ASIC released two reports this week following a major review it conducted into the experiences Australians have when setting up and running SMSFs.
One of these reports, REP 576 Member experiences with self-managed superannuation funds, reveals the findings of an independent market research agency commissioned by ASIC, including 28 interviews with SMSF members, and an online survey with 457 SMSF members.
One of the key findings in the report was that many members lacked a basic understanding of their SMSF and their legal obligations as SMSF trustees.
For example, 33 per cent of members in the survey didn’t know that an SMSF must have an investment strategy and 30 per cent of members had no arrangements in place for their SMSF if something happened to them.
It also found that 29 per cent of members thought they were entitled to compensation in the event of theft and fraud involving the SMSF and that 19 per cent of members did not consider their insurance needs when setting up an SMSF.
Both the interviews and online survey revealed a tendency for some members to be unaware of either what their SMSF was invested in or how the investments were performing.
While 99 per cent of most new members remembered what they were invested in, nearly one in ten established members could not remember what they had invested in.
The report also suggests that many SMSF still don’t understand the importance of diversification with two thirds or 66 per cent of participants in the online survey indicating that their SMSF is invested in only one type of asset.
“In total, 22 per cent of members had invested only in property, 16 per cent had invested only in shares, 8 per cent had invested only in managed funds, 5 per cent had invested only term deposits, and 3 per cent had invested only in collectibles,” said the report.
“Around one in three members had no investments outside of their superannuation. Of those who did, which was 62 per cent of members, the most common type of investment was their own home at 65 per cent, followed by shares at 50 per cent and other investment properties 45 per cent.”
It was also clear from the online surveys that a number of members had been prompted to establish a SMSF from property one-stop shops.
The survey revealed that seven per cent of new members and five per cent of established members had been prompted to set up an SMSF by property one-stop-shops.
“Property one-stop-shops generally made contact by cold calling or by having already helped the member to buy a property before recommending that the member set up an SMSF to buy a second or third property,” the report stated.
“Trust was established through testimonials, referral programs or special events providing opportunities to network with ‘like-minded’ people.”
Members who used property one-stop-shops expressed they had only made property investments within their SMSF with the only exception to this being some new members who said they had put their money in a high-interest bank account while waiting for their off-the-plan properties to be built, ASIC said.
The survey also found that the cost and time of setting up and running an SMSF did not always align with member expectations.
While the survey indicated that the cost of setting up and running an SMSF was “about as much as expected” for almost three in five members or 59 per cent, for 32 per cent of members the costs were greater than initially expected.
The survey also found that 38 per cent of members found running their SMSF to be more time consuming than expected, compared with 15 per cent of members who found it less time consuming than expected.
While the results are concerning, the SMSF Association has been quick to point out its limitations.
Notably, SMSFA said a high number of files that ASIC viewed as non-compliant did not indicate a risk of financial detriment. Rather, they attracted the regulator’s scrutiny for not meeting record keeping and process requirements.
“Similarly, ASIC’s definition of financial detriment to an SMSF member is subjective and is difficult to evaluate without the member’s view being known,” SMSFA said.
I think it’s stupid to expect SMSF members/trustees to remember everything like having an investment strategy etc. No doubt they knew they needed an investment strategy at one point but then forgot. Out of sight, out of mind. I signed a mortgage document a few years ago. I can’t remember all the clauses. I expect most trustees are the same with their SMSF. That is why they have accountants or advisers. Given the excessively high level of regulation and red tape involved with SMSF’s, not even the experts can remember it all. I have been working in the industry for almost 20 years now, and still look up things in order to answer queries from clients.
As for diversification, an SMSF is only a vehicle and a small part of many people’s investments. If you were to look at my own personal SMSF, you would say it’s not at diversified. Until this year, I had almost all assets in Australian Shares. I have recently added some international exposure. But if you look overall, I am actually heavily weighted to property. It’s just that my property investments are not held in the SMSF vehicle. And Australian property being ridiculously expensive, it will take a while before my other investments can catch up.
Then there are those that have chosen to use their SMSF vehicle to hold their business premises, or simply don’t like certain investments. Maybe they lost more than they were comfortable with in the GFC, and chose to remove their super from shares and purchase property, purely based on their own preferences. Some people understand property but not shares and therefore invest in what they know. That’s their choice and ultimately not ASIC’s business.
Cheeky plug if your SMSF clients don’t know a lot about their requirements they should purchase The Ulitmate SMSF Trustee’s Guide from Tax and Super Australia, though I don’t get any royalties as was done when I was employed there.
There are a lot of problems with surveying SMSF members, they are not like a normal fund and should not be criticised for not being like one. Many SMSF are also in retirement phase, so of course, their investments will be different.
Yes, there can be a problem with lack of diversity but then again trustee’s should only be investing where they feel confident and again depends on what other superannuation and non-superannuation assets they have. Unfortunately, the regulators generally have a dislike of SMSF, in part because they are more difficult for them to regulate and 2 they just don’t understand why people do it, which may in large part be because they have nice cushy government superannuation schemes.
The real issues are:
1. have there been major failures in SMSF? Answer: No.
2. Are the investment decisions hurting member returns? Answer: impossible to know as you can’t compare one SMSF to another let alone an industry or retail fund.
3. Are people being put into SMSF when they shouldn’t be? Answer: probably some yes, but vast majority no. those that have been put in when they shouldn’t tend to be because FP has recommended without taking a full best interest of the client approach. This not a failure of SMSF but a failure to regulate FP by both the regulator and the license holders.
Unfortunately, those in the Industry Fund sector who hate the competition and choice that SMSF provides will jump on these findings to further their attack on SMSF.