Tracey Scotchbrook, SMSF Specialist Advisor and Director of Superology, discusses the SMSF findings in the Productivity Commission Report on Australia’s superannuation system, released last Thursday. The common link between this report and previous reviews, is the assessed need for an uplift in the quality of advice for SMSF clients, among other suggested reforms, she writes.
The Productivity Commission report into superannuation was publically released on 10 January 2019. The role of the report was to assess the efficiency and competitiveness of the superannuation system. This report is another in what has been a series of recent reports and reviews impacting the SMSF sector. These include the ASIC reports 575 and 576 into SMSF advice (June 2018), FASEA education and qualification reforms currently in progress, and the Royal Commission, the final report of which is due soon. A common theme is the quality of SMSF advice.
During the conduct of the review there was much discussion and debate on the draft findings on the SMSF sector. These initial findings proposed a minimum balance threshold of $500,000 due to an apparent low level of returns and relatively high costs that applied to balances below this amount. Concerns were raised on whether the data was skewed by the inclusion of new fund establishments. The Commission found this did not have a material impact on their findings when this data was excised.
The final report noted that SMSFs broadly provided similar returns to their APRA fund cousins (Finding 2.6). It was acknowledged that some SMSFs that commenced with small balances quickly grew to sustainable levels. However the data before the Commission suggested there exists a pool of SMSFs that commenced with low balances and have remained so over successive years. Concerns were flagged (finding 3.8) that these funds are exposed to materially higher average costs. Some 380,000 SMSF members, equating to around 200,000 SMSFs, representing 42% of all SMSFs are reportedly affected.
The final report did note that applying “a minimum balance is too blunt an instrument.” Rather, advisors should be prepared to justify why an SMSF has been recommended where a balance remains “under $500,000 beyond the initial establishment years.”
Research conducted from a variety of sources over the years has continually demonstrated the need and desire from SMSF trustees for advice. The Commission noted the trend for higher engagement is present amongst SMSF trustees (Finding 5.1).
Concerns were flagged on the quality of advice provided to some superannuation members, including SMSFs (Finding 5.4). The report referenced the current FASEA reforms noting that steps are currently being taken to lift the qualification requirements of financial advisors. Recommendation 12 states that this program should be extended and require those advising on SMSFs to undertake specialist training. The advice process should also require that advisors provide clients with a document that clearly explains the key issues or ‘red flags’ they need to consider in deciding whether an SMSF is right for them.
Recommendation 24 continues with this theme, prescribing that ASIC should increase its focus on the conduct of financial advisers and the appropriateness of the superannuation product advice given, including SMSFs.
As expected limited recourse borrowing arrangements (“LRBA”) were included in the Commission’s report. A review was expected of LRBAs following the final report from the Financial System Inquiry chaired by David Murray and in response the Federal Governments 2015 undertaking to review of LRBAs in three years time.
The Commission found that a relatively small number of SMSFs (around 7% of funds or 5% of assets) have an LRBA. Given these low numbers LRBAs were found to “not currently pose a material systemic risk to the sector.” The exit of the major banks from this market segment was noted as easing concerns on systemic risks and LRBA. The report did however state that “ongoing and active monitoring to ensure that they do not have the potential to generate systemic risk in the future.” (Finding 10.4)
In line with the ASIC reports 575 and 576, concerns were flagged on the advice surrounding LRBAs and appropriateness of LRBAs for some members. Particularly those who “lack the requisite financial literacy to properly understand the risks associated with them or for whom such arrangements are unsuitable for other reasons.” Concerns on ‘one-stop shop’ property spruikers were also noted.
What is evident from the overall findings for SMSFs from this report, is the high level of congruence between the various reviews and reports we have seen to date as well as the FASEA reforms. The common connection here is the assessed need for an uplift in the quality of advice for SMSF clients, SMSF advice standards and the demand for specialist qualifications and education requirements for those advising on SMSFs. It will be interesting to see whether the Royal Commission findings with respect to SMSF advice continues to align with the findings reported to date or whether anything new will be recommended.
Tracey Scotchbrook is a SMSF Specialist Advisor and Director of Superology Pty Ltd with 15 years’ experience. Early in her accounting career Tracey had the opportunity to work with self-managed superannuation funds, setting her on the pathway to specialisation. She is actively involved in the SMSF Association (“SMSFA”) and is the former WA Chapter Chair and National Membership Committee Member. Her accreditations include: SMSF Specialist Advisor (SSA) with the SMSF Association, CA and CPA SMSF Specialist, and Charted Tax Advisor with the Tax Institute. Tracey is a regular presenter to industry professionals and trustees, commentator, educator, and writer. In 2009 Tracey was awarded the Praemium Scholarship by the SMSFA. Contact Tracey at tracey@superology.com.au