Before the Productivity Commission publicly released their final report into superannuation review this month, there was inevitably much discussion about whether or not a minimum balance for SMSFs would be recommended.
The draft report was interpreted by some as positioning the Productivity Commission to set the benchmark at $1m as it made the claim that while larger SMSF funds perform broadly in line with APRA funds, “smaller ones (with less than $1 million in assets) perform significantly worse than institutional funds, mainly due to the materially higher average costs they incur due to being small. It is not clear how many of these will perform better in future as they grow in size.” (page 14, Draft Report).
The data and methodology used to make this claim was widely discredited and the final report softened the commentary to refer to SMSFs of under $500,000. I suspect even that figure could do with some scrutiny.
Importantly, however, the report did not recommend a minimum fund size.
Instead it made recommendations about SMSF advice. Specifically (Recommendation 12: Stronger Safeguards on SMSF Advice), the report recommended that anyone advising a client to set up an SMSF should require specialist training and they should provide a document written by ASIC about “red flags” (things to consider or issues to be aware of that might indicate an SMSF is not appropriate).
The decision not to impose a minimum fund size makes perfect sense. In every aspect of financial advice our legislation, regulators and even the press emphasise the importance of “knowing your client” and providing advice that is specifically suitable for them. There is widespread acceptance that even people who superficially look the same (eg same wealth or income) could be very different when it comes to their needs for the future, risk appetite and objectives. For that reason, advisers are regularly criticized if there is even a hint that they are treating all their clients as if they are exactly the same.
How does a legislated minimum SMSF balance fit in this environment? Is tailoring advice to suit the particular needs of a client important or not? If clients are different then a minimum balance makes no sense. An SMSF might be exactly the right choice for one person with $100,000 and totally wrong for someone else with $1 million.
What about the recommendations on specialist expertise for SMSF advice and appropriate warnings on the downsides? To be honest decent advisers are already doing something like this. Whenever a good adviser recommends a course of action they also highlight reasonable alternatives if there are any and flag the relevant positives, negatives and implications of both. This makes perfect sense – their role is to equip the client to make a sensible decision that leans on all the expertise and experience of the adviser.
So I wonder why SMSFs need to be singled out here? Should there also be a requirement, for example, to highlight the red flags that come with choosing a public offer fund? Perhaps advisers should be required to quote the average time taken to pay death benefits for the fund they recommend, or the number of times the fund has made unit pricing errors? Perhaps ASIC could create a red flag document that talks about the lack of control you’ll have in a large fund, the fact that product design changes to adopt new strategies are often slow (and frequently only happen after the SMSFs have led the way) and the extra fees they need to charge to build or maintain their operational risk reserves. Finally, perhaps advisers should be required to specifically quantify the fees relative to an SMSF and show that having a large balance in a fund that charges most of its fees on a percentage of assets basis can be terrifyingly expensive. That would help the member make an informed choice about whether they want to manage their own super via an SMSF or pay a large fund to do it for them.
Like every other commentator I will happily say that an SMSF is not for everyone. Nor is an investment property, a Ferrari or running a small business.
But SMSFS ARE the perfect answer for a great many people. I hope to see the day when we stop treating these people like they have been hoodwinked into something slightly stupid rather than making informed and carefully considered decisions about how they take personal responsibility for their retirement. Instead, let’s congratulate them for that and help them make the best possible fist of doing it.