ASIC review finds self-managed super funds can be a road to disaster

On top of all of the wealth hazards that have been revealed lately, along comes the latest finding that DIY Super can also be a wealth destroyer.

Analysis by the corporate regulator ASIC (Australian Securities and Investments Commission) has now shown that 91% of advice given to people setting up their self-managed super funds (SMSFs) doesn’t comply with regulations.

Not only does the advice not comply with relevant laws, a lot of people are setting up SMSFs with no idea of whether it is the best option for them and a staggering 10% will end up significantly worse off in their retirement because of their love of DIY and 19% will suffer from a risky lack of diversification.

No idea of risks or obligations

ASIC found that most people don’t really understand the risks of having a self-managed fund or the legal obligations of being a trustee.

Confirming the suspicion of many, ASIC also found that some people also moved to SMSFs as a way to get into the property market, using it solely for this without a wider investment strategy, as required under regulations.

Even worse, many SMSFs were set up with the help of “one-stop-shops” in which the adviser has a relationship with a developer or a real estate agent whose products the person is encouraged to invest in.

This puts people at an increased risk of getting poor advice that did not take account of their personal circumstances or is not given in their best interests.

High costs for smaller SMSFs

ASIC’s findings back up the recent Productivity Commission super report which found smaller SMSFs with balances under A$1 million delivered on average returns below larger funds.

Costs for low-balance SMSFs are also higher than for funds regulated by the Australian Prudential Regulation Authority (APRA).

This is all really big news given the exceptional growth in SMSFs, which have now reached 30% of the super market with 590,000 accounts holding combined assets of nearly A$697 billion.

ASIC also conducted market research which included interviews with 28 consumers who had set up an SMSF and an online survey of 457 consumers who had set up a self-managed fund.

The online survey found that 38% discovered that running an SMSF took up more time than they expected, almost a third (32%) found it to be more expensive than expected and another third (33%) did not know the law required an SMSF to have an investment strategy.

Another 29% mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.

“It is clear lots of people are setting up SMSFs without knowing whether this is the best option,” said ASIC Deputy Chair Peter Kell.

“The financial advice sector has significant work to do to lift their performance on this issue.”

So what will happen now?

Crackdown on dodgy one-stop-shops

Well, ASIC and the ATO are going to have a crackdown on property one-stop-shops, sharing data and intelligence, and with ASIC taking enforcement action where it sees unscrupulous behaviour.

However, as usual investors need to ensure that they are certain that opening an SMSF is definitely the right choice for them, which often means having enough scale to justify the amount of time taken to manage the fund and the cost of auditing and accounting.

Some of the alternatives they might consider include:

– “SMSF-lite’’ products run by several industry and retail super funds which allow people to make their own investment decisions and buys shares but have low costs and allow the fund to look after all of the paperwork.

– Really low cost funds with excellent diversification such as some industry and retail funds.

– Combining super funds from a couple of family members into a well-run SMSF to provide scale and allow for some potential for estate planning.