Inside ASIC's SMSF push

The snowball in the numbers of self-managed super funds and their associated members and trustees continues rolling, and growing.

The latest Tax Office data, released over the weekend, shows SMSFs numbered 509,362 at June 30, with a total of 963,852 trustees.

The financial year saw growth in SMSF numbers of 33,546. That’s 2,795 a month, 645 a week, or 91 a day. A SMSF is opened approximately every 15 minutes and 40 seconds.

While the majority of those funds are probably being set up following considered instruction from individuals and clients wanting to take control of the future of their superannuation, many are not.

Too many industry professionals – predominantly accountants and financial advisers – set them up when they are not necessarily in the best interest of the client. But they are potentially in the best interest of the professional’s ongoing income stream.

Authorities and sections of the industry have long been worried about this. But it wasn’t until the Parliamentary Joint Committee (PJC) investigation in to the Trio Capital collapse that the government decided to act.

And this year, concerns about property spruikers targeting unsophisticated super investors to invest in geared property investments has increased considerably. See my column of Super property bells ring louder.

The PJC made some recommendations last year. And last week, the Australian Securities and Investment Commission proposed a set of new disclosure requirements for anyone who makes a recommendation to a client to open a SMSF. The aim is to make sure that clients are aware of the risks, costs and obligations they face if they agree to the advice.

The requirements will also, hopefully, lift the quality of advice provided to aspiring SMSF members in the process.

This is interesting, partly because ASIC doesn’t have any authority over SMSFs or trustees. What it does have is control over the industry professionals who provide advice to SMSF trustees.

There are a lot of top-quality financial advisers and accountants who are opening up SMSFs for clients for the right reasons. But there are plenty doing it for the wrong reasons.

And way too many of those clients pay for the advice over and over again.

First, there are overblown fees to set up their funds, then unjustifiable annual accounting and/or audit fees, and then clients are often steered into investments designed to line the pockets of others, including property spruikers, with little or no intention of providing a worthwhile investment for the SMSF member.

ASIC has reiterated this concern in its latest paper, Consultation Paper 216 (CP216).

“ASIC is also experiencing an increase in reports of misconduct about aggressive marketing of investments, notably direct property, through SMSFs. These reports have come both from retail investors and from professional associations,” ASIC said in CP216, which it is now seeking comment on.

“In our view, it is important that investors, through their financial planner or accountant, have access to good quality financial advice and information before they decided to set up an SMSF,” ASIC’s paper says. “From that perspective, we are very keen to insure that investors are better informed about the obligations and risks associated with SMSFs so that they are more equipped to decide whether holding their superannuation investment in an SMSF structure is appropriate in light of their individual circumstances.”

Key areas of concern

There are two main areas ASIC wants to see immediate improvement in. The first is the risks to SMSFs when it comes to fraud, which was highlighted by what happened to SMSF members/trustees in regards to the Trio Capital fraud.

SMSFs are not protected under Part 23 of the SIS Act.

While APRA-regulated funds were covered for the Trio fraud – by way of an industry levy being charged – the SMSFs that lost money through Trio (and its related fund Astarra) had no such protection and lost their entire investments.

They were, potentially, able to take legal action against their advisers, if indeed they were recommended into the investment by an adviser. But ASIC also discovered, in many cases, deficiencies with the level of professional indemnity cover held by those advisers.

ASIC’s CP216 outlines plans to have Australian financial service licence (AFSL) holders and authorised representatives forced to include information on the risk associated with SMSF investments in their advice (generally in a statement of advice, or SoA).

Apart from not being covered for fraud, the proposed disclosure requirements in SoAs would also include information about the duties and responsibilities of running a SMSF they are taking on, even if they outsource some of that responsibility. It also would include the need to have written investment strategies, the time and skill requirements needed, the costs associated with setting up the funds, and the complexity of closing a SMSF.

ASIC seems to want a separate sign-off directly, apart from anything that the adviser or accountant might require, to say that the trustees/members understand the key differences and risks associated with being a SMSF trustee versus being a member of an APRA-regulated fund.

Then ASIC is considering forcing the industry’s advisers to make potential trustees aware of the following issues also:

• The lack of insurance in SMSFs at start-up.
• No access to the Superannuation Complaints Tribunal.
• The accounting and legal knowledge they need to be aware they are accepting responsibility for.
• Risks associated with a breakdown in the relationship of members (i.e., divorce, estrangement, business break-ups).
• Understanding the superannuation sole purpose test.
• Understanding the investments that SMSFs can and can’t invest in.

When it comes to prescribing costs for SMSFs that advisers must put in a SoA, ASIC commissioned a report from actuaries Rice Warner.

The report looked into whether there should be a minimum amount of money before a SMSF was started. The figure often quoted on this is approximately $200,000. I’ve always thought that it should be about that as a minimum, but only if you’re prepared to do all of the work yourself.

I’ve also often said that it’s not until a super fund hits about $500,000 that it would be cost competitive if using reasonably full service provisions from the likes of financial advisers.

Lo and behold, that’s roughly what Rice Warner found also, although their calculations were a lot more complicated than mine, with better justifications.

Quarterly statistics

Just a few quick notes from the ATO’s quarterly statistical tables, outside of the overall growth in numbers mentioned at the start of this column.

Over the 2012-23 financial year, the quantum of investments sitting in “limited recourse borrowing arrangements” rose only 8.1% during the year to a total of $2.444 billion. This was against a total direct property ownership total of about $76 billion (for both residential and commercial).

It’s fairly normal for Australian SMSFs to hold about as much cash as they hold in Australian shares. And, after a pretty ordinary FY12, the overall asset allocation of SMSFs tipped back towards the stockmarket.

The sum invested in listed shares grew from $125.3 billion to $158.1 billion, an increase of 26%. Cash and term deposits grew from $142.5 billion to $154.1 billion, up 8.1%.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• New research from professional services firm Deloitte estimates that by 2033, Australia’s superannuation asset pool will have grown to $7.6 trillion, driven by growth in self-managed super funds (SMSFs), “retail giants” (predominantly the large banks and life insurers), and industry funds. According to the company’s sixth biennial report, “The Dynamics of the Australian Superannuation System - the next 20 years - 2013-2033”, the SMSF sector will be the largest sector in the post-retirement superannuation market by 2017. Meanwhile, industry funds are putting up a strong fight. “Industry funds are expected to grow significantly over the next 20 years with their rate of growth equalling that of SMSFs over the period to 2033, with the industry fund and SMSF sector reaching $1.93 trillion and $2.23 trillion respectively,” the report said.
• SMSFs are missing out on investment opportunities overseas because of the cost and effort involved, according to Crystal Wealth Partners director John McIlroy. “One of the reasons that SMSFs don’t invest much in offshore stocks is because it is fairly cumbersome and expensive to do so,” McIlroy reportedly said. But investing offshore provides diversification benefits, he says. “Investing in a concentrated portfolio of exceptional dividend growing companies, with an absolute value bias, will generate attractive long-term returns with less than average volatility”.
• Xpress Super has taken the top two positions in all three categories in the 2013 Smart Investor Administrator Survey and scored best product for medium-balance SMSFs ($1 million). The low-cost option was launched in April by specialist SMSF administrator SuperGuardian. “We always believed a low-cost option would have strong market appeal, but to have our judgment confirmed so quickly is an enormous fillip for the business,” said Xpress Super chief executive officer Olivia Long.