In an analysis of the Productivity Commission’s final report on superannuation, Rice Warner noted that the report raised concerns about the quality of financial advice provided to many of these funds, largely based on ASIC research.
Rice Warner said the Productivity Commission consequently recommended extending the product design and distribution obligations to the establishment of SMSFs. However, it pointed out that this may be difficult for regulators to monitor.
“This would be difficult to police given the individuals establishing the funds are simply setting up a new structure,” it explained.
Rice Warner suggested, however, that it may be possible to introduce rules around investment strategies, which would highlight concentrated assets such as leveraged properties.
Verante Financial Planning director Liam Shorte raised similar points when the report was first released.
“I’m not sure how this would apply [to] SMSFs, as the whole idea of an SMSF is that the trustees decide on the products and strategies they wish to use,” Mr Shorte said.
“Many SMSF trustees do not use advisers, so it is important to apply any rules to all new SMSF and their trustees, not just those using an adviser.”
In its analysis report, Rice Warner also said that it was critical of the Productivity Commission’s proposal to implement a best-in-show system which would offer new workers 10 of the best performing retail and industry funds as default options.
“There is no particular reason why 10 funds should be picked to capture money from new entrants. Surely, if the bar is raised for MySuper, any of these funds would be appropriate?” Rice Warner said.
“If 10 funds were picked, there would be severe dislocation as they would then promote themselves over all other funds. This would be misleading — for example, a suitable fund for new entrants might have a poor retirement strategy.”
Rice Warner pointed out that, over time, the top 10 would seek mergers to get bigger and the list would shrink.
“When the list is reviewed every four years subjectively by non-experts, they could not come from the industry, some funds would drop out and others would enter,” it said.
“What would then happen to members of a fund which dropped out?”
Rice Warner said the Productivity Commission claims that this structure would lead to heightened competition as funds try to make the shortlist.
“However, it is more likely to lead to uniformity of structure and investment strategy of funds as they make peer comparisons,” it said.
“Funds which do not make the initial list of 10 would have an embedded disadvantage over those which make the list, reducing competition over time. Innovation would decline, benefits could reduce, and investment strategies might become less risky, leading to lower retirement outcomes.”
The concentration of SMSF assets in one or a few asset class is a result of the clients total wealth portfolio which includes assets outside of super. Therefore, it is misleading to look at the clients asset allocation in super in isolation when determining if the client is diversified.