While there are many lessons to be learned from the collapse of the Shield and First Guardian funds that swallowed more than $1 billion of Australian’s superannuation money, key among them is the use of self-managed superannuation funds (SMSFs).
When it comes to hard sales work and lead generation in trying to convince people to switch investments, SMSFs are undoubtedly front and centre of much of this potentially dodgy activity.
There are good reasons why SMSFs are superficially attractive: they deliver full control over investments, they can centralise family super investments, and they can keep beneficiaries fully engaged with what is happening with their investments.
ASIC Warns of Terrible Advice
However, some recent research by the Australian Securities and Investments Commission (ASIC) should be compulsory and very uncomfortable reading for anyone contemplating setting up an SMSF.
ASIC found that far too many people are being encouraged to set up SMSFs they don’t need, with plenty of money being quietly siphoned off through fees, commissions and property deals.
The people getting caught up in it are usually the ones who can least afford to take those risks, and the least likely to realise what they’ve signed up for until years later, when the fees have piled up and the investments haven’t performed as well as a simpler, lower-cost option – or worse, when those investments implode.
Not Even Basic Best Interests Met
ASIC’s review examined 100 real-life advice files from 12 higher-risk advice businesses.
The results were nothing short of disastrous with 62 advisers failing to meet the best interests duty – the most basic rule of financial advice.
Twenty-seven cases showed a serious risk of client harm, with only 38 out of 100 meeting the legal standard.
These results are precisely the sort of self-interested behaviour that was implicated in the Shield and First Guardian collapses, with people being funnelled into retail investment platforms and into managed funds that benefit promoters and advisers.
Rather than a highly personalised superannuation fund, those sold into these platforms and SMSFs were on a profitable production line, with every step along the way extracting a fee.
Cookie-Cutter Advice
ASIC clearly showed that some advisers are handing out near-identical advice, designed more for promoting turnover than “building wealth”, which is the usual sales pitch.
In many cases, the clients were not suited to starting an SMSF in the first place.
Many of these SMSFs were set up with a focus on direct property, which is also a source of concentration risk and fee generation.
In 57 of the 100 files that ASIC reviewed, the SMSF involved a direct property purchase, and in 50 cases it included a borrowing arrangement, with advisers sometimes recommending investments tied to their own firms.
Often there are conflicts of interest with advisors, product promotion and asset management which can bring into doubt the priority that should be given to the interest of the client.
Strong Warning
The ASIC report should be a strong warning to anyone considering switching their superannuation into an SMSF, particularly if the impetus for the change is any form of promotion or sales talk.
There are people with the skills, interest, time and motivation to run an SMSF but for many the risks and costs will be greater than the rewards.
Costs for auditing, accounting and investment are such that SMSFs are also most suited to those with substantial balances.
One of the alternatives for those who are keen to run their own super investments is to use one of the many self-managed investment options offered by many of the large superannuation funds.
That allows for the member to choose most or all of their investments with the fund looking after all of the administration and hopefully charging a lower fee than if the member used a pre-mixed option.
