More SMSF myths debunked

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Last week, I outlined ‘Four Big Fat Myths of Superannuation’: three relating to the superannuation system overall, and one on SMSFs.

In this article, I consider five other SMSF myths. In dispelling these, I offer a health warning: I rely on the most recent detailed public domain data, the ATO’s “Self-managed super funds: A statistical overview 2011–12(released 16 December 2013). The excellent and somewhat more recent data on SMSFs produced by companies such as Investment Trends and CoreData are normally available in detail only by purchasing their work. There is strong consistency in the results of these various factual sources of information.

SMSF Myth #1: There are too many small and sub-scale SMSFs

There are exaggerated claims regarding a preponderance of SMSFs which are too small. Based on the Investment Trends April 2013 SMSF Investor Report, around 80% of SMSFs had assets in excess of $250,000, and ATO statistics as at June 2012 show similar results. Some funds below $250,000 may be in the early growth stage, and anticipating prospective significant concessional or non-concessional contributions. That said, there is a small portion of SMSFs for which size and viability should be questioned.

SMSF Myth #2: SMSFs are expensive

In the 12 months to 30 June 2012, ATO figures show the operating expense ratios of SMSFs at about 0.56%, falling from 0.69% over the five years to 2012. These expenses generally do not include advice fees or the cost of investments, which are usually relatively low given the high portion of direct investments in SMSFs.

With the subsequent growth in asset values of SMSF investments, and the fixed operating costs of SMSFs which are subject to competitive pressures, these operating expense ratios have likely reduced further since June 2012. Due to the fixed costs of operating a fund, SMSFs with low balances will have higher average expense ratios.

SMSF Myth #3: SMSFs don’t make a meaningful contribution to the nation’s long term capital

Based on the Investment Trends report, around 50% of SMSFs are invested directly in Australian shares, listed investment companies (LICs) and Real Estate Investment Trusts (REITs). These are all investment vehicles for the provision of long term capital to fund commercial enterprises and the nation’s future prosperity. They are also investments in a suitably liquid form. Investment in illiquid infrastructure investments would often be inappropriate, unless SMSF investors consciously ‘sign up’ for limited liquidity, whilst investments in listed infrastructure assets would be sound.

SMSF Myth #4: SMSFs have loose regulation and compliance

SMSF prudential oversight and compliance are often criticised, leading to claims SMSFs should come in under a single superannuation regulator (and by implication, APRA prudential regulatory provisions). A recent example was a survey conducted at the 2013 ASFA Conference where roughly 75% of participants expressed the view that SMSFs should come under the umbrella of one superannuation regulator, presumably APRA. These survey results are not surprising given the vast majority of ASFA conference attendees are representatives of APRA-regulated funds.

The facts are that the SMSF sector is functioning well, as concluded by the Cooper Review, and the latest ATO statistics indicate the percentage of the SMSF population with auditor contravention reports (ACR) remains relatively stable at approximately 2% of all SMSFs each year. There’s room for improvement, but such a low non-compliance rate doesn’t accord with alarmist comments about the sector. Further, calls for a change in regulatory oversight do not recognise the fundamental difference between APRA-regulated funds, which are collective vehicles for many unassociated superannuation investors (thus requiring prudential supervision) versus SMSFs where the trustee is intimately involved. SMSFs have a very limited number of members, which are typically ‘associated’, with no ‘collective’ coverage and hence no need for the same prudential regulatory provisions.

SMSF Myth #5: APRA-regulated funds offer complete consumer protection while SMSFs don’t, and hence SMSFs should be part of the super fund compensation scheme

Andrea Slattery, CEO of the SMSF Professionals Association of Australia (SPAA) said on 7 February 2014, “The guiding philosophy underpinning self-managed super is that trustees and members take responsibility for their own retirement income outcomes … (they) have to appreciate that decisions rest with them, although they can get advice, either directly or indirectly, from specialist SMSF advisors.”

Andrea further said, “ … any compensation scheme should only be part of a broader financial services scheme where clients have suffered financial losses because of the misconduct or insolvency of a provider of a product or service, and that the compensation should be funded by a levy imposed on that industry sector where the misconduct occurred.”

APRA-regulated funds are entitled to compensation under the Superannuation Industry (Supervision) Act 1993 (SIS) Act but this is not automatic and is not a guarantee. It is at the Minister’s discretion, and only where it is in the public’s best interest to approve compensation for APRA-regulated funds.

SMSFs are not entitled to compensation under the SIS Act provisions, but are entitled to other legal avenues of redress in the event of fraud, theft, or inappropriate advice. These include but are not limited to personal indemnity schemes, actions under the Corporations law, and the Financial Ombudsman.

Consumer protection can be strengthened by tightening professional indemnity requirements, and strengthening compensation for misconduct or insolvency in managed investment schemes. Trustees of APRA-regulated public offer funds are responsible to a wide collective of their members, who need to be offered protection. SMSF trustees and members need to operate on self-responsibility.

Along with last week’s myth, ‘SMSF investments driving a property bubble’, that makes a total of six SMSF myths. In a competitive industry, any sector with a million members and over $500 billion in assets can expect such myths to be propagated.

 

Andrew Gale is co-owner and Executive Director at Chase Corporate Advisory and a board director for the SMSF Professionals Association of Australia (SPAA). The views expressed in this article are personal views and are not made on behalf of either Chase Corporate Advisory or SPAA.

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6 Responses to More SMSF myths debunked

  1. Ramani February 21, 2014 at 1:48 PM #

    Andrew Gale does the industry a service by dis-spelling some popular SMSF myths. I agree with him except no 4 (loose regulation & compliance).

    SMSFs are an example of individual choice, with choosers accepting whatever consequences follow.

    Most myths are confected angst from sectors constrained by their exponential growth. So, whether it be number, size, expense, economic contribution or comparable protection from fraud, those who opt for SMSFs take it as a package.

    It is legitimate to query if the choice is well-made, as the impact of wrong choices on a national basis has the potential to destabilise the entire system, a proper focus of ongoing policy. The role of dumping unsuitable people into SMSFs (as Trio showed) shows no sign of slowing.

    Even on loose regulation, one could argue ‘part of the package’, but where this gets undone is when the unexpected growth and dominance of SMSFs collides against behavioural imperatives. If, for any reason, the sector comes unstuck on a massive scale, the taxpayer will be forced to bail them out post facto, and without any compensation for this risk, as in the GFC.

    At its most basic, the lack of investment scrutiny of the retirement vehicle is designed to provoke crises. The sector’s one third share of the industry means that this is no idle fear, akin to building massive mansions on geological fault lines. ‘It may not happen over night, but it will happen’ to borrow from a popular ad.

    Think of lightly regulating slow bicycles and tricycles relative to cars and trucks: if over time, they become more like powerful machines able to cause havoc to highway traffic, we will regulate them analogously.

    SMSFs are no longer a toy. They can weave in and out of the APRA highway at their option. Ageing makes this more probable. They demand commensurate scrutiny and regulation in the interest of our retirement incomes policy. Treating them as an adjunct to revenue collection no longer makes sense.

    Senator Sherry had started thinking along these lines, but he left before being able to implement his vision..

  2. Rick Cosier February 22, 2014 at 8:06 AM #

    There are a number of Andrew’s myths that I would take issue with. Firstly, myth 2 last week (retirees spend their money). There is clear evidence that many retirees are cashing out their super to pay off debt or for some other purpose. The evidence Andrew uses to back up his myth is drawn from studies of the SMSF sector. This is the top end of super savings and not representative of the total market.

    Secondly, superannuation is massively skewed to the well off, and the concessions are too generous. How is it right that a couple can live in a $2m home, have several million in super and pay absolutely no tax?

    Thirdly, there are more than 500,000 self managed super funds. The vast majority have only ever been examined by their accountant. My experience is that most SMSFs are not complying with the law. Few have a documented investment strategy, almost never have any minutes and never have letters between trustees and members which confirm contributions, pension payments, etc. The ATO report and the Cooper Review seem very very superficial to me.

    • Cranky Pants February 22, 2014 at 12:03 PM #

      Hi Rick,

      You would be doing the industry a great service if you could supply all the evidence you have to back up your claims, either to this forum or directly to APRA. If SMSFs are really as bad as you say they are, this besmirch on the rest of super needs to be urgently corrected, and I am sure that even APRA would have no trouble winding up or severely penalizing SMSFs AND THEIR AUDITORS without a documented investment strategy or documentation on contributions etc.

      Keep fighting the good fight.

      • Andrew G. February 22, 2014 at 10:12 PM #

        Hello Rick

        I agree with Cranky Pants’ comments – it would be good to support your arguments with hard data rather than ‘your experience’ or anecdotal information, which only risk perpetuating the myths.

        Your comments re non-compliance are simply not supported by the facts, which I outlined in the article.

        Andrew G.

  3. Ramani February 24, 2014 at 10:52 PM #

    Since when did APRA have any power over SMSFs, Cranky Pants? I must have missed the legislative changes.

  4. Ron Burns May 10, 2016 at 10:43 PM #

    Ramani

    My recollection is that APRA was given “power over SMSFs ( having more than four

    members)” when the ATO was given responsibility for SMSFs with less than five

    members. (1993 ?)

    Again if my memory is correct APRA had a role as supervisor of small Funds such as

    Personal Approved Deposit Funds with a bank eg Macquarie or insurance

    company eg Tower (Austrust) as trustee. The previous govt overseer was the ISC

    (Insurance & Superannuation Commission) which some regard as a test bed for the

    much larger Self managed super system we have today.

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