Is Sinodinos stalking self-managed super?

Big superannuation firms appear to have convinced Arthur Sinodinos that self-managed super funds have it too easy. It’s a strategy they’ve used before to try to protect their fat fees.

The new minister for superannuation Arthur Sinodinos says that he plans an inquiry to make sure that self-managed funds do not have an advantage over retail and industry funds.

Arthur Sinodinos is in danger of making the same mistake as the 2009 Labor superannuation minister Nick Sherry. Nick Sherry had close links with the industry superannuation funds and set up an inquiry into superannuation without any representation from self-managed funds. I pointed out at the time that Sherry’s committee was set up to be a “Kangaroo Court” on self-managed funds (Super's kangaroo court, July 2 2009).

Later Chris Bowen became superannuation minister and he quickly added sound self-managed fund expertise to the inquiry. The outcome – the Cooper Report – was an excellent document which understood the vital role of self-managed funds in Australian savings.

Arthur Sinodinos' connections are among the big retail superannuation funds and, like Nick Sherry, he is in danger of appearing to plan a “Kangaroo Court” to pass judgement on self-managed funds. The Coalition equivalent of Chris Bowen is none other than Prime Minister Tony Abbott. Wisely, and without using words that would undermine his inexperienced superannuation minister, Abbott has assured Australians that if Arthur’s “Kangaroo Court” advocates significant adverse changes to superannuation then those recommendations will be sent to the dust bin (No 'adverse changes' to super: PM, September 26). Tony Abbott knows that if he goes back on his solemn vow to the electorate on superannuation he will set the stage for whoever wins the ALP leadership contest to make superannuation the 'carbon tax lie' issue for the 2016 election

Nevertheless, today I am going to save the Abbott government time and money by setting out some of the enormous advantages self-managed funds have over industry and retail funds, and help Arthur Sinodinos understand why one million Australian have shifted away from big funds to the self-managed movement.

If Arthur’s Sinodinos’s inquiry was fair and not a Kangaroo Court it would rediscover what the Cooper Report found and what I explain below: that most of the advantages that accrue to self-managed funds stem from the poor management, bad customer service and high fees of the big funds and their customer advisers.

Arthurs Sinodinos was an excellent chief of staff for John Howard and had a strong grasp of administrative detail. In time he will make a good minister.

The one million Australians who voted with their feet to set up their own funds are now the biggest force in superannuation with over 31 per cent of the market and, according to Macquarie research, are headed for much higher numbers.

Moreover, half – yes Arthur, half – of those who use superannuation for what it was intended for (the provision of pensions) have found it best to use a self-managed fund. Most big funds, until recently, have been reluctant to launch self-managed fund products and services, particularly in the pension mode area.

So let’s list some clear advantages – all of which could be eliminated tomorrow if the retail and industry funds woke up and changed their ways. Instead, the big funds prefer to lobby superannuation ministers like Nick Sherry and Arthur Sinodinos (plus the government advisory bodies) trying to convince them to make it more difficult to set up or run a self-managed fund.

The Australians are not fools – they saw the real advantages. Here are some of them:

  • The big retail funds and their associated sales forces either charged exorbitant commissions/fees or, in the case of the industry funds, spent a fortune on promotion. The fees to agents/financial planners were often so high that the previous government had to legislate for fairness. The big funds should have done this without requiring government action. Australians didn’t wait around for governments to act and voted with their feet.
  • The accounting profession showed the million Australians that they could run their own fund efficiently and at low cost, plus they could comply with all the rules without hassle. The accountants have been so efficient that it is now economic to have a self-managed fund with $200,000 and even less. This really annoyed the big funds but is a huge benefit to the nation.
  • Most of the one million Australians with their own fund have discovered to their delight that there are very low-cost ways of investing superannuation in equities, including investment companies like Australian Foundation and Argo and indexed funds like Vanguard. Similar overseas and local property investments are also readily available. You don’t have to pay large amounts, although self-managed fund people can also appoint high-risk, high-reward managers for a portion of their portfolio if that’s what they want to do. Its what I did when I was younger. And of course those with their own fund can buy their own shares and property trusts etc., often with the help of a broker. Naturally, many self-managed funds have gone outside the accountancy area for extra advice – particularly in financial planning. This makes perfect sense but most are careful not to be ripped off with fees that are a percentage of assets. In addition, disclosure by many big funds is mediocre to bad.
  • Until the last year or so bank deposits have been offering between 5 and 8 per cent, government guaranteed. But few retail and industry funds had a bank deposit category because they could not extract fees out of it. No one ever thought of customer goodwill or service. The only way superannuation savers could access these high government guaranteed returns was set up self-managed funds. Of course, at the moment bank deposits offer low rates, but in time advantage number four will return.

Overall, the performance of self-managed funds has been around or above most of the big funds. The million Australians really cared for their retirement funds, although because so many are paying pensions, they often take less risk.

The big funds hate self-managed funds but in more recent times some retail funds and their advisors have started to provide products suitable for self-managed funds. It’s unbelievable that they took so long. Even now there is no love lost and when you hate your customer it rarely works.

It’s true there are several special advantages enjoyed by self-managed funds. But those advantages are not anywhere near sufficient to have caused self-managed funds to become the major force in Australian superannuation.

For example, there is a capital gains tax advantage, not in the rate but in the timing, but once again if the big funds had got off their tails they would have designed products for self-managed funds that were tax efficient.

Family businesses often have their commercial property owned in family superannuation fund. There are strict rules but as small business minister Bruce Billson knows this has been a very important measure to provide capital for his beloved small enterprises who are an essential lynchpin for the Abbott job creation plan. And again this has not been a major driver of the self-managed funds explosion.

I must say I am worried that some self-managed funds are gearing into housing in unsuitable situations. There are a lot of situations where gearing superannuation into real estate makes a lot of sense – particularly when you keep changing residences for work. The Reserve Bank has expressed concern about the effect of this on the housing market. What Arthur Sinodinos could have done was call and inquiry into this specialised and new area of superannuation.

Of even more value, he could have recognised that because so many Australians have chosen to save via self-managed funds the nation has an incredible advantage. I will discuss it tomorrow.