Advisers will need to understand how the Your Future, Your Super performance test measures are applied to know if it’s in their clients’ best interest to be in a self-managed superannuation fund according to SuperConcepts SMSF technical & strategic services executive manager Philip La Greca.
La Greca tells Professional Planner that if SMSFs and APRA-regulated funds can be compared advisers could be faced with a conundrum if a client’s SMSF is underperforming in comparison.
“If you have a MySuper product that is comparable to your client’s SMSF and it is doing 9 per cent and above the benchmark, what do you do if you have a client in an SMSF who has the same risk profile but only returning 4 per cent? How do you say to the client this is the best place to have your super?”
However, it’s currently not simple to get a fair comparison, with La Greca saying the issue with quantifying SMSF performance is two-fold.
“[The performance test] is about accumulation; they haven’t figured out how to do this on pension-paying funds which is a fair chunk of the SMSF space, so you can’t use those same rules exactly on the pension side,” he says.
“The other issue – and this is where the real interesting discussions are – is we need to start looking at how to calculate performance in SMSFs,” La Greca continues. “SMSFs do not report anything to the regulators about where the money is invested. Tax return data is not about asset allocation, it’s about what structure you use.”
The ATO recently aligned SMSF performance calculations more closely with APRA-regulated funds after research found they were not being fairly compared.
Research from the University of Adelaide found SMSFs with over $200,000 in assets performed “on par” with APRA-regulated funds.
“They have tried to replicate the APRA methodology of doing performance calculations rather than the way the ATO used to do it,” La Greca says of the research. “That at least gives you the ability to do a like-for-like comparison.”
The binary nature of the performance test means advisers are left in an ambiguous position over whether moving a client out of a failed fund is in their best interest.
Potential for review
Last year’s introduction of the performance test rated 80 MySuper products that held $900 billion in assets.
SMSFs make up $876.7 billion of the $3.47 trillion invested in the broader superannuation industry – around the same as the MySuper products – according to the latest data from APRA as of the end of 2021.
Garry Weaven, former ACTU assistant secretary and IFM Investors founder, recently called for a review in the self-managed superannuation fund sector.
“There is a large area of unfinished business, but I don’t think it should’ve been thrown into that hostile political business of the last few years,” he said on the first of Investment Magazine’s ‘Future of Super’ podcast.
“[SMSFs are] legitimate. There are many people who believe they should be able to take care of their own investment affairs and there is a small cohort of people who are good at it.”
Weaven said that small cohort is generally within the high-net-worth part of the sector.
“Equally there are thousands with account balances way too small to ever be efficiently managed and the administration quickly gets beyond them so it ends up being a false label,” he said. “It’s not self-managed at all.”
La Greca says the SMSF sector will not be allowed to be the invisible part of the industry in the long term.
“The APRA space is transparent about how it invests and what it does in performance; we’re not. You can’t have a $850 billion industry where the government doesn’t know what’s going on. Not when you consider the tax concessions it receives.”
La Greca will be speaking at the SMSF Association National Conference in Adelaide on 20-22 April.
Where to start on this one.
Performance reporting is applied to the subset of super called MySuper. In the day that was called a “default fund” because you needed a default for all those that were entitled to compulsory super but had no interest in which fund it was paid to. MySuper is a language change but an apple is still an apple and is not comparable to a SMSF. There would have been a different and conscious reason for the SMSF but the choice of MySuper may well have been by default.
However, comparing any superfund with another based on asset allocation assumes that asset classes are similarly defined as are risk profiles. A ‘balanced’ investor could have different asset allocations including if they use tactical positioning from time to time. The headline performance is just that, a headline.
The best interests of the SMSF member is not just about performance and, if as the article suggests, there are low balance SMSFs out there that are underperforming etc, someone has been asleep at the wheel not to have advised an alternative.
Even ASIC admits the best interest is not always the cheapest or the best so apply that rationale to an annual performance report as the basis for thinking that the SMSF member’s interest is nolonger appropriate?
As for an industry fund spokesperson, sorry, I mean a union representative, comparing the total size of the SMSF pool with the total size of the industry fund pool and trying to draw a like for like comparison, it is not rationale. For a start, a SMSF is accountable only to themselves as the trustees are solely comprised of the membership. If there is a “bad egg” amongst them sadly it is only the members that are impacted. AFCA doesn’t even want to adjudicate it. Ultimately, if a SMSF has an underperforming fund, which BTW is in the context of what the fund objectives are as stated in the fund’s investment strategy, the trustee can rethink its prowess to manage the investment strategy or, if they receive professional investment advice, they can shop around for an alternative provider. An industry fund member can only exit the fund so the regulator, APRA, is making the fund management accountable as there is very much a power imbalance.
Last I checked, all superfunds have to abide by the legislation as it pertains to super. Is this about industry funds being told that they can’t massage performance by staggering valuations policies for unlisted assets? Well here’s the thing, SMSF have to record their investments at market value every 30 June. If an unlisted fund manager hasn’t had a market revaluation, a fair and reasonable value must be determined by the trustee.
SMSF are closely scrutinised by the ATO, ASIC and the fund Auditor so between all that oversight, I think we’ve got this covered.
But this isn’t about best interest. At its heart about the unreachable c$850b of capital. If the SMSF sector is attacked maybe, just maybe, some of those $$ can be wrested away.