The SMSF Association is engaging ASIC over its recent “Fact Sheet” to SMSF trustees, which has adopted the Productivity Commission’s guide as to a minimum advisable sum – $500,000 – to have to efficiently run your own fund. Five years ago, ASIC suggested $200,000 should be the minimum. Now, that’s inflation.
According to John Maroney, the Association’s chief executive, there has been discussions with ASIC over the past two weeks. He and his colleagues believe the regulator should have made the information it has sent to newly registered SMSF trustees clearer. For instance, ASIC appears to have fallen into the trap of assuming averages are the norm.
Here’s an old party trick: “Most people have more than the average number of feet.”
Maroney, a former actuary, got the gist of this straight away. It takes only one person in the world to have had one of his or her feet amputated to reduce the average to below two (say: 1.999 recurring).
Maroney said that the Association would be getting the feedback from several hundred of the 2,000 or so new SMSF trustees who register their fund with the ATO each month. He agreed with ASIC’s recommendation that people should get expert advice before setting up an SMSF.
He said: “It’s always been our policy that SMSFs are not for everyone and before anyone sets one up it should be appropriate for their financial and personal circumstances. For people who are prepared to take the time and effort to personally oversee their retirement savings, SMSFs can be very empowering.”
He said it was “disappointing” that the tone of the ‘Fact Sheet’ cast SMSFs in a very poor light. “By the Fact Sheet’s focus on risks and the use of inconsistent data sources, SMSFs are again portrayed negatively, especially those funds with balances of less than $500,000,” he said.
“We take issue with the representation that the typical cost of running an SMSF is $13,900 a year. The use of averages ignores distortions from very large SMSFs and those who choose to use extensive administration and investment services.
“We will consult with ASIC on the use of this figure, noting that the SMSF software provider, Class, in its submission to the Productivity Commission, indicated the adjusted average cost for lower balance funds was about half that amount or even lower, while our understanding is that many SMSFs operate with total annual expenses below $5,000.
“Although the document explicitly states that ‘care must be taken when using SMSF performance figures, particularly when making comparisons’, it still argues that SMSFs with balances below $500,000 underperform, on average, the APRA-regulated funds.”
Maroney says it’s the Association’s strong belief that these comparisons lack balance when factors such as data consistency problems, investment return and expense calculation methodology and the retiree demographics of SMSFs compared with APRA-regulated funds are considered.
“The reality is that it’s very difficult to make accurate, cost-effectiveness comparisons, a point ASIC’s document would appear to concede.
“For example, SMSF establishment and advice costs vary considerably to the costs incurred by APRA-regulated funds, in the process materially distorting SMSF returns, especially for new and lower balance funds. Another example is the fact insurance premiums and interest payments on investment loans are included as expenses for SMSFs and not for APRA- regulated funds.
“We also argue that the cost-effectiveness debate must be extended beyond a mere analysis of net returns and costs and consider the cost of running an SMSF over the long- term, as well as the varied motivations that SMSF members have in setting up their own funds, such as increased control and their individual retirement goals.”
Maroney says ASIC’s concerns about property spruikers are endorsed by the Association. “We encourage ASIC to remove this egregious element from the industry – something all the specialist SMSF advisers we represent would welcome.
“The Association is also curious that ASIC uses the figure of SMSF investors taking 100 hours a year to run an SMSF as wholly negative. From our perspective it is a positive outcome if people are taking the time to actively engage with the investment and management of their retirement savings, a persistent challenge since compulsory superannuation was established in 1992.”
By IO & C
20 October 2019