Nine out of 10 DIY super funds based on poor financial advice
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Nine out of 10 DIY super funds based on poor financial advice

The corporate regulator has fired a broadside at the $697 billion DIY super industry, with a new report suggesting nine out of 10 self-managed super funds are underpinned by poor financial advice.

The Australian Securities and Investments Commission reviewed 250 files randomly selected based on Tax Office data and found in 91 per cent of cases the financial adviser did not comply with the Corporations Act’s “best interests” duty and related obligations.

In one out of 10 files reviewed, the client was likely to be significantly worse off in retirement due to the advice. In almost one in five cases, clients were at an increased risk of losing money due to lack of diversification.

ASIC deputy chair Peter Kell says the financial advice on SMSFs needs to improve.

ASIC deputy chair Peter Kell says the financial advice on SMSFs needs to improve.Credit:Ryan Stuart

ASIC deputy chair Peter Kell said the standard of advice on SMSFs must improve.

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“It is clear lots of people are setting up self-managed super funds without knowing whether this is the best option,” Mr Kell said. “The financial advice sector has significant work to do to lift their performance on this issue.”

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There were more than 590,000 SMSFs with 1.1 million members in total as of June 30 last year. By dollar value it is worth 30 per cent of the $2.3 trillion held in the superannuation system, while the remaining 70 per cent is held in retail, industry or public sector funds regulated by the Australian Prudential Regulation Authority.

The SMSF sector has undergone massive growth; from 2010 to 2017 the number of funds grew at an average of 5.2 per cent a year and the average value of SMSF assets increased 10.1 per cent a year.

The growth coincided with the property boom and a concerted push by the financial services industry to tout SMSFs.

ASIC found some people had moved to SMSFs in order to get into the property market and were using it solely for this purpose without a wider investment strategy. From 2015 to 2017, nearly one in four new SMSF members set up their funds in order to invest in property.

Two in five SMSF members surveyed first started thinking about setting up their own fund because of a financial professional, most commonly an accountant. The report identified the growing use of “one-stop shops” where the adviser has a relationship with a developer or real estate agent whose products the person is encouraged to invest in.

The one-stop shops tend to promote a gearing strategy, where the fund borrows in order to buy property. A number of members that used a property one-stop shop reported setting up an SMSF after being cold called, raising the possibility of widespread property spruiking.

ASIC said it would work with the Tax Office to share information about one-stop shops and take enforcement action where it sees unscrupulous behaviour.

The Hayne Royal Commission into financial services has heard stories of financial advisers encouraging clients to set up SMSFs against their best interests. In one case, celebrity financial planner Sam Henderson advised his client, Fair Work Commissioner Donna McKenna, to close her  fund and set up an SMSF despite the fact it would immediately cost her $500,000 to do so.

High-profile financial planner Sam Henderson in the witness box at the royal commission.

High-profile financial planner Sam Henderson in the witness box at the royal commission.Credit:Screen grab

Meanwhile, last week the District Court of NSW jailed a Sydney woman, Sarah Jane Busteed, for two years, following an ASIC investigation into her handling of clients' money.

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Ms Busteed was formerly employed at the now-deregistered Murphy Dawson & Partners, providing property investment services to individuals and SMSFs. She admitted to dishonestly obtaining $57,000 from a law firm and $36,000 from a client's SMSF. She used the funds for a variety of purposes, including personal expenses.

ASIC also conducted market research, including interviews with 28 SMSF members and an online survey of 457 consumers who had set up an SMSF. Nearly two out of five respondents found running an SMSF more time-consuming than expected, nearly one in three found it more expensive than anticipated, another one in three did not know the law required an SMSF to have an investment strategy and more than one in four mistakenly thought they were entitled to the same compensation for fraud as APRA funds.

The recent Productivity Commission super report found SMSFs with balances under $1 million delivered on average returns below larger funds, and that the costs for low-balance SMSFs are higher than for APRA-regulated funds.

Caitlin Fitzsimmons edits the Money section for SMH and The Age and writes columns about life, money and work. She is based in our Sydney newsroom.