Self-Managed Super Funds Surge Amid Industry Struggles

Self-managed super funds (SMSFs) are on track to open a record number of new accounts this financial year, aiming for greater control and flexibility, but that growth may expose investors to new risks as large super funds face ongoing crises. An estimated 40,000 new SMSFs will be launched, edging close to the all time high set in 2007.

With big super funds weighed down by governance failures, cyber threats, and bulky investments that limit nimbleness, individual investors are turning to SMSFs as a more agile option. Large scale fund mergers that were meant to drive efficiency have instead led to operational slowdowns, especially during periods of market instability.

The trend is being driven partly by younger Australians who increasingly feel empowered to take personal control of their retirement savings. With easier access to financial information, this demographic is more willing to set up and manage their own super funds. SMSFs typically remain under-diversified and heavily skewed toward local investments, but offer the appeal of autonomy and tailored strategies.

By contrast, major superannuation funds now face limitations in the local market, with some already allocating up to 70% of new inflows to international investments, mainly in the US. However, concerns about a US earnings downturn and impending recession have stirred debate about whether that overseas focus still delivers long-term value for members.

Even before recent market challenges, some of the biggest industry players underperformed. For example, one major fund delivered an 8.5% return in FY24, less than the sector’s median. So far this financial year, returns have cooled further, landing in the mid-single digits. SMSFs may outperform if overseas markets continue to stagnate, given their lower exposure to global equities.

Retirees and pre-retirees are also looking beyond big super for more personalised guidance. While the government had proposed new in-house advisers within large funds to bridge this gap, the reform did not pass before the election. In the meantime, many SMSF owners either consult independent advisers - or opt to manage their portfolios solo.

That said, the decentralised nature of SMSFs creates vulnerability too. Without the rigorous oversight applied to big funds, individual trustees must be cautious. Instances where advisers have directed SMSF assets into questionable investments highlight the ongoing need for due diligence. Meanwhile, experts warn that SMSFs serviced by small firms or sole traders may be more difficult to monitor for fraud or mismanagement.

Source: The Australian, ATO, Finstreet