Those with self-managed super funds risk losing it all, ASIC warns

Ross Greenwood speaks to ASIC Commissioner Danielle Press as the corporate regulator has warned investors with self-managed super funds may run the risk of losing it all due to inexperience.

Interview with: Danielle Press, Commissioner, ASIC

Ross Greenwood: Great to have your company here on Money News going right around Australia. I want to give you a small personal story here. That is when it comes to looking after my superannuation, I’m quite open at admitting that I have half of my money in a self-managed superannuation fund, and I have half of my money in an industry superannuation fund and have for years. My idea has been that the industry super fund would chug along and also provide me with affordable insurance on one side. Then on the other side, the self-managed superannuation fund, if I do willing there, I should be able to make some line calls, maybe add some value and try and do it.

Here’s my admission. The industry super fund does much better than my self-managed super fund. The reason for that is actually identified today by the Australian Securities and Investments Commission. What it’s done is thrown down basically eight red flags that people who look after their own superannuation have got to look out for. If you’ve got a few of these red flags, then you might question as to why you have a self-managed superannuation fund. I probably should take heed of this. Now, of the eight flags that are there, the two that I file, number one, the client wants a simple superannuation solution, which everybody wants of course.

Now I’m happy to have shares or whatever it might be in there. I have never gone to the idea of going to borrow money to buy a property or anything like that because to me, that does make it interest trying to work out how to do that. The second part about this is the flag that I really file is the client does not have a lot of time to devote to managing their financial affairs. That’s the one that I file on. The reason is because ASIC has worked out that the average self-managed superannuation fund trustee spends more than a hundred hours a year managing their self-managed super fund.

I don’t have a hundred hours a year, barely. As a result, it’s the one I file. Maybe I don’t find the time to do it. I don’t have a hundred hours a year to sleep I don’t think. Anyway, ASIC has done this work to try and identify for consumers as to the whether a self-managed super fund is right for them but there are other flags here as well. Let’s bring in here the Commissioner for the Australian Securities and Investments Commission that did this work. Danielle Press, who is on the line right now. Danielle, many thanks for your time.

Interview with: Danielle Press, Commissioner, ASIC

Danielle Press: No problem at all, Ross.

Ross Greenwood: I’ve identified here that I’ve filed part of this. Really, in some ways I should question what I’ve been doing. One of the things I remember when self-managed super funds were create is I remember somebody from, I think about having Vanguard or something like that from overseas, really senior funds managed internationally, came to Australia and said, “The greatest danger of self-managed super funds is that most people keep the money in cash. And as a result they do not have the discipline. They’re putting the money into the market for good or bad. And as a result they tend to underperform in most cases.” Your research, what did that discover?

Danielle Press: Yes, our research discovered that depending on the size of the self-managed fund, but generally if you’re less than $500,000, after facing cost, you are generally underperforming in regulated fund, and that people as you say, are not spending the time they need to to manage these funds properly to actually generate the return they need. I’d argue that going forward that 100 hours is going to look skinny given that investment market is becoming more and more challenging.

Ross Greenwood: Of course, this is not just identifying the opportunities, monetary, trying to clean up your portfolio. This is on the paperwork, the administration. This is on trying to make certain that your fund is compliant because one thing about a self-managed superannuation fund is about the responsibility of the trustee, of the beneficiary to know that it is actually not their money as such. It’s the superannuation funds money and they have got to act as the custodian and look after that money properly.

Danielle Press: That’s correct. There are some– You have trustee duties that sit behind this that mean you have to be acting in a certain way. There are requirements that are legislated that you need to be meeting. It’s very hard to do that if you’re not actually spending the time, dedicating it to running and managing the trustee component of your self-managed fund as well as the investments. I think a lot of people take the view they can outsource that to our professional advisor. Unfortunately, you can’t. You can’t abrogate that responsibility.

Ross Greenwood: Because one of the things, and these are other red flags. If the person with the self-managed super fund wants to delegate all of the writing of the self-managed superannuation fund to a paid advise provider or that the person with the self-managed super fund wants to delegate all of the investment decision to somebody else. Now, in those cases, because that is going to cost money to do that, if the person is not confident enough or capable enough of either A, administrating or B, investing that money themselves, clearly they’re going to add fees and therefore lose performance out of their fund.

Danielle Press: That’s correct. You also still have to oversee those people. It’s very hard to oversee a service provider if you actually have no idea or no concept of what they’re doing. There is definitely an oversight function that the trustee has to have, even if you’re outsourcing at all and that takes time and it takes diligence.

Ross Greenwood: Also on top of this, you’ve got to manage the payment of the tax. You have got to manage the payment of monies coming in when wages are being paid. It’s actually got to be a process driven thing. But here’s the interesting thing about the tax offers that you’ve noted today: At June 30 this year noted almost 600,000 self-managed super funds in Australia. 600,000, get that. Now they had $750 billion dollars give or take in assets making them bigger in assets than either industry funds or indeed typical retail funds of people had. Indeed, they dwarf them both.

Danielle Press: Yes, and that’s partly why we’ve put this piece of research out and why we’re looking at this red flag documents to be going out because I think the benefits of self-managed super funds have been well articulated and are well articulated by any advisor that is talking to a client. The risks are not as well articulated. We think that there needs to be a balancing out of the things you need to consider. It’s not what is possible. It’s what’s in the best interest for me and what should I be doing not what can I be doing.

Ross Greenwood: See, Danielle, I’ve always been troubled by one thing and that is, and we’ve seen it all come along and people spruke it, and that is the concept of borrowing money in your super fund to go out and buy investment properties. Now I get it conceptually but the problem I have is the raising of the risk inside a self-managed superannuation fund. As a result, property investments can go bad, spectacularly bad, especially when they’re associated with gearing. if you can get it right, sure I’d get it there if you get it right, but gee, there are risks that many people take on that I don’t think they even have consciousness of.

Danielle Press: I agree with that. I think the research that the ATO put out recently around portfolios needs to be diversified with very good advice. I think we see a lot of self-managed super funds that aren’t well diversified and that are highly geared into property. I think that is not really leading the objective of superannuation. It’s not meeting the sole purpose test.

Ross Greenwood: I’m going to say for people who have got any doubts, jump on to the ASIC website, asic.gov.au, go and check this piece of research out that they have done. They’ll show these eight red flags. As I say, the key ones here is if you’ve got a low superannuation balance under $500,000, if you want simple superannuation. If you want somebody else to do it all for you. If you want to do all the investment, if somebody else you want them to do it and not you. If you’ve got a little experience. If you have low financial literacy, then probably, a self-managed super fund is not for you. Others will gobble up the fees that maybe you could save yourself if you’re in another form of superannuation.

Danielle Press is the Commissioner with the Australian Securities and Investments Commission. Salient morning there, Danielle. I appreciate your time this evening.

Danielle Press: Thanks very much, Ross.

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