Episode 40: SMSF advice

ASIC Senior Executive Leader Jo Bird joins the podcast to discuss a review of self-managed super funds, and to give some advice to consumers who are thinking of setting up an SMSF.
Read the reports of this review Report 575: SMSFs: Improving the quality of advice and member experiences and Report 576: Member experiences with self-managed superannuation funds, and find out more about SMSFs on ASIC's MoneySmart.

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INTRO: Hello, and welcome to the official podcast of the Australian Securities and Investments Commission. In today's episode we'll be discussing ASIC’s review of self-managed super funds. My name is Tessa Loftus and with me this time around is Senior Executive Leader of Financial Advisers at ASIC, Jo Bird. Jo, thanks very much for your time.

Thanks Tessa.

Q: So, can you tell me what the review was about?

There were two aspects to our review. We did a research on the experience of consumers who set up an SMSF and we also did a review of the quality of advice provided to consumers who set up an SMSF

So, first of all talking about the consumer research, there were two parts to that. We did some in-depth qualitative research with SMSF members and we also did an online survey of SMSF members.

For the advice review component of our review on SMSFs we did file reviews of 250 randomly selected advice files that recommend consumers set up an SMSF.

So, essentially, we looked at people’s experiences when setting up an SMSF and the quality of advice they got before they decided to set up an SMSF.

Q: So let’s start by talking about the quality of advice then — what did you find in the file reviews?

In 10% of the customer files reviewed, we found that the customer was likely to be significantly worse off in retirement as a result of following the advice they received.

In a further 19% of the customer files we looked at, customers were at an increased risk of suffering financial detriment due to the lack of diversification of their SMSF.

And then finally, in 62% of the customer files, advisers were unable to demonstrate that they had met their best interests duty – the customer might not actually have been worse off, but the adviser hadn’t demonstrated that the client would be better off as a result of following the advice.

Q: So that’s a 91% advice failure rate — that’s pretty huge. What does that mean for consumers?

It’s a very worrying failure rate, especially considering the importance of superannuation.

The 31% of files where we considered there was likely to be significant financial detriment are obviously the most concerning, and we will be contacting the licensees who are responsible for that advice to make sure they review all their advice and remediate customers as necessary.

Q: Does that mean there will be regulatory action arising from these advice reviews?

ASIC has taken significant action in relation to SMSFs and the advice provided to SMSF members. In fact, there is a summary of the action we’ve taken in the report that we’ve released.

We’ve taken action in relation to SMSF one stop shops and we are continuing to focus on those because of the conflict of interest inherent in that business model. In fact, we’re working on a number of enforcement matters that involve one stop shops at the moment.

We’ve also highlighted risks of aggressive marketing around SMSFs and have taken and are taking enforcement action in response to that marketing.

We won’t be taking action in all cases of bad of advice uncovered in the work we did for this recent review.  And that’s because this review was actually a large research project and we looked at a random sample of advice.  So, that meant for most advisers we only saw one piece of advice file that they had provided.  We generally don’t take enforcement action in relation to one piece of poor advice.  But as I said, we will be following up with the licensees to make sure the consumers are remediated.

However, where in the project we saw multiple pieces of poor advice we have commenced enforcement action and are well advanced.

Q: So in this review you also spoke to people who have an SMSF or have just set up an SMSF — what were the standout findings or messages that you got from those interviews?

The interviews found that a lot of people aren’t fully aware of the risks involved in running an SMSF, of the costs involved, of the time commitment, or in fact of the scope of their legal obligations.

A few of the specific areas where we identified problems are, we found that:

• 38% found running an SMSF was more time consuming than they had expected
• we found that 32% found it to be more expensive to run their SMSF than they had expected
• 33% of the consumers we surveyed didn’t know that an SMSF is required to have an investment strategy, and
• 29% wrongly thought they were entitled to compensation for fraud or theft in relation to their SMSF.

We also found worrying trends around one stop shops and lack of diversification.

Q: One stop shops — you mentioned those before, what are they?

One stop shops is the term that we use to describe a business model where the person providing the advice to set up the SMSF has a relationship with a whole lot of other people who are involved in the SMSF process. So, for example, often they’ll have a relationship with a property developer or a real estate agent who will then sell property into the SMSF. Or they might have a relationship with a mortgage broker who will arrange a loan for the SMSF or they might have a relationship with an auditor or an accountant who will provide other services to the SMSF.

The report identified that there’s an increasing use of these sort of one stop shops by consumers who are setting up an SMSF. But we would encourage consumers to be very cautious when using them — we understand that consumers like using them, it’s convenient to go once place for all your services, but there’s an inherent conflict of interest in that business model, and that means consumers need to be careful when they take that option of using the one stop shop.

That conflict of interest puts people at increased risk of receiving poor advice that doesn’t take their personal circumstance into account or that’s not in their best interests.

Q: And you were concerned about a trend around diversification, what was that?

Ok, we saw an increasing use of SMSFs to access the property market, but often the property was the only asset in the SMSF. Many people didn’t seem to know the importance of diversification — having different kinds of investments in your SMSF in order to manage your risks.

It’s particularly important to diversify and manage risk in super, because super is actually crucial to people’s long-term financial well-being. And, I have to say, having interest in multiple properties is not diversification.

Q: In that case, what would your advice be for consumers who are considering setting up an SMSF?

Superannuation is very important and consumers have to exercise extreme care in choosing where to place their superannuation money and how to manage it. 

Making a mistake in relation to your super can have a very significant impact on your long-term financial well-being, and you may be unable to rectify the mistake in time.

I don’t want to give the wrong impression — SMSFs are a good product for some consumers, but they are not for everyone and they bring with them higher risks, greater responsibility and they demand much greater consumer engagement. So, it’s important that consumers think about all of those issues before they decide to set up an SMSF. And then they have to remember that SMSFs are not ‘set and forget’, they have to remain engaged with them once they’ve set them up.

Q: Obviously these are important issues for the people who have SMSFs, or are thinking about setting one up, but is that a substantial number of people? Is this really a broad issue?

It’s an increasingly large issue: 1.1 million Australians own 590,000 SMSFs worth $712 billion (that covers the assets and loans of those SMSFs. So they are now a big part of the superannuation sector.

The draft Productivity Commission report which was recently released in superannuation indicates that SMSFs with a balance less than $1m suffer higher costs and lower returns compared to APRA-regulated super funds and SMSFs worth over $1 million in assets.

67% of all SMSFs are worth less than $1 million – that is, below what the Productivity Commission thinks is the minimum investment to generally justify setting up an SMSF.

More alarming, 19% of SMSFs are worth less than $200,000.  In those situations it is really quite unlikely that the SMSF is in the members’ best interests.

Q: So, obviously in this review you’ve identified issues on the adviser side, but also in terms of consumer awareness, so what actions will we see from ASIC on this topic?

Ok, we think this is a really big issue and we’re putting a lot of resources into it, and we’re working closely with the ATO, who are the frontline regulator of SMSFs.

ASIC is taking regulatory action as appropriate, and generally putting pressure on the advice industry to improve standards, and providing as much education and guidance to the advice industry as we can to help lift those standards.

We’d also like consumers to be better informed in the decisions they make. AS I’ve said, super is one of the most important financial decisions you’ll ever make, so take the time to make sure you’re making the right decisions.

There’s a lot of information about SMSFs and how to figure out if they are right for you on ASIC’s MoneySmart, and we’re constantly reviewing that guidance to try to make sure we can reach as many consumers as possible, and provide them the right messages, and the messages that are helpful for them to make this important decision about their superannuation.

1. And we’ll post links to MoneySmart and the reports from this review in the information about this podcast. Thanks very much for your time Jo.

It’s a pleasure.

CLOSE: And we’ll be back with another episode of the ASIC podcast very shortly.