Are self-managed super funds headed for a wipe-out?

Self managed super funds SMSF Australia ASIC industry retail

We Australians are unusually self-reliant people – or at the very least, we hate being ripped off by banks and fund managers.

How else can you explain the proliferation of self-managed super funds in this country, which leads the world in managing our own retirement funds.

Indeed, self-managed funds make up the largest slice of the Australian super pie – a staggering $748 billion spread across 599,678 self-managed super funds as at June 30.

That compared more than favourably with the $719 billion managed by industry funds and the $626 billion in the retail superannuation sector.

The big issue is, are these self-managed funds ready for a global economic shock and are they investing appropriately for the current ultra-low interest rate environment?

Particularly when many self-managed funds were initially set up by accountants, who used them not only because they thought they would suit their clients but also as a way of driving extra fee income through the door.

ASIC concerned many SMSF’s are poorly managed

The corporate regulator ASIC (Australian Securities and Investments Commission) thinks many are not and is warning those with self-managed funds to make sure that they know what they are doing.

In the process of looking at self-managed funds, ASIC identified eight “red flags’’ that should alert those who have a self-managed fund but are worried that it is not the best fit for them.

“ASIC believes that consumers are all too well aware of the potential benefits that might stem from using a SMSF, but are not equally alive to the considerable risks and responsibilities that come with the deal,’’ said ASIC Commissioner Danielle Press.

Not everyone has the time and skill needed

“SMSFs may be an attractive option for investors wanting more control over their superannuation investment strategy, but it requires real skill, care and diligence to manage your own superannuation.

“SMSFs are not for everyone simply because not everyone can meet the significant time, costs, risks and obligations associated with establishing and running one.’’

Ms Press said ASIC had tracked and analysed member experiences in using an SMSF and agreed with the Productivity Commission’s findings that SMSF’s were particularly unsuited to those who had a low fund balance and a limited ability to make future contributions.

She said funds with less than $500,000 in them on average produced lower returns compared to industry and retail super funds.

However, those with much higher balances that are run by people with a strong investment knowledge that are prepared to invest some time in their funds could save significant fees compared to industry and retail funds.

8 red flags to watch for

So, what are the eight “red flags’’ that potential SMSF users should watch out for?

  1. A low superannuation balance and limited ability to make future contributions.
  2. Wanting a simple superannuation solution.
  3. Wanting to delegate all of the running of the SMSF to a paid advice-provider.
  4. Delegating all of the investment decisions to someone else.
  5. Not having a lot of time to devote to managing their financial affairs.
  6. Little experience in making investment decisions.
  7. Wanting to use an undischarged bankrupt or someone who has been convicted of an offence involving dishonesty as trustee, which is against the law.
  8. Having a low level of financial literacy.

“Where people have limited investment decision-making experience or prefer to delegate decision-making to someone else, they should carefully consider if an SMSF is right for them,’’ said Ms Press.

“As the trustees of their own fund, SMSF investors must remember that they are responsible for their fund’s compliance with the law, even if they pay a professional to help,’’ she concluded.