Just in your opinion, where do we need to be as a sector? What would you say is the kind of, as a mark-in, and what you're seeing would be the opportunistic time for an investor?
Arnie: I can't really answer that question because that's advice, but I think you need to think. The answer to that question is personal to every individual. So truly which part of your lifestyle or life stage you're at. If you're younger and you've got more time to retirement, you can be a bit more aggressive in your asset allocation. So in that case you, you potentially would have a higher degree of asset allocation into Australian equities and going for growth in some of those markets.
But I think there's two parts. There's kind of inequities were that spread is geographically, but then also in terms of asset class, fixed income property, alternative asset classes and how you mix that into your portfolio as well. So the younger you are and the more timeframe you have to retirement, you can be more skewed to equities, but the older you are getting, less time to the retirement, you'd probably shift your asset allocation to some of the less volatile but more income generating asset classes like property and fixed income.
David: Yeah, for sure. And I think the fact that there's huge growth within other markets such as the ETF market, LICs are expanding as much as we can think as well at this stage, but there's a lot more growth potential going forward from there as well. Have you seen a change? Because SMSFs now been around for a while, but I think there's a huge shift in the market over the last, like we said in the last five and especially in the last 10 years. Are investors more diversified now than ever or people sort of watching the market carefully? Have you spotted anything which is sort of a bit of an anomaly, so what you think?
Arnie: Look, there's certainly some uncertainty in this space that trustees face. There's uncertainty around regulation and superannuation rules and regulation generally. There's uncertainty around franking credits, which is obviously a political football that's been kicked from one end of the field to the other, between the two major parties.
And then there's uncertainty around the performance of our market relative to other markets. We know that the US market is performing really well at the moment. Europe's starting to perform well as well, and even some parts of Asia and some of the emerging markets are starting to perform. Our market here has lagged a little bit of that. I suspect that's a largely to do with those uncertainties I talked about it a little bit earlier. So I think trustees are a little bit reluctant to go all-in with their investments and as a result, and you'll know that there's a very high proportion of cash held in these portfolios as well. And that's, I think a lot of people sitting in waiting to find the right opportunity to jump back in.
One thing I have observed from a behavioural perspective, which is once again different to where we were 10 years ago, 10 years ago, when the market went down, most clients, most trustees would sell to try and minimise their loss. Today I see that when the market goes down, most people buy. So they're really understood now the opportunity from a moving market and the volatility in the market rather than being fearful of it. So I think that's a good sign. I think that means that people are understanding the market a bit better, understanding and accepting the volatility and using that volatility to actually make good investment decisions.
David: Yeah, for sure. The interesting part here, and one thing that I read earlier from your research is there's a differential point between advised, and I know you touched on this slightly earlier, but there's a differential point from advised to self-directed SMSF trustees. I'm sure that probably carries across the system to normal self-directed investors and advised as well. But from what you were seeing and from what you've gathered, an advised SMSF portfolio continues to be a bit more diverse than the self-directed side. Is that something, and I know that it's down to professional advice, but do you think that's something which is worth highlighting is a consideration for the self-directed SMSF trustees, do you think that's the optimum peak they should be looking to aim for?
Arnie: Look, I think it's certainly a signal and I think in a world where we get validation from multiple sources on a lot of things that we do today, I think certainly looking at how advice portfolios are being constructed is a good indication and a good benchmark for non-advised or self-directed SMSF portfolios. It gives you a clue.
Obviously those advised portfolios have the benefit of an adviser and a professional and more importantly, those advisers are getting access to some information and support from other parts of the market like fund managers and others. So they've got access to a whole lot more information. They've got access to more support. So in theory you would expect that they would get better results.
One of the things we haven't done is actually looked at the underlying performance of those two portfolios, but that's a little task that I've got for myself.
David: Yeah, tune in next time for that one we'll get ...
Arnie: Yeah, that's right.
David: Well, that's interesting I think. That also boils down to when someone becomes an SMSF trustee, they don't always realise how much paperwork, how much regulation, how many things they've got to do to manage it. Managing your SMSF is what Nest Egg is always talking about because it's such a big task and it isn't ... Just another point here which is, you've highlighted that self-directed SMSFs are spending on average 8.4 hours a month just managing it. So just looking at the admin side of things, that could probably take away a lot of the time actually looking at the market and having a chance to really sort of make the most of your investments on.
Arnie: Absolutely. You've hit on a topic that's close to my heart, that 8.4 hours was actually 6.3 hours in 2014.
Arnie: So in three to four years, that's increased by a third. I suspect that's largely due to the increased compliance and regulation that now trustees are faced with. And if you drill down into that 8.4 hours, more than half of that is actually just on admin. So the trick here is how do you spend less time on admin and more time on actually getting better performance?
I think a lot of trustees still do a lot of the admin themselves. I'm a big advocate of technology as you would know. Now with technology there are a whole lot of other solutions available at a very competitive price point. That means that the trustee could free up 4 of those 8.4 hours, actually more than 4 of the 8.4 hours and spend that time researching better investment options.
If you think about the economics of that, if the average portfolio balance in an SMSF is $630,000, if they could improve the return by 1 per cent, that's six and a half hours and just under six and a half thousand dollars a year. Multiply that by every year that you've got between now and retirement. That's a lot of money that you're leaving on the table by not focusing on the right things. There are investment admin solutions now available for $1,500 a year, everything included. So I would really encourage people to look at where you spend your time and really focus on the things that are going to add value to you, which is really around getting better performance out of your portfolio.
David: It's such a huge topic and it's obviously not just one of the fastest growing investment vehicles in Australia, but it's one of the most simple and most logical in theory to sort of look at but it does come with its own sort of headways and hurdles to jump over. That brings it to a nice point is, what would you see as sort of, if you can, to a number of five, what are the five most important things that you think are viable for anyone who's looking to set up an SMSF these days? Have you got anything which you think is worthwhile mentioning?
Arnie: Absolutely. I think- and I'm my own trustee of my SMSF so I live and breathe this obviously- I think the five things are, you have to set an objective for the fund. And what I mean by that is sit down and think about where, how much money have you got today in your fund? How much time have you got between now and retirement effectively? What do you think you'll need to spend post-retirement? So what does the fund need to be at the time that you retire? That should give you an indication of the average return you need to achieve in your fund over that period of time.
A lot of people basically are in a hit for the fences every time they place a trade, but if you do the numbers, it'd be quite surprising to you. The average return you need to achieve in your fund only really needs to be 6 to 7 per cent per year, so that's not a large number. It is a large number in a low-growth environment, but in other environments it's a reasonably achievable average.
Now, if you just think about that and how you achieve that average return, you're going to keep yourself out of harm's way by chasing high returns. Because high returns also means high volatility and the way to kill your performance is to lose money. It's better to make zero return then to lose money obviously.
So I think understanding the objective of your fund and being clear about the type of return you need to achieve.
The second thing to think about is don't confuse the assets or investments that are sitting in your SMSF with those that you want to make in a discretionary context. So buying artworks or classic cars, those things really shouldn't be in your SMSF. They should be things you do outside your SMSF because you enjoy them. The SMSF investments need to be those assets which are going to fund your retirement.
David: Yeah, for sure. Maybe not so much crypto or anything like that?
Arnie: No, maybe not so much crypto. Diversify appropriately is number three, I think. Make sure that your asset allocation is appropriately balanced and we talked about that earlier. Making sure you've got asset class diversification as well as geographical diversification.
Number four we talked about, which is spending too much time on admin. Make sure you're spending the time in the right places.
The last one is something that's probably difficult to control. We find that people, when they hit retirement and now have much more time on their hands, investment trends reports that the 8.4 hours goes up to 9.9 because they have time on their hands. That's good and that's appropriate, but we also see that retirees are much more active in their portfolios and that they're buying and selling a lot more often. So be careful that you don't be too active in that you use up all of the additional returns-
David: It's a good point.
Arnie: ... in brokerage costs-
David: Yeah, yeah.
Arnie: ... Also your strategy as you get to retirement, should be less volatile investments which are driving income and they don't need to be traded. So I think, think a bit more about what you do in retirement with your portfolio.
David: Yeah. Sometimes it's all about the quality of time over quantity of time and having a whole car is always good, but you need sort of ... need to manage that and extra -
Arnie: You should be engaged, but you don't necessarily have to be active.
David: Yeah, exactly. One hundred percent correct. Well, Arnie, I've really appreciated. That's a great summary of points to our readers and listeners out there. You can also as well, anyone else who's out there who's sort of struck a chord with Arnie's philosophy here, it's good to know that you've already provided us some blogs and insights across Nest Egg so you can follow those as well and read those too. Arnie, thank you very much again for coming in. It's been great to have you in.