Wealthy investors are defecting from managed funds en masse to set up their own self-managed super funds (SMSF).
Investment Trends research has shown that more than 8% of members of Australian retail and industry funds left to set up their own SMSFs in the year to June 2013. "It's just a one-way valve. When members move to an SMSF, they don't come back," Investment Trends chief operating officer Tim Cobb has told the Australian Financial Review (AFR). According to Investment Trends' latest report, less than one in 200 of those who changed funds came back.
The rate at which SMSFs are being setup is also soaring, rising from 7,000 per quarter over the past five years, to 8,500 per quarter currently. And it's the wealthy and more financially savvy investors who are leaving, believing that they have better chances of boosting their nest egg by managing their own fund.
And figures from the Australian Prudential and Regulation Authority (APRA) show that SMSFs now account for more than $500 billion of superannuation assets, or around 31% of Australia's superannuation pool of $1.6 trillion. Retail and industry funds represent 26% and 20% of total assets respectively.
Managed funds are desperately trying to woo members back with increased investment flexibility, but until the sector changes its pricing and fee structure, more and more members are likely to leave. Almost all industry and retail funds charge a management fee as a percentage of assets under management, which means their fees rise if the stock market rises, with managers having to do little to earn an increase in fees.
For companies like BT Investment (ASX:BTT), Treasury Group (ASX:TRG), Perpetual (ASX:PPT) and AMP Limited (ASX:AMP) who still currently manage billion of members super, hugging the index and still charging fees as a percentage of funds managed, mean they will continue to lose members to SMSFs. The rise of index funds (exchange traded funds or ETFs) charging minimal fees is also spurring the move to SMSFs.
Foolish takeaway
The writing is on the wall and it wouldn't surprise to see the trend continue and the SMSF sector come to totally dominate Australia's superannuation system.
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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.
