You could call it tall poppy syndrome. With SMSFs now the largest and fastest growing sector in Australian super, they’ve attracted plenty of commentary from the media and super industry insiders, some of it wide of the mark. Now it’s time to sort out the myths from the reality.
The myth: SMSFs don’t diversify
The reality: SMSFs are often just part of a larger strategy
It’s often said that SMSFs aren’t diversified, at least in comparison to the giant industry and retail funds. And at first glance, the data seems to bear this out.
According to the Australian Taxation Office (ATO), in March 2015, SMSF portfolios were highly concentrated in Australian shares and cash, with few direct international investments. Yet this is only part of the picture.
The same ATO data shows that most SMSF portfolios hold managed funds — and, according to Peter Burgess, Head of Policy, Technical & Educational Services at AMP SMSF, managed funds are often the vehicle of choice for SMSF trustees seeking broader diversification, especially offshore.
Research also shows that SMSF trustees typically have 50% or more of their wealth outside their SMSF . This means their SMSF holdings are often only part of a larger and more diversified financial strategy.
The myth: SMSFs lack strong supervision
The reality: SMSF members are actively engaged in managing their money
Given the strict prudential rules the big APRA-regulated funds have to follow, it’s not surprising some fund managers and commentators think SMSFs should be more tightly supervised.
But those prudential rules are there to ensure fund trustees keep their financial promises to their members — not really a problem when the members and the trustees are one and the same.
The myth: SMSFs fail on compliance
The reality: Despite hugely complex rules, most SMSFs are fully compliant
Investment professionals sometimes suggest SMSF trustees lack the skills to meet their compliance responsibilities. This is one of the easiest myths to disprove.
ATO statistics reveal that fewer than 2% of SMSFs were reported for compliance breaches in 2014. This is not surprising when you consider the high standard of advice now available to trustees from accountants, advisers and specialist SMSF administrators.
The myth: SMSFs take dangerous risks
The reality: SMSF trustees are generally conservative
It’s true that SMSF trustees aren’t subject to the same investment checks and balances as the big APRA-regulated funds. But while that could give them the freedom to splurge on riskier investments, research shows the opposite is true.
For example, 51% of SMSF direct Australian shareholdings were in the ASX top 10 shares . Burgess argues that this indicates SMSFs are, if anything, more conservative than their regulated counterparts, not less so.
The myth: SMSF members lack legal protection from fraud
The reality: Many SMSF investments are protected (but not all)
The collapse of Trio Capital in 2009 highlighted a key difference between SMSFs and APRA-regulated funds. In this case, industry and retail funds were able to seek government compensation for fraud, while SMSFs could not.
But ATO figures show most SMSF investments are in assets that offer some protection from fraud and theft. This includes:
• cash investments (usually government guaranteed up to $250,000),
• cash transactions (covered by the ePayment Code),
• direct share investments (covered by the National Guarantee Fund)
• property (less exposed to theft and fraud).
What does all this mean for SMSF members?
As long as you invest with care, you can rest easy.
Like to know more?
Have a look at our range of self managed super funds and decide what’s right for you.
We have years of experience in providing administrative advice and support for SMSFs. If you’d like help with running your SMSF, simply call us on 131 267 speak to your adviser or if you don’t already have one, let us help you find a financial adviser in your area.
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