Why SMSFs shouldn't attempt to perform their own surgery

In the first week of May, the Australian Securities and Investments Commission stunned the market with a no-nonsense rebuke of the everyday habits of regular investors.

Amid the unprecedented, coronavirus-induced volatility between late February and early April, trading activity surged while the average holding time of stocks plummeted, the regulator found.

The unusual behaviour was down to an influx individual investors engaging in short-term "day trading" and trying to get rich quick.

But according to ASIC, the attempt was unsuccessful.

"The average retail investor was not proficient at predicting short-term market movements over the focus period," the regulator wrote in a scathing report on the findings of its surveillance.

"While markets generally recover over the long run and tend to grow with economic fundamentals, short-term trading and poor market timing can be a major risk in volatile markets. Therefore, retail investors should be wary of trying to ‘play the market’."

For fintech entrepreneur Andrew Varlamos, the findings were a reminder of what many investors had forgotten during the long bull run in financial markets: that a completely DIY approach to investing often ends in tears.

"A reasonable person wouldn't get a mirror and a sharp knife and try and perform surgery," Varlamos says.

"They would realise this is serious stuff. Well the seriousness of investing has been brought home very bluntly as sharemarkets have gyrated and stocks and dividends have been whacked.

"People are realising it is much harder than they thought and the world's a lot more complex and risky than they've been led to believe."

Varlamos has long been concerned about the information and advice gap facing most investors. Too few see a professional financial adviser and the rest are left to take their chances on the open market.

The problem is especially acute for self-managed superannuation fund (SMSF) trustees, who quite literally are playing the markets with their life savings.

As a co-founder of ASX-listed wealth platform Powerwrap, and former commercial director of rival platform Praemium – both of which are used almost exclusively by financial advisers – Varlamos understands the role of good advice.

But the vast majority of trustees are not professionally advised. Varlamos estimates the number to be around 75 per cent, based on his synthesis of several pieces of data from sources including the Commonwealth Bank, SMSF Association and research house Investment Trends.

Research by ASIC in March 2019 detected a worrying advice gap more broadly across the investing landscape. It found that the rising costs of financial advice made it too expensive for almost 40 per cent of consumers, while an additional 20 per cent did not trust the industry to provide it, after a series of scandals and the damning Hayne royal commission.

"If you don't have access to an adviser you have to do it yourself and most people are not trained to do it themselves," he says.

Battle of ideas

To manage their own portfolios, many investors turn to consumer-facing platforms like those owned by the big four banks.

"The awesomeness about CommSec, Nabtrade and the like is you get really cheap trading and good user interface," Varlamos says. "But it doesn't solve the fundamental problem: which is what do I buy, and when should I sell?"

In order to try and solve that problem, some subscribe to analyst notes from stockbroking and research firms, or flip through the pages of the financial press. While these sources are helpful, they ultimately don't provide the missing ingredient: someone or something to manage their portfolio.

It is akin to car manufacturers selling parts and leaving the consumer to build a vehicle from scratch, he says.

Frustrated by the lack of options, Varlamos built OpenInvest and launched it in early 2019 as Australia's first direct-to-consumer managed accounts platform.

That means investors use the platform not to execute trades in individual stocks but to pick and choose investment managers.

OpenInvest doesn't take any money off the fund managers, seeking to minimise conflicts by adopting a user-pays model instead. But Varlamos believes most investors need their portfolio professionally managed, especially in times of historic volatility.

"My message is that these guys know what they're doing – they've been doing it for, in some cases, 100 years," he says. "That's super smart people around the planet managing money."

He urges investors to engage with the battle of ideas, reading the content uploaded to the platform by big name managers, like Blackrock, Macquarie and Schroders, and understanding their investment philosophy and strategy to see which best aligns with their values.

The funds management industry has traditionally been focused on selling products via intermediaries like financial advisers and its communications has therefore been full of jargon in the past.

"That is changing," he says, particularly as the advice gap widens, with a lot of educational content, as opposed to marketing guff, being produced by the big investment houses.

Of course, by their very nature, SMSF trustees like to be in control.

"I've never had a trustee say I wish I'd never done this," Varlamos says.

But that doesn't mean they couldn't use a little help.