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Education, Investments, Retirement

SMSFs face three key risks

A new industry paper, published today, has highlighted a triple risk for the $750 billion of retirement savings of over 1.1 million Australians with an SMSF.

The “SMSF Investor Insights: Discussing key myths surrounding SMSFs” report revealed a lack of appropriate diversification to mitigate investment risk, an unstable regulatory environment and returning volatility to investment markets are amalgamating and pose a unique set of challenges for SMSFs.

The release of the paper, sponsored by OpenInvest, kicks off the inaugural SMSF Week, running from 19 to 23 November, which aims to improve Australians’ understanding of SMSFs and how trustees can mitigate common risks.

The report found diversification improvement is needed, with 53 per cent of SMSFs saying there are barriers to achieving diversification and 47 per cent having over half of their portfolio invested in one investment type.

This is despite 82 per cent of SMSFs believing diversification is important.

“There is a concerning gap between knowledge and action amongst SMSFs regarding diversification,” the paper said.

It also found regulatory uncertainty is now the top-cited challenge in managing an SMSF.

“The imposition last year of the $1.6 million transfer balance cap once again removed superannuation goalposts and the recently proposed changes by the Australian Labor Party to remove franking credit refunds could result in a significant reduction in retirement income for many Australians, particularly those with SMSFs,” it said.

Further, 60 per cent of SMSF investors aged 65 or older plan to invest in blue-chip shares, which commonly encompass strong yields from franking credits, in the next 12 months.

Removing or limiting refundable franking credits on dividends would turn the world of many self-funded retirees upside down, the report said.

Within this context, SMSF Week is looking to address whether SMSFs are for everyone, whether funds need $1 million to be cost-effective and the impact of franking credits being scrapped, as well as appropriate diversification and what assistance is available for trustees running a fund.

SMSF Association chief executive John Maroney said the peak industry body wants to help Australians take control of their retirement savings.

“We want to provide answers to dispel misconceptions, bridge the gap between knowledge and behaviour, and connect SMSFs with the best insights, advice, tools and technology,” Maroney said.

“SMSFs place you in the driver’s seat to take control of your retirement savings, but with more control comes more responsibility. However, it does not mean you have to manage everything yourself.

“It’s surprising that one in five SMSFs have not used any financial advisers in the last 12 months, particularly when we know regulatory and market volatility is increasing.”

He added regulatory instability will always be difficult to navigate, but specialist SMSF advice can help all SMSFs cope with regulatory changes.

“There really should be no barriers today for SMSFs to be run cost-effectively and to mitigate against regulatory changes,” he noted.

“The right assistance and tools can bridge the gap in the SMSF sector between a strong understanding of the need for true diversity and the ability to achieve it.

“Investing in an SMSF means you’ve taken control of your retirement savings; it does not qualify you as an expert investor, and one of the most effective ways to achieve a secure and dignified retirement is with expert assistance.”

The report was based on the Investment Trends 2018 “SMSF Investor Report”, which surveyed 2315 trustees.

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