Advisers say there’s a flood of unnecessary self-managed superannuation funds. Some have voiced concerns that clients are not being advised of other options available that might suit them better.
The Australian Taxation Office released figures recently showing that, as of June last year, the number of SMSFs in Australia was at about 600,000. The ATO also provided information on how the 36,160 SMSFs first lodged in 2011-12 have fared since.
While only 7 per cent of the funds established in 2011-12 had wound up by 2015-16, 68 per cent of those wind-ups were for funds that reported a balance of under $200,000 in their first lodgement year. The tax office reported that in the 2015-16 financial year, 18 per cent of total SMSFs held assets under $200,000.
Liam Shorte, director at Verante Financial Planning, says the proliferation of smaller, less-efficient SMSFs is an issue for consumers.
“There is no good reason for anyone with a $150,000 superannuation balance to have a fund,” he says. “I’m happy to see some of these smaller funds close.”
Shorte says many funds are being set up due to a combination of the frustration that some account holders feel with underwhelming returns, and undue confidence that they can beat the market.
“Quite often it’s a knee-jerk reaction,” he says. “People will get their returns and decide that they can do better. They might find themselves with the wrong selection in a retail fund, or they end up with a bad result one year. You can understand how people get disappointed.”
Education is the key, Shorte asserts, and it is up to advisers to make sure all the options are placed before the customer, regardless of the client’s enthusiasm for opening an SMSF. Making clients aware of other options is vital; for example, avenues such as self-directed investment accounts for super give people a measure of choice and control, without the responsibility of running a fund.
“You can also set up a small APRA fund and use their trustees,” says Shorte, who estimates that only three out of 10 people who approach him to open an SMSF require one.
BFG Financial Services managing director Suzanne Haddan agrees that “not enough alternatives are being explained” in the process.
“We have to make sure clients are across all their choices,” she states. “Having access to 5000 investments instead of 500…is that really what the client needs?”
Haddan says the risk of compliance breaches and investment failure is being overlooked in the rush for Australians to keep up with financial trends.
“SMSFs are fashionable,” she says. “After the GFC, people started deciding they could do better, but trying to beat the market in terms of investment returns should not be your reason for setting up an SMSF.
“There are valid reasons for having different structures. Some might want to invest in collectibles or borrow to invest in property, or they might just be a control freak. But advisers have to make sure their clients are across all the other options.”
While Haddan states that BFG is more than happy to recommend the establishment of an SMSF if it decides that’s in the best interests of the client, “we are more likely to be recommending a wind-up of an SMSF than the set-up of an SMSF.”
SMSFs have long been a source of debate. David Murray’s 2014 Financial System Inquiry recommended limited recourse borrowing arrangements in SMSFs be banned to reduce the risk of economic instability. The government rejected this recommendation, stating that it applied to only a small proportion of SMSFs.
The Professional Planner/Financial Planning Association Post Retirement Conference, on March 21, 2018, will feature a session on SMSFs and their applicability for various client demographics. Registration is complimentary for FPA members. To read more or to register, click here.