I have long been an active supporter of and believer in SMSFs as the investment vehicle of choice for a growing number of successful Australians. One million Australians who have voted with their feet by setting up their own SMSF simply cannot be wrong.
Vested interests
There are those with vested interests such as industry funds and retail funds that attack SMSFs for their own purposes. They rightly perceive SMSFS as a growing threat to their business model. Increasingly they are seeing their largest and most profitable clients voting with their feet by leaving their industry fund or retail fund and starting up their own SMSF. Some of the industry and retail funds criticisms of SMSFs are valid; most are not.
Nothing to see here, move on
In response, there are many who operate within the SMSF industry who, defending their vested interests, continue to argue that there is no problem whatsoever with consumer protection in SMSFs. They argue there is no need for regulators or the federal government to review the regulations currently in place that supposedly adequately protect consumers.
SMSF investors will continue to be preyed upon
Sadly, it was recently revealed that a one-stop SMSF business in Adelaide specialising in SMSF property investing had allegedly fleeced its clients and collapsed, owing millions. It is clear that some in our SMSF industry have done things that are unethical and wrong. As SMSF professionals, this saddens and embarrasses us.
My prediction is that, unfortunately, in the coming months and years, more and more instances of unscrupulous operators and their victims like this will come to light and taint the reputation of the whole SMSF sector.
As SMSF professionals we face a choice. Do we recognise this growing threat now and take the lead to better protect consumers or do we continue to bury our heads in the sand, pursue our own self interest and keep yelling that it is merely a small and/or rogue element in the SMSF industry? As SMSF professionals we know it is a minority operating in this way, but that is and will be scant consolation to those who are going to be ripped off by unscrupulous SMSF operators in the future.
Clearly a compensation scheme for SMSF investors is not the answer as it would likely lead to moral hazard issues, potentially furthering encouraging SMSF investors to take unnecessary risks.
The problem is one-stop property spruikers are encouraging investors to set up SMSFs to invest in leveraged properties that may be completely inappropriate, without explaining the true risks. The rising problem of highly geared single-asset SMSFs is going to continue to hang over our industry until we do something about it.
We should stop fighting reform and start demanding it
In my view, true SMSF professionals should stop arguing that the new federal government should not review consumer protections in the SMSF industry. That approach is rightly perceived by investors as merely self serving. Instead, as professionals, we should stand up and proactively demand the government examine better SMSF consumer protections.
We should take the leading role to ensure the long-term reputation of SMSFs as the retirement vehicle of choice for successful Australians is maintained and strengthened.
We should act in the best interests of consumers and we should act professionally. That is our greatest challenge and our greatest opportunity.
Tim Mackay, principal and wealth adviser at Quantum Financial.
Kingsley I don’t have a problem with either your suggestion or reasoning.
How ever I believe there still the issues of (1) the loss of rental income or the need for a major repair bill(‘the tennant from hell’) and (2) the need for cash to pay out a death benefit if the property asset comprises say 50% plus of the funds assets.
If the deceased member is young enough, then life cover could be arrnaged within the SMSF at a reasonable cost to cover the cash needs without selling any key assets. For an oldie (like me 65+) that is just not on.
Yet again every client needs to be looked at on an individual basis.
Lord Stockton My suggestion is mandate LVRs on residential LRBAs to no more than say 70%. I choose 70% as a rough guess as to where most properties would be positively geared or close too but obviously different markets different outcomes. It might be it needs to come back to 60-65%. It also means some people quite capable of handling more geared situations in their SMSF will be cut off from that but for me the overall objective is to make LRBAs as horror story-proof as possible or we run risk of blanket ban in first property downturn of note.
Tim, you can’t legislate against greed, envy and stupidity.
Let’s face it: many, if not most, Storm victims didn’t check with their accountants or (as I know from one accountant) left their accountant when he warned them against the Storm scheme. Some people simply want to believe in fairies, so let them, and let them pay the price.
Existing legislation is sufficient, provided it is actually enacted. Just adding more red tape is never going to stop the crooks from fleecing the fools.
How is a SMSF trustee being preyed upon by a property spruiker any different to an individual being preyed upon by a property spruiker or leveraged share spruiker?
Trust me, even in this post Storm world, we still see the same strategy recommended.
Why are SMSF trustees, who declare that they, amongst other things, exercise skill, care and diligence in managing the fund and act in the best interests of all the members of the fund, any more vulnerable than ordinary investors, including the elderly, who are just as often preyed upon?
The rising problem of highly geared single-asset SMSFs is going to continue to hang over our industry until we do something about it.
So name 3 ideas that you think are worth while investigating?