Inherent dangers with SMSFs and technology
Technology and the SMSF sector are becoming increasingly intertwined, but there are inherent dangers to be aware of.
The Super System Review final report set out “ten guiding principles” for self-managed superannuation funds. Principle 10 provides in part:
Given that SMSFs are widely dispersed and non‐institutionalised, and that many SMSF service providers are also fragmented and lack scale, there is a challenge for the sector in investing in improvements such as technology, governance and investor education.
Technology and the SMSF sector are clearly engaging with each other – but is it all good and what should the SMSF trustee (or potential trustee) consider before embracing modern technology for any superannuation purpose?
Why the fuss?
For the SMSF sector, modern technology enables, amongst other things, the setting up of funds in less than 15 minutes, the making and changing of investments in less time than it takes 'to boil the kettle’, and the gathering and disseminating of more words than any one person could read in a lifetime.
Speed, a lightened management load and access to information are not inherently evil – but in the world of self-managed super they are inherently dangerous.
When to be wary
A. The service provided does “everything” for you. This service ignores the ‘fundamental truth’ of the self-managed super scheme – self-management.
Insisting on “self-management” is not needlessly purist. The legal responsibility for the fund rests with the trustee alone. At the same time, where the SMSF trustee fails to fully engage with the administration of the fund and the making of its investments:
• there is greater scope for inappropriate dealing with fund assets; and
• the trustee is left with no defence where the trustee is called to task for a particular act or omission with respect to the fund.
B. An investment switch can be triggered by one trustee (or one director only of a corporate trustee with more than one director). For the non-engaging trustee or director here, the problem is as set out above. As for the person exploiting technology to commit an act in breach of obligations set out in superannuation legislation, the resultant pain on being “caught” may not just be financial loss. Certain breaches can be prosecuted as criminal offences where there has been a dishonest attempt to gain advantage or where there has been an intention to deceive or defraud. Successful prosecution of a criminal offence can in some cases lead to prison time.
C. Return-focused performance comparison tools. The SMSF trustee must “formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity” (Regulation 4.09, Superannuation Industry (Supervision) Regulations 1994), including member age, actual and suitable risk profile and likely retirement date, and the fund’s expected cash flow requirements. The statutory requirement for a trustee to consider the “whole of the circumstances” of any one fund demands a case by case approach when it comes to the fund’s investments, while a performance comparison tool focuses on one point only – return.
D. The facility to switch investments quickly as and when needed. For the vast majority of superannuants engaged in the SMSF sector, this is a bit like having a panic room - you probably don’t need it. At the same time, the greater and more complex the activity within your fund in any one year, the greater the fund auditing fee will likely be for that year. As for strict legal points, switching investments will not in itself put you in breach of any superannuation law. But a fund trustee must turn the trustee’s mind to a number of factors with each investment of the fund’s assets including “the risk involved in making, holding and realising, and the likely return from” each investment. A “quick switch” approach does not accommodate that legal obligation on the trustee.
Should you engage?
The SMSF trustee can definitely benefit from the proper use of modern technology. But the SMSF trustee is legally bound to be engaged with the fund, to be thinking about long-term goals, and to be responding to individual circumstances rather than group trends. There is an inherent tension between these legal drivers and the potentials of modern technology. If not properly respected, this tension can lead to real pain for the trustee and the assets of the fund. The end game? Proceed with caution.
Kathleen Conroy is a partner at Gadens Lawyers