Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 264

Some trustees should self-manage out of SMSFs

One of the great misnomers in the Australian investment scene is that self-managed super funds are actually self-managed.

The simple reality is that there is an entire advice industry built around SMSFs, be they traditional accountants, financial advisers, lawyers or one of many SMSF administration platforms.

This makes the provision of quality advice to those Australians who have an SMSF - or those considering setting one up - absolutely critical, if the more than one million SMSF trustees are to achieve the best outcome when they retire.

Concern about quality of SMSF advice

Last month, ASIC released a comprehensive report on the quality of advice and member experiences in the SMSF sector.

The 120-page report is uncomfortable reading for many in the industry because it calls out a high level of non-compliance with the best interests duty. In a review of 250 client files by an independent expert, 10% of the files risked clients being significantly worse off as a result of the advice they received to set up an SMSF.

A healthy and vibrant SMSF sector is a vital part of our compulsory superannuation system. It provides a competitive alternative to the institutional APRA funds and gives super fund members an effective choice and alternative.

ASIC says that in the right hands:

“SMSFs can be very effective retirement savings vehicles. In the wrong hands, however, SMSFs can be a high-risk option.”

ASIC’s focus was on funds set up in the past five years – so the research sample is skewed to relative newcomers to the sector - and there are some strong messages for the advice industry on where it needs to lift standards. There are also some red flags that both existing SMSF trustees and those thinking about establishing an SMSF should pay attention to.

Common problems with SMSFs and trustee expertise

ASIC found common issues centred on the disclosure of costs and risks about the set up and running of an SMSF, advisers not properly considering the client’s circumstances or existing super fund and not prioritising the needs of the client.

The ASIC report also holds up a mirror to trustees, or would-be trustees, with a challenging reality check around the personal responsibility that comes with the decision to set up an SMSF. In some of the case studies, financial literacy among trustees is clearly an issue with some trustees not aware of how their fund is performing, what it costs to operate or even if it has an investment strategy.

The bottom line is that an SMSF is not for everyone. Even someone who has good levels of financial literacy and resources may not be suited to an SMSF. ASIC cites the example of an investor with more than $2 million in super but no time or interest in running their own fund.

It raises the question of whether some base level of financial literacy needs to be demonstrated before the keys to an SMSF are handed over. The stark example in the ASIC research is that 55% of the SMSFs in the research sample had more than half their money invested in one asset type. That level of portfolio concentration risk, ASIC says, means those members may face greater risk in reaching their retirement goals.

SMSF marriage of convenience with property

Nowhere is the issue of financial literacy more pointed in the SMSF world than on the issue of borrowing to buy property. What ASIC’s online and face to face interviews showed is that for some, an SMSF has become a happy marriage of convenience between those wanting to access the residential property market and using their super savings to do it.

Now Australian investors’ love affair with property is beyond dispute. The property market has generally been kind, to the point that ASIC found that the surge in prices in recent years particularly in Sydney and Melbourne markets had “created a sense of urgency driven by a fear of missing out”. But perhaps this is a case of where love of the property market is making investors blind to risks and costs.

The fear of being locked out of the market is clearly playing into the hands of so-called ‘one-stop property shops’. ASIC’s research showed that trustees who had used a property one-stop shop had quite different experiences to those using a financial adviser or accountant. ASIC reports:

“After members had made a decision to set up an SMSF with a property one-stop shop they were introduced to related parties such as mortgage brokers, lawyers, insurance brokers, property management companies and property developers.”

What was surprising was not how the one-stop shops were operating but rather that the members seemed unconcerned about the potential conflicts of interest, and some even saw that as an advantage. Some members didn’t know if commissions or kickbacks had been paid to related parties, indeed they were vague about what the total cost of setting up the SMSF and the loan facility had been.

A Sydney case study, Luke, provided a hard-earned lesson. He set up an SMSF to buy a property in Queensland after a cold call from an adviser and a related accountant. He found costs of buying the property and running the SMSF higher than expected. He is now attempting to sell the Queensland townhouse for $22,000 less than he paid for it and his overall loss will be around $70,000. Luke admitted he should have done a lot more research, but he is not alone.

SMSF trustee responsibility

And while the financial advice industry has much to do to improve its level of professionalism, the trustees of SMSFs have to also take personal responsibility for both the decision to set up the fund, and for its investment decisions.

You certainly do not have to manage everything to do with an SMSF yourself, but if you are not prepared to spend the time understanding the costs of running an SMSF, setting an investment strategy and monitoring its performance, then you should seriously question whether an SMSF is the right retirement savings vehicle for you.

 

Robin Bowerman is Principal and Head of Corporate Affairs at Vanguard Australia, a sponsor of Cuffelinks. This article is in the nature of general information and does not consider the circumstances of any investor.

For more articles and papers from Vanguard Investments Australia, please click here.

 

8 Comments
Ben
July 27, 2020

Interesting, as I read this 2 years on, I wonder how these 'investors' are doing now the 10 year bull market has ended.
Investments aside, I also wonder if they can explain their responsibilities as trustees, and SMSF/ superannuation/ tax (ATO & SIS) rules and regulations beyond a few basics.

Minimal number of people with sufficient capacity, knowledge and/or time to run an SMSF. Self-confidence, particularly over-confidence with limited ability, is a significant factor in SMSF (and general investment) failure.

David Williams
July 30, 2018

It's also important to realise that cognitive decline will affect an increasing number of trustees who themselves may not be aware of this. There needs to be tests that can help trustees and their advisers to identify this issue. This is a community issue because of the tax-favoured treatment of SMSFs.

Bryan
July 26, 2018

As another trustee for an independently operated SMSF (no use of financial advisers, full service brokers, lawyers or administrators) I can't help but marvel at the financial industry's ongoing attempts to try to frighten retirees into surrendering their independence to their industry. If someone has been an investor over 20 years or so, and have had a good performance, they should have no qualms about establishing and running a SMSF. I have not found the exercise onerous.

If in the furure I feel I am starting to loose interest in day to day investing, I have observed a number of LICs or specialist management funds that I would be more than happy to pass the baton to, but still retain overall control of our SMSF.

Ken S
July 26, 2018

My experience is also like Ashley's. I have been running our SMSF since 1999.
I have never used a financial advisor, and my experience with share brokers has been quite disappointing.
I am now in regular contact with a team of like-minded investors (mostly with SMSFs). We benefit from each other's knowledge and wits.
I don't think there is a better alternative. After some terrible years allowing professionals to make buy & sell decisions for me, the last couple of years are showing an average total return of 14% pa, with which I am quite happy.

Paul
July 26, 2018

Thank you for this article Robin. You make some excellent points about the realities of managing an SMSF. It is a refreshingly unemotional and unbiased account.

The recent ASIC report that you mention highlights what many of us have believed for years - that the SMSF sector is basically an accident waiting to happen. Whilst some SMSF trustees have the knowledge and wherewithal to manage their own finances and make sound investment decisions, common sense tell you this would have to be the minority. And no doubt the recent trend of SMSFs piling in to investment properties via limited recourse borrowing arrangements will have unfortunate consequences for many as the market continues to unravel.

As independent economist Saul Eslake stated earlier this year: “allowing SMSFs to borrow in order to buy residential property is on my list of the dumbest tax policy decisions of the last 20 years.”

SteveDarke
July 26, 2018

"The stark example in the ASIC research is that 55% of the SMSFs in the research sample had more than half their money invested in one asset type. That level of portfolio concentration risk, ASIC says, means those members may face greater risk in reaching their retirement goals."

So half of all SMSFs probably had more than half of their money invested in Australian shares - that's what this is saying. Where's the problem? Every 'balanced' Industry Super Fund probably has over 80% of the money invested in one asset type - namely equities. Why isn't ASIC getting itself into a lather about that?

Yes there's the odd SMSF trustee who put $100k into the fund and perhaps foolishly bought an investment property through an LRBA, but those are minor and isolated cases.

Rob
July 25, 2018

I tend to agree with Ashley.

In our own case my wife and I do not have any engagement with investment or financial advisors, we do all our own investments, minutes, etc. however we do engage an accountancy firm for the annual returns and the audit.

We seem to be doing ok, averaging 11.68% return over 5 years and 10.15% over 10 years, which I note compares quite favourably to the ISF numbers recently quoted in the press.

Ashley
July 25, 2018

Robin's argument is that SMSFs are not really self-managed at all. He says all the SMSF accountants, lawyers, administrators, platforms, etc are the ‘advisors’ advising the SMSFs. But I reckon the vast majority of SMSF owners (or at least the dominant trustee in each fund) actually do make up their own minds on investments and therefore they really are ‘self-managed’ after all. They make the decisions and then they get all the service providers to do the paperwork, lodge the tax returns, generate reports, do the minutes, etc

 

Leave a Comment:

RELATED ARTICLES

SMSF trustees who question their capacity and look for options

Avoid these top five errors in your SMSF annual return

Every SMSF trustee should have an Enduring Power of Attorney

banner

Most viewed in recent weeks

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

How not to run out of money in retirement

The life expectancy tables used throughout the financial advice and retirement industry have issues and you need to prepare for the possibility of living a lot longer than you might have thought. Plan accordingly.

Latest Updates

Investment strategies

Investors are threading the eye of the needle

As investors cram into ever narrower areas of the market with increasingly high valuations, Martin Conlon from Schroders says that sensible investing has rarely been such an uncrowded trade.

Economy

New research shows diverging economic impacts of climate change

There is universal consensus that the Earth is experiencing climate change. Yet there is far more debate about how this will impact different economies across the globe. New research sheds more light on the winners and losers.

SMSF strategies

How super members can avoid missing out on tax deductions

Claiming a tax deduction for personal super contributions can end in disappointment if it isn't done correctly. Julie Steed looks at common pitfalls and what is required for a successful claim.

Investment strategies

AI is not an over-hyped fad – but a killer app might be years away

The AI investment trend looks set to continue for years but there is only room for a handful of long-term winners. Dr Kevin Hebner also warns regulators against strangling innovation in the sector before society reaps the benefits.

Retirement

Why certainty is so important in retirement

Retirement is a time of great excitement but it is also one of uncertainty. This is hardly surprising given the daunting move from receiving a steady outcome to relying on savings and investments.

Investment strategies

Have value investors been hindered by this quirk of accounting?

Investments in intangible assets are as crucial to many companies as investments in capital equipment. The different accounting treatment of these investments, however, weighs on reported earnings and could render ratios like P/E less useful for investors.

Economy

This vital yet "forgotten" indicator of inflation holds good news

Financial commentators seem to have forgotten the leading cause of inflation: growth in the supply of money. Warren Bird explains the link and explores where it suggests inflation is headed.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.