Investors considering establishing an SMSF should take the potential downsides into account to avoid the risk of setting up a fund that isn’t appropriate for their circumstances, the Australian Securities and Investments Commission (ASIC) has warned.
ASIC commissioner Danielle Press said, “ASIC believes that consumers are all too well aware of the potential benefits that might stem from using a SMSF, but are not equally alive to the considerable risks and responsibilities that come with the deal.”
“SMSFs may be an attractive option for investors wanting more control over their superannuation investment strategy, but it requires real skill, care and diligence to manage your own superannuation.
“SMSFs are not for everyone simply because not everyone can meet the significant time, costs, risks and obligations associated with establishing and running one.”
ASIC cited “Report 575 SMSFs: Improving the quality of advice and member experiences”, containing research conducted by the regulator last year which identified “red flag indicators” in situations where an SMSF would be inappropriate for investors.
The “red flag indicators” are part of a new ASIC factsheet called “SMSFs: Are they for you?” to assist consumers and SMSF trustees deciding whether or not to establish or continue running an SMSF. Red flags include having a low superannuation balance, wanting a simple superannuation solution, or not having the time, experience or financial literacy to manager their financial affairs or make investment decisions.
“Our research found that SMSFs are not suitable for members with a low fund balance, particularly where they have limited ability to make future contributions,” Press noted.
“This is important because consumers starting off with a low balance need to be aware that they may not be in a better financial position in the future by holding an SMSF compared with investing in an Australian Prudential Regulated Authority-regulated fund.”
ASIC also highlighted the complexity of having an SMSF, and pointed to the unsuitability of SMSFs for people with either a lower level of financial literacy or limited time to manage their financial matters.
“Where people have limited investment decision-making experience or prefer to delegate decision-making to someone else, they should carefully consider if an SMSF is right for them,” Press added.
“As the trustees of their own fund, SMSF investors must remember that they are responsible for their fund’s compliance with the law, even if they pay a professional to help.”
ASIC has previously undertaken research into the quality of SMSF-related advice and member experiences with SMSFs, with the SMSF advice sector noting the issues found by the regulator did not create any adverse outcomes for fund members.