The licensing of accountants to provide advice to SMSFs will help counter to the unreasonable leakage of superannuation members from funds, according to Nick Sherry, consultant at Citi.
“There are far too many SMSFs that are sub-economic, that the operational costs cannot be justified. I see a level of mis-selling around property investment and I worry a lot of people are going to get hurt.”
Sherry said the current situation sees any accountant advising people to set up SMSFs regardless of their account or knowledge as a trustee.
“We went through this with Trio Capital, [which was] the last case I sat on a Parliamentary committee, where hundreds of people in their SMSFs lost their money. That’s a real worry.”
In particular, Sherry said it’s not ideal for small business owners, who commonly invest in their business premises or borrow.
“The concept of superannuation is diversified investment. It’s never a good idea to have the investment in one asset, i.e. single or one or two properties, it’s just not a good idea.”
Sherry further argued that any balance less than $200-300,000 was “ridiculous” because of the amount paid in fixed operational costs.
“There’s a lack of diversification and also we’ve got people being leveraged to borrow. For a part of the SMSF sector, that’s a very dangerous combination.”
Sherry signals the licensing of accountants as a positive step forward.
“Accountants were supposed to be licensed under FSR but they got the exemption eight or nine years ago. The same rules – best interest of the member test, assessment of the from-fund to-fund etc – will apply to accountants as applies to everybody. That’ll be a good thing.”
Sherry also pointed to the increase in prudentially-regulated funds introducing a member-direct select option that’s interactive and web-based.
“Prudentially-regulated funds can replicate an SMSF without the cost. They can’t do the property investment or the borrowing within the APRA fund, but they can replicate the real-time individual equities, bonds, cash, asset selection,” he said.
“AustralianSuper is a good example of that…. But from my knowledge, every major corporate retail and industry fund is looking at providing that service.
“And you can replicate it at about a tenth of the fixed cost, and you can also replicate it safely because it’s covered by theft and fraud provisions, whereas an SMSF is not covered by [those].”
Sherry expressed further concern about the state of Australia’s superannuation industry, saying it has to be careful about indulging in “self-congratulatory back-slapping”.
“I know we’re not the envy of the world. We are widely admired for having a compulsory system that is sustainable, that is large and growing. But we are not admired for the operational cost and complexity of our system.”
Sherry said Australia has the world’s most expensive, complex DC system, and pointed to tax and sustainability as part of the problem.
“The tax is still complex [and] the operational features are still complex. Albeit everything flowing from Cooper and various changes I think are necessary. It’s been tough for industry but we’re living in a world of $1.5 trillion in super, not $150 billion 20 years ago.”
He believes the proposed council of superannuation custodians, the report for which is being spearheaded by a charter committee with Jeremy Cooper as chair, will go some way to addressing industry’s accountability.
“Anything that provides independent, expert evidence, free of vested interest, is a good thing. I think that’s a good thing and it helps advance the debate.
“Am I optimistic that we’re going to have less emotional or self-interested debate? No I’m not, and that’s the reality. But at least if you’ve got good, robust, independent evidence, you’ve got a good starting point.”