The offer to address the 13th International Convention of Independent Financial Advisors forum in Monaco on Australia’s SMSF system made me pause to reflect on the strength of our sector of the superannuation industry. So often we get tied up in the day-to-day minutiae that we fail to sit back and appreciate just how much has been achieved.
Speaking to a forum of independent financial advisers from around the globe, therefore, provided the perfect opportunity to go back to basics and tell the SMSF story to an audience where many would have only a rudimentary knowledge of our superannuation sector. But how best to tell it?
It seemed to me that exploding the many myths that continue to haunt our industry like Banquo’s ghost is an appropriate way to show how the sector has an excellent track record in providing more than 1 million trustees and members direct control over their retirement savings, whether in the accumulation, transition-to-retirement or retirement phases.
The first is that many trustees are fishing in uncharted waters, having scant knowledge and not choosing to get financial advice.
The reality is, of course, trustees are drawn from the ranks of the self-employed (blue and white collar), small to medium business owners, contractors, primary producers and executives. These are people who know how to make responsible decisions – they having been doing so on a daily basis in their businesses, often for decades.
They also know when and where to get advice. As our research shows:
- 42 per cent of trustees have a dedicated financial adviser,
- a whopping 98 per cent have a dedicated accountant/administrator,
- 97 per cent have a dedicated lawyer, and
- just as significantly, 52 per cent of trustees regularly use financial media to help inform their decisions.
In short, they are a financially literate, well-informed cross-section of our society.
However, it’s on the investment front that I wanted to set the story straight. It’s often said the Australian Prudential Regulation Authority (APRA)-regulated funds outperform their SMSF counterparts, despite compelling evidence suggesting otherwise.
In particular, it is when markets are underperforming that SMSFs come to the fore. In the five years between 2009 and 2013, SMSFs held their own against their APRA-regulated cousins. In 2009, when the markets headed south, they outperformed and then were basically on par in 2010, 2011 and 2012 when the positive returns were in single digits. It was only in 2013, when the performance from overseas markets kicked in, did the APRA funds pull ahead. Even so, SMSFs still had an average return of slightly more than 10 per cent in 2013, a more than credible performance.
This is unsurprising. SMSFs are typically established by people who are relaxed about making decisions and capable of getting professional advice when they need to. Their size gives them flexibility: the endless investment committee meetings to decide on a change of strategy are not for SMSFs. Their size also means their interests are more likely to be aligned and often at a lower cost.
Tax, too, is an area where confusion and misinformation still reigns. The simple fact is the same tax laws apply to both SMSFs and APRA-regulated funds. There are no special provisions or a separate tax act for the SMSF sector.
What’s often forgotten is the APRA-regulated funds choose to sell a member’s investment units before entering the retirement phase and drawing the benefit. That creates a taxing point between accumulation and retirement. There is no requirement in law to do so; it’s simply the fund’s choice in how they administer their members’ benefits.
By contrast, SMSFs can shift more efficiently from accumulation to the retirement phase without selling assets if they choose not to because of the direct nature of their investments. In the process they avoid inefficient tax outcomes. Remember, too, SMSFs offer their members greater flexibility to maximise their after-tax returns through tax-effective strategies, such as the use of franking credits in the retirement phase.
Finally, it’s a common cry that SMSFs don’t pay enough tax. What that conveniently forgets is that a large percentage of SMSF assets are held in the retirement phase where earnings and drawdowns are exempt. Also, as the balances are higher per member, a significantly larger tax take occurs in the SMSF sector in the accumulation phase.
The SMSF experience, like Australian rules football, is an Australian phenomenon; it is a fulfilling way of engaging people in saving for and living in retirement that doesn’t have an exact replica anywhere in the world. Gauging the reaction of the audience, it’s a captivating story – the benefits it delivers to trustees and members ensures that.