SMSF administration outsourcing trends and options

Accounting and financial planning businesses are increasingly outsourcing specific tasks and processes such as SMSF administration. By outsourcing these non-core areas they can free up capacity and deliver their services to more clients as well as being able to deliver them in a more powerful and meaningful way.
It’s also possible to use outsourcing to broaden the range of services delivered to an existing client base by ‘plugging in’ the expertise of the outsourcing provider. Once again SMSF administration is a great example: A boutique provider – accounting or financial planning –can leverage the scale and technical expertise of a larger provider to confidently and powerfully deliver SMSF services to their client base. Additional benefits of SMSF administration outsourcing include:
  • Faster speed to market compared to building a service offering from scratch
  • Higher quality, more consistent service delivery
  • Less key person risk
  • Lower delivery cost compared to utilising in-house resources

When businesses are weighing up the pros and cons of outsourcing certain tasks, they also need to also consider the opportunity cost of what could be done if they employed their existing resources into other areas of their business. This factor is often ignored when considering the benefits of outsourcing. Offshoring is a subset of outsourcing and the terms are often confused and used interchangeably which is inaccurate. Offshoring is a specific form of outsourcing where business tasks happen offshore, typically followed by a local review and final delivery to theend customer. Offshoring of accounting functions such as SMSF administration also seems to be the current hot trend in certain accounting circles.

On the surface offshoring looks attractive due to the labour cost savings, but both accountants and financial planners need to look at the risksand benefits in a lot more detail before sending SMSF work offshore. Recently I was interested to read that we are now starting to see a reversal of this trend in the U.S with “reshoring” becoming the new buzzword. That is, bringing previous offshored processes back to the home country. The reasons for reshoring are many, but as wages in many offshoring destinations increase at a rate that outstrips inflation, a number of businesses are starting to look at the actual efficiency gains, loss of skill set, negative public image as well as the technological advantages that can be gained by re-engineering the same processes onshore. When we developed Superfund Wholesale we spent a lot of time researching different models and made the decision to invest into technology and people to deliver our wholesale SMSF administration solution rather than leverage lower-cost offshore wages. Our research has shown us that SMSF trustees who utilise advice services are typically more concerned about the quality of advice and service delivery. Price is obviously still important but when itcomes to higher net worth individuals, they are happy to pay a slight premium of a few hundred dollars per year to keep their SMSF administration onshore.
Although investing in technology and quality people initially placed us at a disadvantage in terms of pricing when compared to an offshoring model, the long term benefits we are starting to see definitely validate our decision. Through efficiency gains, innovation and a focus on superior service delivery we and the practices we work with have virtually removed price from the equation. The trend of outsourcing certain types of services including SMSF administration in Australia to specialist providers is likely to continue and grow as businesses refine their own services models. In financial services and accounting we are seeing more specialization and focus on working in certain niches. Businesses are focusing on either a specific client segment (e.g.medical specialists) and providing a wide range of services to that client type, or they are specialising on delivery of a specific service (e.g. virtual CFO) and providing that service to a wide range of clients.The future for financial services and accounting businesses is bright although challenges are coming from robo-advice, removal of the accountants licensing exemption and technological changes. Outsourcing of niche services such as SMSF administration may be a way for advice businesses to provide an additional service or new revenue stream through collaboration, without the large investment required to develop the same capabilities from scratch.

Managed Discretionary Accounts Trend in SMSF Advice

At Superfund Wholesale we see many different portfolio management models being utilised by the advisers we work with. An emerging trend is towards Managed Discretionary Accounts (MDAs) which can provide significant benefits to both clients and advisers.

Traditionally with fully advised clients, the need to provide a Record of Advice (RoA) for every portfolio change tends to allow ‘inertia’ to take over the portfolio, and as a result things that should be sold often aren’t, and things that should be bought are left till ‘another day when I have more time to write the Statement of Advice / Record of Advice.

It costs advisers in terms of resourcing and staffing, and it costs clients because of missed opportunities and potentially higher transaction costs on the traditional platforms. Advisers we work with are constantly on the hunt for solutions that will save them time and enable them to provide high quality, personalised advice to their clients.

We took this opportunity to talk to some of the service providers who are helping advisers to overcome the problems associated with keeping portfolios in the right balance.

ASIC regulations are stringent in terms of trading a client’s account without the correct licences in place, as evidenced by a recent five year ban on a Macquarie adviser for ‘un-authorised discretionary trading’. Obtaining the correct licences and setting up the associated infrastructure would be out of the reach of most practices, but by partnering with the right providers, advisers can tap into portfolio efficiency at cost effective rates.

HUB24 are one of the leading technology providers in the MDA sector. We asked account manager David Leigh for comment about how advisers are using the HUB24 platform to improve efficiency.

“Good technology is an enabler, and can fundamentally change the way advice is delivered, and implemented,” said David.

“HUB24’s market leading managed portfolio capability combined with our state of the art platform implementation technology can help advisers reach a new level of efficiency. For example, a professionally managed diversified portfolio of direct shares will provide greater investment transparency for advisers and their clients, right down to the asset level.

Clients also get the benefits of direct ownership and with the help of their adviser, can have greater control over their tax outcomes, helping to minimise the CGT impact during portfolio changes.”

“Access to professional portfolio construction can lead to lower risk and better linkage between advice, product solutions and client outcomes. Implementation via the HUB24 platform means less paperwork and compliance and by netting all asset changes at an individual account level, transaction costs can be reduced. A professionally managed portfolio of shares also means an adviser doesn’t have to do the reweighting or reallocation, giving them more time to spend servicing their clients.”

The important point to make here is that HUB24 have the facility for advice groups with adequate expertise to set up an investment committee and make the key investment decisions and applying resulting changes across all clients in the specific model portfolios they’ve established.

Within that HUB24 custodial system, an adviser can also appoint managers to provide advice on discrete portfolios of shares. One of the leading providers in this segment is Lonsec.

Bill Keenan, General Manager of Equities Research had these comments on the service they provide: “Lonsec’s equity model portfolios are in increasing demand from planners looking for quality, low turnover portfolios, with a strong 15 year track record. Lonsec offers three key portfolios: Core, Income and Emerging Leaders; and all are available on HUB24 and other leading MDA platforms at a cheaper cost than traditional fund managers”.

You can obtain further information about the Lonsec Core Model Portfolio here (PDF).

Of course, the cost of platforms and payments to external managers may be something that you are trying to avoid, in order to strip out as much cost as possible for your clients. The feedback Superfund Wholesale receives from advisers is that SMSF clients are especially keen to reduce or remove that middle layer of fees.

To cater for this mindset we also spoke to Bruce Williams, Director of Elston, who have spent many years developing their ‘non-platform’ MDA service. We were particularly interested in their performance based fee structure which can provide strong correlation between portfolio performance and costs, something that clients are likely to readily engage with.

“The Elston MDA service is designed to provide direct beneficial and legal ownership of client’s assets and professional investment management based on true after-tax management of assets so the full benefits of strategic tax and planning advice can be realised” said Williams.

“As the name would suggest accounts are managed on an individual basis, providing a tailored, individual approach focussed on after-tax return catering to investors with a high sensitivity to tax, or those in beneficial tax structures such as an SMSF.

For advisers, the offering allows them to provide the type of direct investment solution demanded by high net worth and SMSF clients while enabling them to achieve scale efficiency gains within their practice. This is achieved through reducing compliance risk and costs, managing more clients with less people by reducing administration costs and time through systems and automation of reporting and corporate actions, freeing up advisers to spend more time focussing on core competencies and manage client relationships”.

Williams concluded by saying that “Practices can drive profitability and growth by eliminating platform costs and reducing investment and administration costs. This gives them the flexibility to increase advice margins at the same total cost to client or pass on savings to their clients. Technology and administration benefits allow firms to increase EBIT per SMSF client through vertical integration of systems”.

When it comes to vertical integration of systems, advisers also need to think through how their portfolio management will flow through to the clients’ accountant or SMSF administrators. There is little point managing a client’s portfolio in a more efficient and profitable way if their SMSF accounting fees skyrocket due to an increase in portfolio transactions that the local accountant may be handling manually.

Superfund Wholesale has been working with Elston for a number of years and more recently has been deeply involved in the testing and development of an automated data feed from their MDA to Class Super’s leading SMSF administration platform.

The recently activated Elston data feed provides us with daily portfolio information including trades and transactions, investment holding balances and corporate actions. Advice businesses using the Elston MDA service can tap into our complete SMSF compliance solution for only $120/per SMSF per month – which includes daily administration, annual accounts, tax lodgement, independent audit and technical support.

Just as it is with SMSF administration, by partnering with the right service MDA providers, advisers can achieve customisation that SMSF clients demand, while also being able to provide quality, sustainable, ‘industrial strength’ portfolios.

It’s all about a scalable experience for SMSF clients.