In the coming decades, an increasing number of older and more vulnerable individuals will have an SMSF, according to the Australian Law Reform Commission.
An Australian Law Reform Commission (ALRC) inquiry has drawn attention to the growing issue of elder abuse in society, including in financial matters. Are self-managed super funds (SMSFs) addressing the issue?
The latest SMSF statistics reveal the risks for the sector. As at June 2016, the median age of all SMSF members was 59 years, with average assets per fund of $1.1 million and around $620 billion in total assets.
In its discussion paper issued in December 2016, the ALRC noted that 55 per cent of SMSF members were aged between 55 and 74 years, although only 8.8 per cent had members aged over 75, "the most vulnerable cohort for elder abuse".
Yet with the growing ageing membership, "in the coming decades, a greater number of older and more vulnerable individuals will have an SMSF," it said.
The ALRC suggested SMSFs' vulnerability to financial abuse related to a regulatory framework based on self-protection. However, it said this framework "may be problematic, as a larger number of SMSFs come under the control of older people who may have diminishing decision-making ability".
This was highlighted by a submission by the Financial Services Institute of Australasia, which argued "the issues of population ageing and cognitive decline are a 'silent tsunami' for self-managed super funds, exposing investors in this sector to financial abuse, including fraud and inappropriate investment advice".
The Office of Public Guardian (Queensland) (OPG) pointed to a case where an 80-year-old man named "Peter" was director of a trustee company of an SMSF but suffered a loss in his decision-making ability due to dementia.
"A couple of years after moving in care, Peter was diagnosed with dementia, at which time Peter's attorneys, appointed under an enduring power of attorney, assumed control of Peter's financial affairs," the OPG said.
"A complaint was made to the OPG that the attorneys were financially mismanaging Peter's funds … the [OPG] investigated the matter and identified that the attorneys were not competent to manage Peter's financial affairs due to the complexity, and their lack of understanding of the laws regulating SMSFs."
The ALRC noted that the Australian government's 2009 super system review found that "SMSF members had chosen to take responsibility for the management of their retirement savings and on that basis should not be subject to further regulatory intervention".
Yet with Alzheimer's Australia estimating that 20 per cent of Australians aged over 65 could develop dementia, "what happens when an SMSF trustee loses decision-making ability is of critical concern in managing the risk of elder abuse".
The ALRC suggested a legislative change could be necessary to specify the "steps to be taken when a trustee or director of the corporate trustee has lost legal capacity. These legislative parameters could provide a safety net in the event the trustee has not themselves put in place an effective succession plan".
It also pointed to the challenges with individual trustees regarding a succession event. "Assuming the trust deed allows for the succession, there are complex legal questions as to how the transition on loss of legal capacity will be managed, particularly who will sign the transfer of property from the trustee who has lost legal capacity."
It suggested a legal change could be considered "requiring a corporate trustee for new SMSFs" given their benefits, including perpetual succession and greater administrative and estate planning flexibility.
It also argued for improved documentation for SMSFs, given many establishment documents are "off-the-shelf products" that do not provide for succession events on loss of capacity by a trustee.
Another suggestion related to potentially giving access to the Superannuation Complaints Tribunal for SMSF members, in relation to loss of decision-making capacity, along with potentially additional obligations on SMSF trustees and directors.
Education, Not Legislation
However, the SMSF Association has urged the federal government to put the focus on education, not legislation, in strengthening protections against elder abuse.
"We are not convinced that additional and stronger legislation will result in increased protections against elder financial abuse," SMSF Association head of policy Jordan George said.
"Rather, we suggest that education for trustees and advisers on planning for the loss of capacity is the first step to reducing the risk of elder abuse occurring in the SMSF sector."
George, however, called for the regulations to be amended requiring trustees to "formulate and review regularly the consideration and planning of the loss of capacity and SMSF exit strategy as part of their investment strategy".
Similar to the requirement regarding insurance, he suggested such a move would make it front of mind for trustees, becoming part of audit standards for SMSF auditors.
The association also called for interested parties to be blocked from witnessing binding death benefit nominations (BDBNs), as well as barring individuals appointed under power of attorney from putting BDBNs in place or reviewing one, unless specifically authorised under the power of attorney.
Greenfields SMSF Lawyers senior counsel, Caroline Harley, has also argued that SMSF members and trustees should already have plans in place in the event of loss of capacity, suggesting that relevant provisions be incorporated into the trust deed.
Ignoring Issue "Disastrous"
Yet Liam Shorte, director at Verante Financial Planning and an SMSF specialist adviser, warned that many SMSFs were ignoring the issue with potentially disastrous consequences.
"I'm very concerned that many people are still not putting arrangements for management of their personal and financial affairs in place before they need to, and as a result leaving themselves and their finances vulnerable to abuse," he said.
"They are part of a generation who while they want to preserve wealth for their partner and family, are unwilling to engage them in the discussion about ongoing wealth management, not wanting to divulge personal financial details and unwilling to accept the need for relinquishing control."
Shorte gave the example of a client's deceased estate, where the mother had built up a diversified and moderate portfolio delivering a target 7 per cent annual return while minimising capital risk. However, her son took over the portfolio after her death, investing instead in higher-risk shares, options, and foreign exchange, with "disastrous" results.
"Can we call this elder financial abuse? Maybe, but his dad wanted to trust him and his mother had never discussed her wishes in terms of what was to happen after her death with the portfolio," Shorte said.
"So, I would urge people to talk about money, talk about ongoing management of portfolios in the event of mental incapacity or death. Let the next generation or surviving spouse know their wishes and how they would like the money to be managed and who to work with in doing so.
"While the wishes may not be followed by those with the control, it may guide them to be more cautious and think twice."
The ALRC's elder abuse inquiry is due to issue its final report to the Attorney General in May 2017, with the industry awaiting the government's response.
In the meantime, SMSFs have been given plenty of reasons not to ignore the risks of elder financial abuse, amid a growing elderly population of members with billions of dollars in assets at stake.
23 May 2017