Should you be running a self-managed super fund?
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Should you be running a self-managed super fund?

There are two basic requirements of a licensed adviser giving personal financial advice. The first is to have a reasonable basis for your recommendation and the second is to ensure your advice is suited to the client’s personal financial circumstances.

Self-managed super funds now account for 99 per cent of the number of super funds in Australia.

Self-managed super funds now account for 99 per cent of the number of super funds in Australia.Credit:Jessica Shapiro

After the Financial Services Reform Act became law this responsibility became a colossal pain in the butt for advisers and clients. Everyone’s personal financial circumstances have to be assessed and documented and every bit of personal advice noted and often repeated in a formal "Statement of Advice" (average length: eight pages) that is then sent to the client. More often than not the client then rings up, a little confused, asking why you’ve sent him something that tells him what they've already been told. And any recommendation change needs a "record of advice" (ROA) telling the client what the client has been advised to do, which again, is something they have already been told.

The structure was designed to protect the client in the wake of the tech wreck. Of course, all that stupidity and loss had to be someone’s fault, and this was the government’s response: a massive layer of bureaucracy.

Rather than protect the client, it just protects us, the advisers, because it creates a legal record of advice that a client can’t really dispute. Perfect for our legal defence should the client ever think someone did something wrong and want to blame us.

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For the bulk of active clients it creates paperwork and dumbs down the advice advisers give. What it does do is it eliminates all the juicy bits of advice, which, actually, in my experience of commission-hungry advisers, is probably a good thing.

Retirement is meant to be fun ... running an SMSF isn't always.

Retirement is meant to be fun ... running an SMSF isn't always.

'Do it yourself' is not always better

That covers advisers and their clients but what the legislation is missing of course is protection for the hordes of people whose funds are being traded without advice. What about them? What about all the people relying on the do-it-yourself investment skills of their spouses, parents, business partners or friends. Where’s their bureaucracy? Where’s their protection? What are they going to do when they or their loved ones or associates monumentally cock it up?

And what about the protection for you, the self-managed super fund (SMSF) manager? The person who has found themselves responsible for the futures of others in between doing a proper job and having a life? What happens if the well-intentioned amateur SMSF trustee splits up, or falls out with their spouse, de facto, relative, business partner, friend or child –the people whose money they are managing – and those people come after some restitution for the hapless destruction of their combined funds by someone they now don't like.

Hadn’t thought of that? It is commonplace.

Looking after someone else’s money is a responsibility that can turn unpleasant when relationships do too. Looking after other people’s money can be very divisive and put a completely unexpected and avoidable pressure on a relationship. Failure to make money when managing money can cause the fractures to widen at the worst possible times.

Those of you nearing retirement are particularly vulnerable. This is the classic moment to visit some lazy financial professional for the first time and the opportune moment for them to make the suggestion you run your own super.

As my business partners Pauline Hammer and Anna Garuccio can tell you, there are legitimate reasons for setting up a self-managed super fund. It is a structure that allows choice and access to some tax advantages, but often the suggestion is driven by some disengaged professional whose job it is to create as many entities as possible and charge you for administering them. In so doing they can create your nightmare.

Not everybody needs an SMSF. They are for wealthier clients of financial advisers who can professionally manage them and use them to maximise tax advantages, or for highly engaged and interested people who relish the job. And if you don't have a financial adviser do it for you, it is a job.

The suggestion you set up and SMSF will probably come with the line "everybody has one", or some financial flattery about your sophistication, or how easy it is to manage investments, or some investment simplification like a fictitious average annual return from the sharemarket that will double your money every six years and triple it every decade.

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Retirement is supposed to be fun but how much fun is it going to be when you are dumped with a sharemarket responsibility you didn’t really want, have no aptitude for and does little but reveal you to your previously respectful and loving spouse as incompetent? It’s no fun at all.

I am talking my own book. We set up SMSFs for most clients, but they do tend to be wealthier and we do all the management and investment for them.

This article comes is a warning to those who idly do the paperwork to set up an SMSF without knowing the consequences in terms of investment responsibility and annual administration.

Be very careful before taking on the burden of investment for yourself, let alone for others. It is difficult enough not losing money in the sharemarket, let alone making it from your amateur kitchen office. The sharemarket is not a gravy train and in order to do better than a boring managed fund that charges you 2 per cent, you had better be good. In order to do better than highly engaged fund managers whose sole purpose is to make money you have to be very, very good.

If you really think you can do better, go for it. It’s a fantastic game. But if you’re doing it because some dipstick friend or adviser thought it would be a good idea for you to go from loved retiree to incompetent investment manager spouse, think again. It might be a good idea for other people. But for you?

And be careful who you advise to set up an SMSF – not everybody wants to do what you do.

Marcus Padley is the author of the daily stock market newsletter Marcus Today. For a free trial of the Marcus Today newsletter, please go to marcustoday.com.au

Marcus Padley is the author of the daily stock market newsletter Marcus Today.

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