The Australian Securities and Investments Commission (ASIC) recently issued a consultation paper suggesting additional disclosures that might be appropriate for advisers who recommend clients set-up self-managed superannuation funds (SMSFs).
Several of these disclosures make sense and in fact, in our view, should already be part of a discussion with the client at the establishment phase.
However, our main objection to the current proposals is that they ignore the fact that there is no “zero risk” choice when it comes to superannuation. We believe that a focus on SMSFs in isolation has been fuelled by considerable media and expert commentary which has not been balanced.
SMSFs certainly create some additional challenges that members of retail or industry funds could avoid. However, SMSFs also mitigate other challenges. A genuinely helpful discussion with a client will highlight both and allow the client to make an educated choice about which factors matter most to them. Just like there should perhaps be special flags about new risks or work being taken on when moving to an SMSF, we believe that there should also be equivalent warnings about moving the other way.
The risks associated with running an SMSF
The risks that SMSF trustees face are many and varied.
They may make a mistake that results in fines or, even worse, in the fund losing its status as a complying fund, which has harsh tax consequences.
Just to put that last point in context, there are more than 500,000 SMSFs in existence and only around 200 were reclassified as non-complying in 2012/13. In none of these cases did the trustee simply make a mistake – there was always a lot more to it.
Trustees may choose poor suppliers to advise them, who will make mistakes for which trustees are ultimately accountable.
Someone will defraud them. There are no special mechanisms in super law that provide compensation from the government under these circumstances. Trustees would have to rely on the usual methods of redress such as legal action and professional indemnity insurance.
Protection from risks
One very important risk from which an SMSF protects trustees is having to move funds and therefore incur tax costs just because they wish to change suppliers. SMSFs are highly portable. If the service from an accountant or financial adviser isn’t good enough, a trustee may just move to another one.
Unless they have invested in something that is only available to them while they use a particular adviser, doing so won’t require them to change anything else about their SMSF (such as selling down assets or transferring to a new structure).
But regardless of what type of fund a trustee has, they still could lose all their money.
But if you stay where you are…
Members of large funds face risks, too, and some of these risks are unique to large funds. For example, the fund trustee may make decisions that are sensible when the needs of all members are taken into account, but which absolutely do not suit an individual member (such as withdrawing or changing particular options that they used but no-one else did).
A fund may be run poorly and the trustee may make foolish decisions – members may have chosen a dud fund.
The trustee may defraud members and take their money. There are specific mechanisms in super law that allow members to be compensated by the government under these circumstances. The fund pays a levy to fund this guarantee – in effect, members are already paying for it (and also for all the members in other funds who have not made such careful choices about who they use to look after their super).
An individual member may decide to move funds because they feel their current fund is not serving them well. This will potentially impose significant costs in terms of capital gains tax (if assets have gone up in value). Even if assets have fallen in value, changing funds can be a problem – individual members cannot take the losses they’ve made with them and use them to reduce the tax paid on capital gains in the future.
Unfortunately there are many things members can’t change in a large fund (think administration service, investment choices and insurance options) without actually changing funds.
Regardless of what type of fund someone chooses, they could lose all of their money.
Life is risky.
