ASIC warns SMSF trustees: When it comes to fraud, you’re on your own

The Australian Securities and Investments Commission wants to beef up the mandatory disclosures advisers give to people setting up a self-managed super fund, saying in many cases the advice given doesn’t reflect the risks.

In a report released yesterday, the regulator flagged it wants to make SMSF advisers warn clients that if they set up a SMSF, they do not have access to compensation in the event of fraud or theft.

It also wants advisers to give more information about the roles and responsibilities of trustees, the costs of setting up a SMSF, as well as more information about other types of superannuation products that might be more suited to someone’s particular situation.

“When it comes to planning your retirement, establishing an SMSF is a very significant decision,” said ASIC deputy chairman Peter Kell.

“We want to help ensure that the SMSF sector is healthy, and that investors make informed decisions about SMSFs.

“Our recent surveillance of the sector found that advice was not up to a standard we would like.”

The warning comes after the Trio Capital affair, which saw the company collapse in 2009 after directors and executives stole $176 million from SMSF investors in what was called “the biggest superannuation fraud in Australian history” by a joint parliamentary committee. More than 6000 investors lost money after placing it into two offshore hedge funds through Trio Capital.

However, Graeme Colley, the director of technical and professional standards at the SMSF Professionals’ Association of Australia, says ASIC’s concerns about poor quality advice may be overblown.

“Last year, ASIC decided to have a look at advice on a very select part of the superannuation industry, which was self-managed super funds with less than $150,000 in them that had received advice on property investments where the property was mortgaged. Looking at those, they concluded that the advice being given wasn’t adequate.

“But it was a very selective sample.

“Unfortunately, ASIC hasn’t provided examples of the poor or inadequate advice it saw.”

ASIC also released a report yesterday by actuaries Rice Warner, which looked at the minimum balances needed before SMSFs become cost-effective relative to other superannuation arrangements.

“Through our consultation we are looking to encourage further discussion and explore the issues relating to SMSF costs with industry and consumer stakeholders,” Kell said. “We think that understanding the costs associated with having an SMSF will help advisers and their clients consider whether a SMSF is a cost-effective option when compared with an APRA-regulated fund.

“ASIC does not want to see an influx of trustees who are ill-equipped to cope with the responsibilities and obligations of running a SMSF.”

The report found that when the maximum level of compliance administration is assumed, SMSFs do not become cost-effective when they have balances of less than $500,000.

However, many trustees do their own administration and compliance, which means the costs of maintaining a SMSF would be lower, Peter Burgess, the head of policy and technical at AMP SMSF told SmartCompany.

“This is in line with what we already knew – you need a reasonable amount in your SMSF for it to be cost-effective.

“But cost isn’t the only consideration here. There are other reasons to manage your own super – you might have specific estate-planning needs, or want to take advantage of specific investment opportunities and so on.

“And while it’s not cost-effective for very low balances, when you have more than $100,000 in your fund, it does depend on how much work you’re doing yourself. It’s hard to get data on this, but a significant amount of trustees do their administration work and so forth themselves. This can make it cost-effective below the $500,000 threshold.”

Colley was also reluctant to accept the higher threshold, saying that in his experience most trustees contribute to the operation of their fund.

“Much of the work with these funds is done by the trustees, so the expense is exaggerated. The Rice Warner report does say that where trustees do contribute, the running cost is around 1.5% of assets. In my view, that’s at the upper end, but probably more realistic.

“We think the $200,000 threshold mentioned by both ASIC and the ATO many years ago is still valid when it comes to cost-effectiveness.”

Recently, ASIC has flagged its concerns about the growth of the self-managed superannuation industry, saying the increasing amount of money being held in SMSFs could prompt newcomers who are far less financially sophisticated to set up their own funds.

The self-managed superannuation industry now holds just under a third of all the money held by Australians in superannuation, having grown around 20% per annum in recent years. There is now $439 billion in assets held by SMSFs. There are over a million SMSF trustees who together manage half a million SMSFs.

Colley does not believe SMSFs are necessarily more risky than investing through a major fund.

“There are two persistent criticisms around SMSFs. One is that trustees don’t know what they’re doing, and the other is that SMSFs are being used by property spruikers to invest in property.

“I was at a major super fund conference earlier this year when one of the speakers got up and said: ‘If you think SMSFs are jokes, who don’t do as well, you need to think again’. They do, roughly, 1% better, on average, than bigger super funds.

“And there’s a huge amount of noise around property, but if you look at the statistics, less than half of 1% of SMSFs invest in property loans.”

Burgess believes there’s still further growth to be had for the industry. “There’s still significant room to grow. There’s a lot of research and statistics out there that shows there are plenty of people with tendencies that could benefit from a self-managed super fund, but who don’t currently have one.”