The Australian Securities and Investment Commission (ASIC) has launched a campaign warning future self-managed super fund trustees of the high costs and risks associated with having an SMSF.
ASIC’s latest fact sheet estimates that the average cost of running an SMSF is $13,900 per year and takes over 100 hours a year to run.
ASIC Commissioner Danielle Press says: “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.”
Costs include set-up fees, an annual supervisory levy, costs for an annual financial statement, independent audit, administration costs, investment fees, wind-up fees and an annual actuarial certificate if required.
The annual 100 hours is spread across meeting and reporting obligations, preparing and implementing an investment strategy, keeping up to date with changes to superannuation laws and managing the SMSF’s administration and paperwork.
Press says: “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.”
There are 599,678 SMSFs in Australia holding nearly $748 billion in assets. This is larger than both the industry and retail fund sectors which hold $719 billion and $626 billion respectively.
A Productivity Commission report on superannuation published earlier this year found that large SMSFs earn broadly similar net returns to APRA-regulated funds but smaller ones, with less than $500,000 in assets, perform significantly worse on average.
ASIC is emphasising the Productivity Commission’s findings and urges those with SMSF balances under $500,000 to ask their financial advisers why an SMSF is the best option for them.
Press says that SMSFs are not suitable for members with low fund balances and particularly where they have limited ability to make future contributions.
“This is important because consumers starting off with a low balance need to be aware that they may not be in a better financial position in the future by holding an SMSF compared with investing in an APRA-regulated fund.”
In addition, ASIC warns SMSF trustees that they are responsible for the SMSF complying with the law, even if a professional is paid to help.
Consequences include disqualification from being a trustee and having to wind up the SMSF, being taken to court and heavy fines.
Press says: “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. 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.”
The fact sheet highlights the risks of property investment in an SMSF such a high upfront and ongoing costs, the difficulty of selling quickly and potential property damage.
ASIC reiterates that residential properties must not be acquired through SMSFs with the intention to be lived in or rented by a member, their family or associates.
The corporate regulator has highlighted this issue before when it reviewed SMSF property spruikers and identified a growing number of one-stop shops, where the adviser has a relationship with a property developer or a real estate agent, whose product the client is advised to invest in.
ASIC has issued a number of red flags for financial advisers to take into consider if an SMSF is appropriate for their client. These include:
- the client has a low superannuation balance, and would have a limited ability to make future contributions;
- the client wants a simple superannuation solution;
- the client wants to delegate all of the running of the SMSF to a paid advice-provider;
- the client wants to delegate all of the investment decision making to someone else;
- the client does not have a lot of time to devote to managing their financial affairs;
- the client has little experience making investment decisions;
- the client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee); and
- the client has a low level of financial literacy.
The fact sheet will be sent to all newly registered SMSF trustees as a pilot in November, when they register with and elect to be regulated by the ATO. ASIC will then survey a number of the SMSFs to assess the usefulness of the fact sheet.