Author: Richard Webb, Policy Advisor Financial Planning and Superannuation, CPA Australia
The Productivity Commission in 2018 found SMSFs with less than $500,000 in assets were likely to perform significantly worse than Australian Prudential Regulation Authority (APRA)-regulated funds on average, whereas SMSFs with a balance of $1 million or more were “broadly competitive”. The commission also found costs for funds, relative to assets, had increased over the years. ATO figures cited by the Australian Securities and Investments Commission (ASIC) for 2016/17, in response to a question on notice, also showed funds with average assets of up to $200,000 posted negative net earnings, whereas larger funds showed positive returns.
Although ATO figures are averages where outliers may potentially skew results, the attention low balances have received from regulators is a sign they are being closely scrutinised. Yet, according to ASIC research, control over investments is consistently cited as the main reason consumers set up an SMSF, suggesting the fees and costs are of less importance among SMSF trustees.
The mismatch between preferences and outcomes fuels a genuine public policy issue: given the tax-advantaged environment superannuation provides, at what point does a preference for control become detrimental to retirees’ own retirement savings or taxpayers more broadly?
SMSFs, of course, have flexibility in ways APRA-regulated funds are unable or unwilling to fully provide, with advantages ranging from basic taxation differences through to estate planning. The situation is also likely to continue where SMSFs can accommodate specialist investments that APRA-regulated funds cannot, meaning the decision to recommend this type of retirement savings vehicle to clients, regardless of balance, may sometimes be a necessity. For example, the need to set up an SMSF with a zero or low balance in readiness to receive certain assets, such as real property, or even a rollover. In such cases, there is no realistic cost comparison with APRA-regulated funds.
The cost consciousness of SMSF members itself is not insignificant. ASIC research found around one-quarter of members were concerned what their previous fund charged and cited this as the primary reason for them to set up an SMSF. While the Productivity Commission recently concluded these were more costly than they could be, earlier research performed by Rice Warner for ASIC in 2013 suggested the annual costs of operating an SMSF could be competitive with APRA-regulated funds for balances over $250,000, provided the trustees undertook some administration obligations.
ASIC ‘s guidance in Regulatory Guide (RG) 175 highlights a number of factors that should also be considered by financial advisers when recommending SMSFs, including the desire to minimise fees and costs, together with access to the other benefits an SMSF can provide. The factors in RG 175, key client needs and objectives, as well as the risks of an SMSF, should all be considered as part of compliance with the best interest duty. Given ASIC’s research suggested in nine out of 10 cases the best interests of clients were not considered by financial advisers, it is no surprise SMSFs will be an ongoing focus for this regulator as outlined in its Corporate Plan 2019-23.
The Financial Adviser Standards and Ethics Authority Code of Ethics, in particular Standard 10, the duty to develop, maintain and apply a high level of relevant knowledge and skills, means the risks for advisers recommending SMSFs in marginal situations are high. A purely quantitative view of benefits and costs in favour of commencing an SMSF, for example, is likely to fall at the first hurdle if a client is not able and willing to assume trustee responsibilities.
In any event, the risks and costs of starting an SMSF or transferring an individual’s super balance into an SMSF must be understood by a prospective trustee. While not exhaustive, ASIC’s Information Sheets 182, 205 and 206 provide further detailed guidance.
The public policy question asked about taxpayers more broadly is presently under review. The retirement Income Review has been tasked with identifying the impact of current policy settings on public finances.
The attention being paid to fees and costs for accounts with low balances is unlikely to go unnoticed, particularly if there are likely to be future implications for tax and social security expenditure with an ageing population.
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