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Self Managed Super Funds (SMSF)

Shots fired: ASIC raises red flags on SMSFs

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

A recent media release1 from ASIC that questions whether SMSFs continue to be right for consumers is another in the long list of publications from regulators that probably miss the point.

The broader question that should be asked is whether a superannuation fund(s) is suited to an individual’s current situation. This applies whether the fund is an industry, public sector, retail, corporate or small fund.

Rather than shooting from the hip, let’s have a look at what ASIC has really said about SMSFs beyond the heading in the release, and then share some market commentary.

What does the ASIC release say about SMSFs?

Well, it starts with a warning that anyone contemplating an SMSF should be aware of the downsides and make sure it is appropriate to their circumstances. ASIC identifies eight ‘red flag’ situations, signalling that if an SMSF was established, it would unlikely be to the members’ advantage.

This point in particular has caused a stir among the SMSF community:

Our research found that SMSFs are not suitable for members with a low fund balance, particularly where they have limited ability to make future contributions. This is important because consumers starting off with a low balance need to be aware that they may not be in a better financial position in the future by holding an SMSF compared with investing in an APRA-regulated fund.

- ASIC, October 2019

ASIC recognises that SMSFs can be attractive for anyone seeking control of their superannuation, but they also must take responsibility for the fund as trustee. There’s nothing new in that, providing you have the required skill, care and diligence to mange your own fund or seek help from professionals when required.

However, when managing a fund there’s the time, cost, risks and other obligations to set up and run your SMSF that needs serious consideration. ASIC says that SMSF trustees spend more than 100 hours annually managing their fund.

The release refers to previous research undertaken by ASIC that questioned the quality of financial advice and whether it was consistent with the Corporations Law.

My recollection of one situation identified by ASIC was financial advice being given to a couple who had retired and had less than $100,000 in super. It was recommended they establish an SMSF predominately invested in geared property via an LRBA. I’m sure your thoughts on this type of advice is centred on disbelief, and you’re hoping the client didn’t proceed with the recommendation, or the transaction was unwound with compensation.

Unfortunately, ASIC have referred to part of the Productivity Commission’s Report – Superannuation Assessing efficiency and competitiveness, without putting things in perspective. The report from the Commission states that SMSFs with balances of less than $500,000 produce lower average returns. It would have been useful to recognise that the average balance of an SMSF, usually with one or two members, is about $1.223 million. ATO statistics say that in total there are only about eight per cent of funds which have balances below $500,000.

Whether an SMSF is right for anyone really comes to the suitability of the fund to your circumstances, your commitment and understanding when professional assistance is required. These are also mentioned in the media release.

What do others say?

The chief executive of the SMSF Association, John Maroney, agrees that SMSFs are not for everyone which has been a long-held belief. He points out that the costs in running an SMSF of $13,900 as published in an ASIC facts sheet may distort the costs in running the fund. This figure may be distorted by larger SMSFs which may engage extensive administration and investment services at a cost.

The SMSF Association will seek further information on how ASIC has determined its average cost figure because industry data indicates annual expenses to run an SMSF could be in the vicinity of $5,000.

John says that just analysing costs and returns of the fund need to look at the long-term gains of operating an SMSF which include increased control and consider the retirement goals of individual members.

An article by the wealth pages editor of The Australian, James Kirby, considers that the regulator’s release and facts sheets about SMSFs is ‘using a sword where a scalpel may have done the trick’. While he says there may have been good intentions behind the publications it ‘smacks of excessive force’.

In response to the average time it takes ASIC to run an SMSF (over 100 hours) James says there are probably other activities fund members put in the same amount of effort, such as looking after the garden. Both may be equally satisfying.

Other comments by ASIC relating to the cost of running a fund are questioned by James as he thinks that excessive costs could be incurred by those “trading in some type of demented fashion.” I’ll leave that to your imagination.

It is recognised that comparing costs of running SMSFs needs to be made more transparent so that each type of fund can be accurately compared. The comparison issue is ongoing but the ATO statistics for SMSF recognise that it is not possible to compare APRA based funds with SMSFs.

In the end, it comes down to you

Whether an SMSF is right for you is something only you really know. What’s required to set up and operate the fund depends on your dedication and experience. After all, it’s your money and I’m sure you and the other members of the SMSF will take an active interest to invest responsibly to build their retirement savings.  

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Graeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
  • Regulation
  • SMSF News
  • Self Managed Super Funds (SMSF)
  • Superannuation
  • Tax
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

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