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Watchdog warns SMSF advice must improve amid property spruiking fears

Glenn Freeman  |  03 Jul 2018Text size  Decrease  Increase  |  
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One in three SMSF users are in the dark about their investment strategy and are sometimes being urged to push their savings into high-risk property, according to a survey from the corporate regulator, who warns that the standards of financial advice must improve.  

Skewed self-managed super advice from "property one-stop shops" is a key concern of Australian Securities & Investments Commission (ASIC), according to latest research. A shadow-shopping exercise conducted by ASIC found around 91 per cent of SMSF client files were non-compliant in some way, according to the recently released findings of a June-July 2017 study.

The reports, based on 28 interviews with SMSF members, an online survey of 457 members and a review of 250 new SMSF client advice files, revealed several shortcomings in advice provided to clients within this sample.

ASIC deputy chair Peter Kell says the standard of advice on SMSFs must improve. "A healthy and robust SMSF sector is an important part of our super system. However, it is clear lots of people are setting up self-managed super funds without knowing whether this is the best option".

In the online survey:

  • 38 per cent of respondents found running an SMSF more time consuming than expected;
  • 32 per cent found it to more expensive than expected;
  • 33 per cent did not know the law required an SMSF to have an investment strategy; and
  • 29 per cent mistakenly believed SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.

"A number of members saw an SMSF as a vehicle for investing in property. They were motivated by a fear of being locked out of the property market and/or a desire to help their children enter the property market," the report says.

It cites earlier findings from a Productivity Commission draft report into the efficiency and competitiveness of superannuation, including SMSFs. This was released at the end of May this year.

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In the area of advice, it finds: “One survey of SMSF investors found that they had no better financial literacy than other superannuation members, but that 85 per cent rated their skill as at or above average".

“The commission’s member survey found that SMSF investors had lower average financial literacy than other choice members because a smaller share got all the answers right.

Property ‘one-stop shops’

Regarding the presence of property investments within SMSFs, the PC review cited by ASIC says:

“The strategy of gearing through an SMSF to invest in property, which is being actively promoted by ‘property one-stop shops’, is high risk.

“Our results suggest that, in many cases, this is likely to result in financial detriment to SMSF members. We are particularly concerned about the operation of one-stop shops because of conflicts of interest and, together with the ATO, we will have an increased focus on property one-stop shops in the future."

Sydney-based financial planner and mortgage broker Chris Bates says it is unreasonable to expect a “one-size-fits-all” approach to adequately manage the more than 10 million properties in Australia. He asks: "How can a referral partner [inside a financial planning business] possibly be across all these properties?"

This is partly because of the highly fragmented nature of residential property markets, with no single Australian or even state-wide market, but one that traverses specific cities and regions. Property prices and types vary markedly across Sydney, Melbourne, Brisbane and other state capitals.

"Also, you’ve got to look at new and old properties too … it’s very difficult for [in-house property specialists] to cover all of that independently,” Bates says.

Instead, his financial planning business engages independent buyers' agents who are removed from the advice component.

“You can’t just keep funnelling people into one-size-fits-all. For example, someone who has five properties in Brisbane shouldn’t be looking at more properties in that market.

“Likewise, someone with $2 million equity in a property portfolio will need very different advice to someone that is a first-home buyer,” Bates says.

Referring to the often-cited leveraging risks of borrowing for property inside an SMSF, he notes the dwindling number of big lenders as an additional risk.

Commonwealth Bank and Westpac are the only big-four banks who still provide loans to SMSFs.

SMSF performance versus APRA super funds

Many smaller SMSFs – those with balances under $1 million – have delivered lower returns on average than larger SMSFs. The PC report finds a more than 10 per cent performance gap between small SMSFs – those with sub-$50,000 balances – and those with portfolio sizes of between $1 million and $2 million.

Rising SMSF costs were also evident, with expenses "broadly comparable with APRA-regulated funds as a percentage of member account balances".

Perhaps unsurprisingly, smaller SMSFs were at greatest risk, both in terms of their vulnerability to rising fees, and the risk of receiving damaging financial advice. The SMSF Association, which offers guidance and training, notes many of the non-compliant SMSFs were not at risk of financial detriment. Rather, their potential non-compliance related to poor record-keeping.

Liam Shorte, an SMSF specialist adviser and director at Verante Financial Planning, recently told Morningstar.com.au that “around 40,000 SMSFs face the risk of being named non-complying for not meeting their lodgement obligations, with such reporting coming under greater scrutiny due to the new super rules”.

SMSF Association chief executive John Maroney says that despite the warnings, SMSF members were largely more satisfied with their arrangement.

“The reports also highlighted that 74 per cent of SMSF members were satisfied with their SMSF, higher than for other superannuation funds,” Maroney says. “But it is clear that advisers need to make SMSF trustees aware of the obligations and responsibilities of having an SMSF at the outset.

“Where SMSFs are investing in property and using gearing to do so, it is essential that this be considered in a broad retirement savings strategy in the best interests of the individual.”

Regulators vow to boost scrutiny

In response to the findings, ASIC and the Australian Tax Office (ATO) have vowed to increase their scrutiny of property one-stop-shops. “This will include building and sharing data and intelligence, and ASIC taking enforcement action when we see unscrupulous behaviour,” ASIC says.

 

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Glenn Freeman is senior editor, Morningstar Australia.

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