Australia's Pension Industry Is Driving Self-Managed Family Offices

Lachlan Colquhoun WealthBriefingAsia Features Editor Sydney 31 January 2010

Australia's Pension Industry Is Driving Self-Managed Family Offices

In wealth management, Australians' passion for do-it-yourself activities has manifested itself firstly in the move for self-managed superannuation (or pension) funds, and now in a growing interest in what are – effectively – self-managed family offices.

Australians, perhaps more than most other nationalities, are into do-it-yourself activities.

In wealth management, that has manifested itself firstly in the move for self-managed superannuation (or pension) funds, and now in a growing interest in what are – effectively – self-managed family offices.

It is well documented that Australia has the world’s fourth largest funds management industry, with A$1.2 trillion (around $1.1 trillion) in assets, largely due to more than a decade of mandatory retirement savings, with employers paying 9 per cent of an employee's gross wages into a nominated fund.

Over time, successive governments have tweaked the system, gradually increasing the attractiveness of superannuation as a savings vehicle through tax reform incentives.

The other big change has been the creation of a self-managed superannuation sector where people can set up their own funds, instead of having their nest egg managed by an industry fund, the company fund, or a retail funds provider.

Australia’s self-managed sector is one of the big stories in the personal wealth management industry.

Each year around 35,000 new self-managed superannuation funds are created, equivalent to 117 for each working day. The SMSF sector has gone from representing just over 10 per cent of all retirement savings at the beginning of the decade to more than 30 per cent, and there are around 400,000 separate funds.

But while the majority of those funds are for one or two people, under current legislation there can be as many as four people in a self-managed funds. And this is resulting in a new wave of three- or four-member superannuation funds in which two generations of families are coming together.

The idea is that with four people in the fund, compliance costs and fees are shared four ways, and the younger generation can “pay back” the older generation for all their investments in their upbringing, while also capitalising on capital growth for the long term. When the older members die, it is simpler for the other members to attain the benefits they would be left through inheritance.

Fewer than 9 per cent of Australia’s self-managed pension funds have either three or four people, but it is the next wave and wealth managers and advisors need to get used to it, otherwise their services will become increasingly irrelevant.

Even though their numbers are low, that still means that there are roughly 40,000 of these self-managed family funds in Australia, and their average size is around A$1 million.

As with all family finances, there are pitfalls. Younger members may disagree with their parents’ investment strategy and siblings may feud when parents pass on. But experts in the field say that all contingencies can be planned for and structures arranged for almost every eventuality, and that the benefits outweigh the disadvantages.

The reality is that the old family office structure is largely the province of the top echelon of high net worth individuals. Other affluent, but not quite so wealthy, Australians have used family trusts over the years, but that structure has – to borrow a phrase from a leading private banker – a few too many barnacles on it to be as relevant now as it used to be.

In the twenty-first century there is no doubt that the number of family-based self-managed superannuation funds will increase in Australia, and that it will become a structure that will survive not just one generation, but be a focus for family wealth over several generations.

How the wealth management industry will respond is not yet clear. They are only just coming to terms with the regular self-managed superannuation fund, of one person or a couple. A large part of the industry’s future lies in servicing this new trend in family savings.

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