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Self Managed Super Fund (SMSF) Article
Getting to grips with facts of self managed super
By Tony Negline.
This article may be out of date.
25th March 2009
A problem that becomes apparent to anyone who has tried to study the Self Managed Super Fund sector is the almost complete lack of meaningful and useful data.
Now that Self Managed Funds are the largest type of super fund this lack of data could create a major problem. For example suppose someone started vigorously campaigning against small super funds by claiming that every small super fund member were a criminal and were using their super funds to launder stolen money. How would anyone be able to prove otherwise so stop the lie becoming the truth by constant repetition?
To solve this problem the SMSF Professionals' Association of Australia (SPAA) has been working closely with the University of Adelaide's International Centre for Financial Services. At SPAA's recently held annual conference the ICFS released the first stage of its research into small super funds which was extracted from an appropriate random selection of two date sources.
The research has revealed that just over 50% of small super funds performed better than the S&P ASX 100, ASX 200 and ASX 300 in 2007/08. This is no paper-weighted achievement.
In relation to asset allocation the ICFS data shows that on average small super funds have 20% in cash and fixed interest securities, 9% in properties, 18% in unlisted trusts, 50% in ASX listed shares and 2% in other assets.
By way of contrast an average super fund used for employer contributions has 26% in cash and fixed interest, 10% in properties, 29% in ASX listed shares, 23% in international shares and 13% in alternative assets.
Once again this dispels the myth that on average small super funds have large amounts sitting in cash.
These statistics also show that small super funds seem to have almost no exposure to non-Australian investment markets.
According to the ICFS data the average size of small super funds was $1.5m at 31 March 2009. Tax office data shows that the average size is just under $1m. This is quite a stark difference and perhaps comes about because small super fund trustees do not need to report to the tax office the market value of their fund's assets.
According to the SPAA figures small super funds incurred an average of $8,600 in direct costs during 2007/08. Based upon this data it costs 0.615% of total fund assets to run a small fund. After we add the indirect advice costs for small super funds estimated by Rice Warner Actuaries of 0.52% per annum we get an average total cost of running a small fund of 1.135%.
This average cost is about the same as the average cost of running low cost retail super funds such as Industry Super Funds and about 1% less than advice driven for profit retail super funds.
At the SPAA conference, Senator Sherry revealed that ASIC had decided that small super funds need $140,000 before they are economically viable which is $60,000 less than its previous estimate.
In early 2008 Sherry proposed placing a minimum level of assets on small super funds because he was concerned about the expensive running costs of funds with low asset amounts. He has now announced that he does not intend to proceed with this plan.
Also in early 2008 Sherry had said he was concerned about the lack of knowledge small super fund trustees seem to have about their duties and responsibilities. At that time he suggested that some form of mandatory education might be necessary. He now says that he will not make trustee education compulsory but expects the small super fund sector to solve this problem.
Both of these Sherry announcements are welcome developments. In general the small super fund sector was not particularly keen on either of these ideas.
Presumably if the industry fails to act or only pays lip service to trustee education then it will only have itself to blame if the government ultimately feels compelled to regulate this area.
Finally at the SPAA conference, the association's patron, Sir Anthony Mason, Chief Justice of the High Court between 1987 and 1995 gave a brief speech principally about financial advice and professionalism.
He said that many of our recent market ills were caused by "excessive reliance on debt and leverage, extravagant remuneration rewards for writing risky business, lack of transparency, departure from prudential financial standards, inadequate supervision by regulators, and non-compliance with professional and ethical standards."
Sir Anthony said that it is to be "hoped that the quality of advice given to participants in the superannuation industry by financial planners and advisers will improve. But it is impossible to believe that existing problems in the industry and the wider investment industry will be resolved in the absence of substantial reforms and a greater insistence on higher professional and ethical standards by all those who participate in the corporate world and the financial services industry."
In relation to regulatory reform Sir Anthony noted the recently announced Parliamentary inquiry into aspects of the financial advice industry. He said that this inquiry cannot "become a reason for delaying the design and adoption of obvious reforms that need to be made. As we know only too well, there have been occasions when the holding of an inquiry has been relied upon as an excuse for inaction".
Is there anyone in politics, regulators and financial services not only listening but also intending to act upon these wise words?
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