- Analysis by ASIC finds that 91% of advice given to set up self managed super funds doesn’t comply with regulations.
- One in ten people would be significantly worse off in retirement because of the advice.
- And a lot of people are setting up a self-managed super fun without knowing whether this is the best option for them.
Most financial advice given about setting up a self-managed super fund (SMSF) doesn’t comply with relevant laws, according to a review by the Australian Securities and Investments Commission (ASIC).
ASIC discovered that most don’t really understand the risks of having a self managed fund or the legal obligations of a trustee.
Some people also moved to SMSFs as a way to get into the property market, using it solely for this without a wider investment strategy, as required under regulations.
The number of self managed funds have grown since they were introduced in 1999 to more than more than 590,000 holding combined assets of nearly $697 billion, or 30% of funds held in superannuation.
The corporate watchdog reviewed 250 client files randomly selected based on Australian Taxation Office (ATO) data and assessed compliance with the Corporations Act.
The adviser, in 91% of files reviewed, did not comply with “best interests” duty and related obligations. The non-compliant advice ranged from record-keeping and process failures to failures likely to result in significant financial detriment:
- In 10% of files reviewed, the client was likely to be significantly worse off in retirement due to the advice;
- In 19% of cases, clients were at an increased risk of financial detriment due to a lack of diversification.
“It is clear lots of people are setting up self-managed super funds without knowing whether this is the best option,” says ASIC Deputy Chair Peter Kell.
“The financial advice sector has significant work to do to lift their performance on this issue.”
ASIC also conducted market research which included interviews with 28 consumers who had set up an SMSF and an online survey of 457 consumers who had set up a self manged fund.
The online survey found that 38% discovered that running an SMSF more time consuming than expected, almost a third (32%) found it to more expensive than expected and another third (33%) did not know the law required an SMSF to have an investment strategy.
Another 29% mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.
The results of ASIC’s study:
The interviews also identified a growing use of one-stop-shops where the adviser has a relationship with a developer or a real estate agent whose products the person is encouraged to invest in.
This put people at increased risk of getting poor advice that did not take account of their personal circumstances or is not given in their best interests.
ASIC’s findings are supported by the recent Productivity Commission super report which found smaller SMSFs (with balances under $1 million) delivered on average returns below larger funds, and that the costs for low-balance SMSFs are higher than for funds regulated by the Australian Prudential Regulation Authority.
ASIC and the ATO will have an increased focus on property one-stop-shops. This will include sharing data and intelligence, and ASIC taking enforcement action where it sees unscrupulous behaviour.