For anyone who set up a self-managed super fund (SMSF) on advice and later discovered it was really not for them, a recommendation from the Australian Securities and Investments Commission (ASIC) might be music to their ears.
ASIC is advocating a minimum balance for SMSFs as a means of better protecting consumers and banning limited recourse borrowing arrangements (LRBAs) when SMSF trustees borrow for investments. Again, the purpose is to protect consumers and their retirement nest eggs.
The move comes as the big four banks and AMP retreat from lending to SMSFs to buy residential investments in the wake of softer property prices and the financial services royal commission.
About one million SMSF balances in Australia account for $750 billion or one-third of all superannuation funds. However, there are concerns that too many SMSFs with small balances and inexperienced managers are costing the economy.
A Productivity Commission report into super showed that SMSFs with less than $1 million in assets perform “significantly” worse than retail or industry funds. “It is not clear how many of these will perform better in future as they grow in size,” the report says.
Industry Super Australia reported earlier this year that SMSF members “have potentially wasted billions in life savings due to poor performance”.
Australian Tax Office (ATO) statistics show that SMSF membership continues to grow despite 40 per cent of funds receiving zero or negative return on assets in 2016.
The Australian Financial Review reported: “The (ATO) briefing note says SMSFs with less than $2 million of assets were, on average, worse off than members of an Australian Prudential Regulation Authority (APRA) regulated fund. It says an SMSF with a balance of between $1 million to $2 million generated a 2.2 per cent return on assets, while SMSFs with balances less than $200,000 suffered negative returns. In contrast, industry super fund members generated average returns of 4.1 per cent over the same period.”
Answering a question on notice from the Parliamentary Joint Committee on Corporations and Financial Services this week, ASIC listed “possible policy solutions” to SMSF issues.
It wants more education for members, better financial advice for consumers considering SMSFs, better oversight, and says minimum balances should be investigated but did not suggest an amount.
It said: “Consideration could be given to prohibiting LRBAs and/or mandating a minimum SMSF balance.
“We note the Council of Financial Regulators is currently considering LRBAs and is due to report to the Government by the end of this year.”
ASIC suggested that promoters of SMSFs undergo specific education to ensure their advice did not disadvantage older Australians.
“This could involve imposing an obligation on SMSF promoters to consider the type of consumer whose needs would be addressed by establishing the SMSF and the channel best suited to distributing the SMSF as a product class.”
It also suggested new training and education standards be set by the Financial Adviser Standards and Ethics Authority (FASEA) to improve the quality of financial advice provided to consumers.
Do you have an SMSF? Do you believe you are getting good value from the fund? Is your SMSF performing better than retail and industry funds of a similar size?