SMSFs expensive, poorly diversified: ISA

Industry Super Australia has hit out at the SMSF sector, saying self-managed funds are “generally expensive and poorly diversified” and have implications for systemic risk.

In its submission to the Financial System Inquiry (FSI), ISA stated published data indicates that average running costs of SMSFs are significantly higher than the costs for not-for-profit APRA-regulated funds, with the exception of larger SMSFs.

“The most recent data show that 30 per cent of SMSFs have less than $100,000 in funds under management and have costs of between three per cent and seven per cent per year,” ISA stated.

“These expense levels represent a significant leakage from the superannuation system, resulting in lower retirement accumulations for those with SMSFs who are least able to afford it.”

“SMSF trustees and account holders with assets in this range are likely to qualify for full or part age pensions, so reduced accumulations in this range will also result in increased public pension outlays in coming years.”

Data also indicates most SMSFs are poorly diversified, ISA stated, with approximately two thirds having the “overwhelming” majority of assets in either high-risk assets or low-risk assets.

“An excess of low-risk assets will reduce long-term expected returns. An excess of high-risk assets will lead to a very high level of volatility,” ISA stated.

The SMSF sector remains in the domain of self-regulation, ISA said, governed by the ideology that members will have a vested interest in optimal decision making.

“This is not too far from the market self-regulation principles that since the GFC have been largely abandoned as the preferred paradigm for regulation,” ISA stated.

“As the SMSF sector grows, the impact of sub-optimal asset allocation and regulation will become increasingly systemically important. The paradigm for SMSF regulation merits a review in this context.”

The future of the SMSF structure will likely be as a “distribution channel for the major banks’ wealth arms”, ISA also said.

“This will remove the final reason that the ATO had regulatory oversight of SMSFs,” ISA stated. “As the SMSF provider market concentrates around the major banks, the basis for APRA regulation increases.”

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