Cbus chief calls for SMSF guardrails as advice fee debate heats up

Cbus CEO Kristian Fok has called on the regulator to provide clearer guidance on when SMSFs are economical and for greater transparency around advice fees, as the SMSF Association warns any regulatory response to recent fund collapses must be evidence-based and proportionate.

Fok told Professional Planner sister publication Investment Magazine that more guardrails needed to be put up around SMSF establishment and advice to prevent fraud and ensure that fee deductions are in consumers’ best financial interests.  

“What I’m saying is that people are being promised things, but the actual costs, the actual evidence is not comparable,” Fok said.  

Fok said he doesn’t want to establish a minimum balance for SMSF establishment but for the regulator to provide more guidance around “what is economical”, noting that ASIC used to consider the “starting point” for SMSFs to be a minimum balance of $500,000 in order to achieve performance comparable to that of APRA-regulated funds.  

That guidance was issued in 2019 but abandoned in 2022 following lobbying from the SMSF Association, which worked with the University of Adelaide on research that showed there was “no material difference” in performance when funds had significantly less than $500,000. Previous research by Rice Warner made similar findings.  

But data from the Super Members Council, which represents industry funds including Cbus, has argued low balance members are unnecessarily switching to SMSFs.

The comments come as the SMSF Association hosted its annual Technical Summit last week in Sydney with CEO Peter Burgess telling delegates in a keynote address that around 80 per cent of rollovers for balances under $100,000 are made to SMSFs with balances of $200,000 or more.

“This is indicative of consolidation behaviour by financially mature investors managing and refining an established retirement strategy – it is not an indicator, as portrayed by some, of risky and poor decision making,” Burgess said.

“While we support measures which protect consumers against clear cases of inappropriate advice fees being charged for a small balance rollover, it is important any legislative or regulatory response appropriately considers the wider circumstances which may legitimately impact on the advice fee being charged.”

The only constant is change

The debate over SMSFs come as the government looks to announce policy reforms in response to the $1 billion Shield and First Guardian collapse this month, as well as changes to limited recourse borrowing arrangements (LRBAs) in the federal budget that prevent SMSFs borrowing for residential property.

Burgess said that regulatory intervention should be evidence-based, proportionate and directed at the behaviours that cause consumer harm, while preserving confidence in the SMSF sector.

“To this point, we support a ban on high-risk lead generation activities that are likely to cause consumer detriment,” Burgess said, referring to one of the proposed changes.

“This approach is preferable to a blanket ban on all lead generation activities with multiple exemptions, which may create uncertainty and risk inadvertently prohibiting genuine referrals and other legitimate activities, such as education or compliance support.”

The association supports this move over a ban on LRBAs for residential property inside superannuation.

“High pressure sales tactics and property spruiking were behind the recent government decision to ban LRBAs being used to acquire residential property,” Burgess said.

“We have always maintained the focus of government intention should be on addressing this behaviour rather than making changes to the rules which unnecessarily reduce choice and flexibility.”

Fok thinks SMSFs should be included in the Compensation Scheme of Last Resort, but doesn’t support the cooling-off period for super switching proposed by the government in the aftermath of the $1 billion collapse of Shield and First Guardian master funds, saying that super funds already have friction points to deal with fraud and that changes will do little to help victims of scams or high-pressure sales tactics.

“With a cooling-off period, they’ll just use that period to keep at them and keep convincing them,” Fok said. 

Fok also wants more disclosure around how advice fees on “complicated investment aspects” impact returns so “that consumer can actually see the true net of return outcomes” and regulators will have a database to determine whether deductions were actually in their best financial interests.  

His comments follow a similar line as the SMC, which warned consumers should be wary of significant advice costs associated with switching and how it might impact net returns and retirement savings.

“In the same way as our performance test benchmarks whether our active management is truly adding value over a straightforward strategy, should the cost of advice to support a complicated strategy be included in terms of its impact on net returns?” Fok said.

“They’re promising things that we know, institutionally, are very hard to deliver. Certainly they’re charging for it, right? We’ve heard of examples of advice fees up to $30,000 out of super savings to support giving this very sophisticated advice on manager selection. 
 
“We have to declare asset consultants, fund manager fees and our own costs, and they come off our reported return – why would you not ask for the same transparency under that model or under SMSFs?”  

Choice versus compulsion  

Fok’s comments on SMSFs comes as industry and profit-to-member funds haemorrhage members to retail platforms and as SMSF establishment rises among younger members.

It’s led to an industry debate off the back of the Professional Planner Advice Policy Summit in February and a war of words between the Financial Services Council and SMC over super switching after data has found industry funds are bleeding members to the retail sector.

Fok said that he’s got “no problems with competition” and that super funds “have a lot of work that we should be doing”, especially around proactively educating members.  
 
“Younger members are in this wonderful space where they’re earning good coin… and have the capacity to invest and save up more than anyone else. But they don’t come in with basic financial education, and they’re seeking it – they’re hungry for it.”  
 
“[But] we believe costly complexity is not the answer. So we actually need to engage with them and say ‘look, here’s the basics of how you can build wealth – it’s different to gambling’. We need to engage and educate our members in what will build their wealth.”