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Association rejects articles criticising SMSFs

The SMSF Association has taken issue with criticism of the SMSF sector in articles that appeared in the consumer press over the past few days.

The SMSF Association chief executive Andrea Slattery today said: “You may have seen the Fairfax Media articles on SMSFs over the long weekend.

“They provided harsh criticism of the sector with a strong focus on small balance SMSFs, fees and SMSF investment returns.

“Many of these arguments were a repeat of concerns we have seen aimed at the SMSF sector before.”

The association said it was aware of the issue smaller SMSFs could face in relation to expenses and investment returns, and had always stressed the need to carefully consider starting an SMSF, no matter what size a person’s starting balance might be.

“The decision to set up an SMSF is not trivial and should only be done after seeking specialist advice,” Slattery said.

“SMSFs are not a universal solution for everyone, but have provided a healthy competitive balance to large Australian Prudential Regulation Authority (APRA)-regulated funds (a view endorsed by the federal Treasury) where despite the massive growth in assets and scale benefits, lower fees have barely been passed on to members.

“The articles were critical of SMSFs being set up inappropriately or ‘spruiked’ to consumers [and] we note that ASIC (Australian Securities and Investments Commission) has considerable power to shut down spruikers if they are not properly licensed or fail to meet the best interest test.

“While the article has raised some important issues for trustees and professionals alike to consider, we take issue with some of the assumptions, inaccuracies and SMSF myths put forward.”

The association provided its views on a number of statements in the articles that it was concerned by.

When it came to claims SMSFs with small account balances up to $250,000 were unsustainable and a minimum balance needed to be introduced, it said that was a poor generalisation and the sustainability of SMSFs with lower balances depended on many factors, including plans and capacity for future contributions, asset allocations, member preferences and needs.

Further, claims that SMSF members would not have enough money to live off in retirement and would have to rely on the age pension were incorrect – 94.2 per cent of benefits withdrawn from SMSFs were in the form of an income stream, it said.

In addition, in 2013/14, SMSFs withdrew $30.6 billion in benefits with the average benefit withdrawn around $120,000 a year, it said.

The SMSF sector’s drawdown phase was leading the Australian superannuation system in providing retirement income for its members, it said.

Commenting on claims there were inadequate consumer protections for SMSF trustees, the industry body said trustees were protected by the same retail financial services law as other consumers of financial services.

“Ongoing moves to strengthen the ethical and educational framework for financial advisers and licensing accountants providing SMSFs advice will continue to improve consumer outcomes,” Slattery said.

“In regards to strengthening consumer protection, the association has previously called for tighter policing of advisers’ professional indemnity arrangements by the Australian Securities and Investments Commission and for the government to consider a broader financial services industry last resort compensation scheme to protect all consumers of financial advice and services from fraud and theft.”

She said predictions funds with low balances “will eat themselves alive” due to accounting and auditing fees and SMSFs with $50,000 or less in assets had an average operating expense ratio of a staggering 12.1 per cent were based on a number of factors that distorted the true picture.

“As SMSF statistics are gathered via the ATO SMSF annual return, funds report their position as of 30 June – this can mean that new funds can report higher costs compared to their balance, resulting in inflated cost ratios and poor returns as the fund is awaiting a significant rollover to be invested,” she pointed out.

“This is exacerbated by the common practice of establishing an SMSF with a nominal contribution, for example $10, to comply with ATO and trust law requirements, and when the rollover is eligible to be made, it can often be received in the following financial year.

“The ATO calculation of SMSF expenses differs greatly from that of APRA-regulated funds, which distorts SMSF cost figures in relation to APRA-regulated fund costs.

“We have made representations to the ATO on the statistical issues.

“Further, we believe increased use of technology and competition within the SMSF audit and accounting profession is driving costs lower for most SMSF trustees.”

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