The banking royal commission continues to unearth disturbing examples of bad financial practice, but it’s hard to imagine anything much worse than what was revealed last Tuesday about “celebrity” financial adviser Sam Henderson.
I was watching it on live stream, and was transfixed by evidence from Donna McKenna, a senior public servant, who told how Henderson, of Henderson Maxwell, advised her to cash out of her public service superannuation fund two years early, and use the proceeds to start a self-managed super fund. She had made it quite clear she did not want to start a self-managed super fund, and Henderson was aware that leaving the fund early would cost her $500,000. She called the advice he gave her “risible”.
Unfortunately, the string of dodgy operators being unearthed in the finance industry is making many Australians more wary of financial advisers. The reality is most financial advisers are competent, and in most cases the advice they give saves far more than it costs.
So what are the warning signs of a dodgy adviser? Two of the biggest red flags are the suggestion that you move your superannuation to a fund under the control of the adviser; or that you start a self-managed super fund.
This is not to say these strategies are not appropriate in the right circumstances, but any adviser recommending them should give you extremely good reasons why it would be in your interests.
So let’s consider the question of whether you should start – or keep – a self-managed fund.
Running your own super fund is not as simple as it sounds. It involves three major jobs: administration (doing the paperwork), investment (deciding where to place the money) and insurance (arranging appropriate cover for your circumstances).
If you can handle these tasks with ease, you are well on your way, but there are five major factors that should influence your decision.
First, the fund must have assets of at least $200,000. If it does not, the set-up costs and annual expenses are almost certainly not worth the exercise.
Second, your work situation must make it practical for you to have a self-managed super fund. If you work for a major company there may be barriers to transferring your balance in the employer's fund to your own fund. If your main fund is a defined benefits fund, it would be impossible to transfer your balance – defined benefits funds don't work like that. Self-employed people, or those with large amounts rolled over, are best suited to start self-managed funds.
Third, you must have the time and skills to handle the administration, investment and insurance. This need not be a difficult job if you hire good people to do the work. Your accountant could do all of the bookwork and, if your self-managed fund invests mainly in managed funds such as share trusts, you and your adviser could decide which funds to use.
Fourth, you must be the type of person who understands the importance of carrying out legal responsibilities. There are many decent and competent people who run small businesses efficiently but work so hard at their business they ignore or forget about statutory requirements such as having meetings and keeping detailed records. If you are like this, and want to run your own superannuation fund, contact a company that specialises in administering self-managed funds to do it all for you. Your accountant or financial adviser will be able to recommend one.
Finally, you must have a plan for what happens if the person running the fund becomes incapacitated. If the fund members are a couple, typically one person does all the work because they enjoy doing it, and the other one would rather be doing something else. Of course, this can cause enormous problems if the person who handles the fund becomes ill or otherwise incapacitated, and cannot make decisions any more. You should consider how to handle this situation when you set up the fund.
Taking control of the investment decisions for your life savings is a massive responsibility and making mistakes with your own money while you are learning could cripple you financially. To run your own fund, you need to have a good track record with investing, and be able to take care of all the other aspects outlined in this article. A self-managed fund is most suitable for high net worth individuals who want to run their own race and have the skills to do it.
So think carefully about advice you are given. Starting your own fund, or moving your super to your financial adviser’s company, are choices that need to be supported by strong benefits. It’s your money: don’t trust blindly.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making financial decisions. Email: email@example.com