The truth about SMSFs being mis-sold


I’m pretty passionate about defending the SMSF industry (maybe I’m biased), but it makes my blood boil when representatives from the ‘other side of the fence’ take a few cheap shots at self managed super funds with very little supported data (or none at all).  I’m referring to an article I read in Money Management yesterday prepared by Mike Taylor, “Are SMSFs being mis-sold?“.  This article discusses comments raised in a recent Superannuation round-table discussion in which industry fund representatives have questioned the professional standing of accountants, claiming that many are setting up SMSFs with as little as $40,000 for their own commercial gain, rather than in the member’s best interests.

Take some of the following claims made in the article:

  • SMSFs spike in August or September when people do their personal tax;
  • people are leaving industry funds with $30,000 – $40,000 to setup SMSFs;
  • A significant number of new establishments are done not to benefit the individual, but the accountant

When we look at SMSF statistical information produced by the ATO each quarter, the September quarter has predominantly been the second largest quarter for growth in a financial year, not the largest.  Since 2008, SMSF establishments have ranges between 25 – 29% of new establishments each financial year – this certainly isn’t a “spike” as suggested in the article.  Why is September larger than some other quarters?  In my view and based on experience, the decision to establish the fund is typically deferred until the new financial  financial year to save on the compliance costs.  I not sure that sounds like a money making exercise for the accounting profession?

SMSF Account Balances

For some time now, the discussion on a minimum dollar ‘entry point’ has been debated with SMSFs.  Certainly, the role of technology is bringing greater automation and efficiency to the sector to challenge the widely held view of $200,000 being the minimum balance required.  However, I think that a representation that industry fund members are being targeted to switch to SMSFs with low balances is simply inaccurate.  The ATO statistical report 2009-10 shows a continued downward trend in SMSFs being established with less than $100,000.  There certainly may be rollovers coming from industry funds with low dollar balances to SMSFs, but wouldn’t it appear more likely that it is part of a series of rollovers for a member or multiple fund members?

From a statistic viewpoint, this does raise a good question for the ATO to consider in gathering intelligence on the SMSF industry to track the new fund entrants over their initial years to get a representation of both fund and member balances.  This analysis can then show the level of assets being used to create and operate these newly established funds?

Are SMSFs sold by accountants?

There is a significant amount of evidence supporting that the decision making of SMSFs clearly rests with the individual, rather than being ‘sold’ by the accountant or financial adviser.

Consider some of the following:

Whilst being quite critical of the comments made about the industry, I’m certainly not going to sit here on a pedestal saying that every accountant/adviser acts in the best interests of their client in the decision making process of SMSFs.  However, the findings of the Cooper Review did conclude the chair, Mr Jeremy Cooper to say that the industry was “well functioning”.

There was one thing that I did agree within the article, and this was in respect to the comments that the greatest challenge for APRA regulated funds is the building of stronger relationships with its member because of the trusted relationship many individuals have with their accountants.

I may be called biased (I’ve probably been called worse things!) with my views on SMSFs, but my arguments to supporting a contra view are based on statistical evidence obtained through independent research on the SMSF sector.

With many of the myths about SMSFs finally dispelled in the Cooper Review, I would have thought that “SMSF mud-slinging” as a sport would have finished?  With the quantum of superannuation dollars at now stake, I guess it is highly unlikely!

I’d love to hear your thoughts on this topic???

POLL: Do accountant’s sell SMSFs?

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Comments

  1. Thank you for this article Aaron.

    I agree with all your comments, and I had the same response to the article you mention.

    A point that I would like to add is that although the average member balance is $963k, a large number of the higher balance funds would have to have started somewhere – with balances in the $100-$200k range maybe? Less?

    Due to these individuals becoming engaged, taking control and taking advantage of the tax efficiencies of investing via superannuation, they have managed to significant grow their retirement nest egg.

    Although this phenomenon is not restricted to SMSFs, the industry super fund environment does not seem to be as supportive of these behaviours. Maybe they should be trying to learn from the SMSF sector rather than taking uninformed pot shots.

    Kris

    • Not sure I agree with this – the average fund balance is under $900,000 (not member balance – and median balance would be a more useful measure). In my experience (having worked in the industry) many funds are set up by both accountants and financial planners where it is inappropriate. The ‘control’ reason is also arguable when many members then invest in managed funds in the SMSF or devolve the financial decision making to others anyway (so a wrap account would often a be better option). In addition too many trustees do not have an adequate understanding of superannuation and do not like paying others for advice (which is sometimes of questionable accuracy too).

      • Yeah – sorry – I meant fund balance not member balance. Typo.
        My point is the same if using median fund balance – you have to start somewhere.

        Yes – agree regarding additional level of managed fund and wrap fees within a SMSF often not appropriate, but realise control doesn’t necessary mean picking the individual investments. Maybe think control via a personalised experience.

        Education definitely needs to be increased – not just in regards to super, but overall financial literacy. If you are a professional in this industry, you have a responsibility to educate your clients.

  2. Daryl Lee says:

    I too agree with your comments and started our fund with less than $200k and believe with prudent investing you could reasonably start with $50K.

    Daryl

  3. Another good read Aaron. Most of the sound comes from the Big end of town, hanging on for dear life with their expensive non competitive products, actively buying Advisers souls so that they can continue their product flog.
    I read today that Industry Funds want to provide advice to SMSF in an effort to stop the outflow. More of the same propaganda no doubt.
    As Aaron has pointed out, costs have reduced significantly with automation and software now available. Access to wholesale investments is now also easier with lower entry levels.
    Client’s engaging a competent Adviser can now access strategies and direct investments without the cut going to stakeholders.

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