Changes in the wings for SMSFs

Representing over 1.1 million Australians self-managing more than $720 billion in super assets, the SMSF Association is a powerful voice in the superannuation sector.

While the banking Royal Commission report is currently grabbing most of the headlines, CEO John Maroney spoke with me to discuss the findings in the recent Productivity Commission report into the superannuation sector, which has far more relevance for SMSFs.

As well as talking about some of the current shortfalls in financial advice to SMSF trustees, our conversation covers education, minimum SMSF asset levels, and the impact of changes to franking credits.

Listen to the podcast or read the full interview transcript below.

Hello, I’m Tony Kaye, I’m the Editor of InvestSMART and I’m joined today by John Maroney, who’s the CEO of the SMSF Association.  Hi, John, how are you?

Good morning, Tony, I’m very well and hope you are too.

Yes, all good.  John, I thought it would be good to touch base with you, the Royal Commission report, as you know, has just come out, that being the Royal Commission into misconduct in the banking, superannuation and financial services industry – a bit of a mouthful – has just put out their report.  From what I could see, there wasn’t anything specifically that related to SMSFs, aside from the recommendations around financial advice and commissions, which are indirect recommendations not just for SMSFs but for anyone receiving financial advice.

But I did want to talk to you about the Productivity Commission report that came out fairly recently, a separate report, and that was an inquiry into the superannuation sector.  From what I could see in that, certainly there were quite a few recommendations aimed at providing better protection to self-managed super funds.  Is that how you see it, John?

That’s right, Tony, that’s how we’re seeing it.  We’re looking at both reports but as you say, there’s very little directly in the Royal Commission report about self-managed super funds.  There will be some indirect impact in terms of changes/improvements to the way that the financial advice sector is regulated and we’re supportive of anything that’s lifting standards, better consumer protection and we have been working on those general approaches, all of the existence over the past 15 years.  But, yes, the main focus for the self-managed super fund sector is in the Productivity Commission and how the government will respond to those recommendations.   

That report shone a spotlight on trustees receiving poor financial advice and it also made mention of the higher fees being paid by some SMSFs with low balances – it went into this in quite a bit of detail and there were some recommendations around that. 

That’s right.

What’s the SMSF Association taken out of this Productivity Commission report?

We were overall pleased with their final report because it had gone in a different direction regarding self-managed super funds, compared to their interim report in the middle of last year when they were canvassing options which would have been more prescriptive.  They’ve come down on the side of improving training, education, rather than having a minimum balance to start an SMSF and other more prescriptive approaches.  We’re very supportive of improving standards and so we like the recommendation that there should be compulsory SMSF training for all the advisers in the area and that’s something that we’ve been encouraging the government and inquiries to think about for some time. 

They thought about mandatory education for trustees before they became involved in the SMSF sector, but they decided that wasn’t appropriate at this stage.  They want the training to focus on the advisers first and if more work needs to be done in that area some time down the track, they could look again at that issue of training and education for trustees.  We think both are important and we’ve invested quite a bit of time, effort and energy in providing educational material both for advisers and for trustees and we will continue to do so but we think it’s appropriate to focus on training of advisers in this area as the top priority.

Yeah, mandatory training for individuals, they say, could be a last-resort option, but that’s quite a hard one to implement, isn’t it?

That’s right.  There’s over a million members of self-managed super funds at the moment that have all different levels of engagement, knowledge, understanding, relevant skills, experience, etcetera…  To come up with a framework that’s going to deal with educational and training needs for a million people is quite a tall order, whereas there are probably somewhere between 5-10,000 advisers that are the main advisers in the area of providing support for self-managed super funds and it’s a lot of the million people rely either regularly or on occasion with getting support from those advisers who are licensed in the area, but at the moment they don’t have to have a specific SMSF requirement.  We provide accreditation for those that have done our specialist education and passed the exam. 

We would like to see that approach extended more broadly because we think that is appropriate given what the productivity commission and ASIC has found looking at the area, that it is necessary to step up the obligations on advisers, but we think it would be going a little bit too far to make it mandatory for the million individuals, but we encourage them all to have enough knowledge so that they can look after their own interests either directly or to ensure that their adviser is looking at the right questions for them and they’ve got a better understanding of the regulatory environment, the investment issues, etcetera.

The report made mention of the higher fees being paid by SMSFs with low balances.  One of their recommendations was that they want advisers to be forced to justify to ASIC if they recommend individuals set up an SMSF with less than $500,000.  They’ve obviously picked a line in the sand and said, “$500,000 is the absolute minimum.”  Does the Association view, think the same way on that score?

We are reading the report differently, that they could have set a specific minimum balance of $500,000 or a lower or higher figure.  They didn’t actually give a hard number, they said, “Below this level you should be able to justify that the advice is appropriate.”   We believe that all advisers should always be able to justify that their advice is appropriate and we don’t want to see people coming into the SMSF sector where it’s not appropriate for them.  They’ve come up with a $500,000 number, which is much lower than the $1 million number they put in the initial report, which we think was through faulty analysis and we said that at the time and they listened to our response and they listened to views from others. 

In particular, Class put in a very good submission just showing that there were flaws in their methodology of comparing SMSF sector versus the APRA regulated sector because both regulators collect information differently and they corrected for some of those differences.  That got their number down from a million to half a million.  They didn’t go as far as we had hoped they would, so they’re still counting items in expenses for self-managed super fund that include taxes and insurance costs which are not administration fees and expenses, and so if you want to compare apples with apples between SMSF sector and APRA sector, you need to deduct those items as well because they’re not part of the expense of running a fund, they are items that either have to be paid on a tax basis or where people choose to have insurance.  

There still is the issue about the cost for particularly the funds under $200,000 and ASIC has used the $200,000 benchmark for some years now and we think that’s probably still the more meaningful one of funds being setup under $200,000.  But as I said, all funds should be setup appropriately.  We believe self-managed super funds are not suitable for everybody.  They’re certainly likely to be suitable for a significant minority of people, a la the million people in them at the moment.  But people do need to take care that it makes sense for them and so the idea of having advisers needing to justify their advice under half a million, we’re quite comfortable with, we think will be too blunt a tool as the Productivity Commission says to put a hard number because you can certainly come up with a strategy that says start with $100,000. 

Use some borrowing potentially if that suits your risk profile and your interest, roll in some extra money over time so you can steadily build that $100,000 to $200,000 to $500,000 over a planning horizon and we think it’s those long-term aspects that advisers and trustees should be thinking about considering before they move into the sector and as they manage their investment strategy and investment decisions.  It’s a complex process and it really does need to be tailored for the individual circumstances of trustees and their family situation and all those factors need to be taken into account in coming up with the initial plan and then managing that plan over time. 

Yes, I suppose the Productivity Commission, reading between the lines, is saying that some people are in SMSFs that probably shouldn’t have been.  They may have got in there for different reasons and we’ve had plenty of examples of, in the past, accountants and advisers, getting people into their SMSFs for different reasons, they probably shouldn’t have been in there and they’ve got fairly low balances.

Yes, and I think that’s a problem for the individuals and for the sector.  We are supportive of any process that helps people that may have been appropriate at some time in the past, due to ageing, due to running down their account balances, due to other reasons – it’s no longer appropriate to assist them in shifting back into the APRA regulated sector and so as part of our trustee education modules, we actually have a module that gives people a checklist of questions as to whether it’s appropriate to remain in there or to move back in the APRA sector.  Again, we are not in the process, we’re not licensed to give financial advice. 

To get formal advice, people need to sit down with a licensed adviser for that process, but our education modules provide the description of the issues that the questions that people should be asking themselves and asking their adviser that if they think their SMSF is no longer viable and they no longer are keen to put in the time and effort involved from a regulatory and compliance point of view as well as the investment decision making, and that’s an important part of the process that SMSF funds are not suitable for everybody and they’re certainly not suitable for everyone all the time and particularly as people get very late in life in their 80s and beyond, they may find that some of the regulatory and other obligations become too much of a burden and while advisers can sort of help manage that burden, at some stage they may find it appropriate to move out of the SMSF sector, into either an APRA sector fund or other options.  

One of the things in the report was to require advisers to provide individuals with ASIC’s red flags document.  I was curious as to what was in that document, I couldn’t see it myself.

Yes, it’s contained in the ASIC 575 report that was published in the middle of last year.  It covers basic issues in terms of the size of funds, is obviously one key factor.  People’s knowledge and experience in terms of their understanding of their regulatory requirements and their willingness to spend the time and effort to do that.  It covers off in terms of areas on investment sort of issues, as people’s ability to actually take on investment obligations.  It’s basically a list of things that came out of their process of looking at where things had caused problems in their surveillance exercises.  We’re supportive of, again, any tool that is going to help people do that.  I think some advisers and trustees would find the ASIC material in its current form as a little bit inaccessible and we’re certainly looking at ways of endeavouring to make that sort of list of concerns more readily accessible.  That’s an interesting recommendation and one that we’re relatively supportive of. 

I just wanted to move onto FASEA, which is the new regime around qualifications and accreditation for advisers.  The report did also mention that as a result of various ASIC surveillance, etcetera, that it found that the level of advice provided to SMSFs was often questionable and in many cases, non-compliant.  This move to FASEA, are you seeing that that will really clean up all of this issue around the level of advice being provided? 

It will help in terms of FASEA’s mission in life is to lift the overall standards of education, training and ethics across all the financial advice sectors, so there’s 25,000 or so financial advisers that are operating at the moment and they’ve now got a process of trying to lift all the basic education up to degree level or beyond, making sure people do more continuing professional development and there’s a code of ethics that’s just about to be finalised that will be monitored, there are plans to have several monitoring bodies for that.  The Royal Commission has recommended there be a single disciplinary body, so we’ll have to see how that process goes forward. 

Where FASEA hasn’t really put its attention yet is it’s having specialist requirements in areas like self-managed super funds.  At the moment, they’re seeing that as a voluntary exercise that people do in their continuing professional development over and above the mandatory requirements and we can understand why they’ve done that.  In terms of the short time frame they had to deal with quite a range of issues at the generic level but we feel this is a priority area and that certainly is included in the Productivity Commission’s report that FASEA should move quickly to looking at having specific standards in specialist areas like self-managed super funds.  We’re supportive of the whole FASEA process, it will be somewhat disruptive to the financial advisory sector. 

Certainly, it will accelerate the retirement plans for some of the older advisers where on a cost benefit basis they make a decision that it’s not worth the time and effort and the cost of doing further education to continue in practice if they were not planning to stay around for a while.  Some people don’t like the thought of having to do a mandatory exam, but we support all of those measures as improving consumer protections, but understand it will be disruptive until the industry adjust to that and you get the flow of new entrants and new graduates.  But it takes a while to get someone out of a new financial planning course university level to become an experienced adviser that can replace some of those with 20-30-40 years’ experience that are potentially going to move out of the sector. 

We think that will have less impact in the SMSF area because the people working in that area generally are more experienced, we believe they have higher than average tertiary education levels already, so they probably need to do fewer subjects.  For most of the advisers they’ll have to do somewhere between three and eight subjects equivalent to a graduate diploma, provided they’ve got enough basic education.  That’s a good thing in itself but it will be a significant period of transition over the next five years as the advisers sort of work through that and we’ll certainly work with our members and with other associations to try to smooth the pathway to make it as efficient and manageable as possible so that people can focus on where the gaps are.

It’s a big change for all those in the financial advice world and we’ll do our part of trying to make that as smooth as possible in terms of, we’re going through revising our educational material.  We’ve got good programs that run through University of Adelaide and Kaplan at the moment and we’ll look at keeping those up to date and extending out the educational offerings more broadly to advisers and as I say, we’re already providing educational material to trustees.  We’ll be upgrading the website offering on that in the near future and we’re committed to the overall education standards across the whole sector and the standards of training, education and ethics for all the advisers that work anywhere in the financial sector but particularly in the self-managed super sector.

In summary, John, it’s going to be quite a busy year really, isn’t it?  That’s probably an underestimate, but between the Royal Commission report and Productivity Commission report it’s going to be very busy.

That’s right, and we haven’t mentioned a federal election and issues like refunds of franking credits which are causing a lot of angst for a lot of the trustees in the self-managed super sector and their advisers.  We’ll keep working on those issues as well as the regulatory, the education, the training and the ethics.  Yes, we are expecting it to be one of our busiest years on record.

Yeah, we haven’t talked about franking credits and I think we’ll have to come back to that one at another stage because it’s a huge topic and a very interesting topic for SMSF trustees in itself, causing lots of consternation at this stage.

Yes, if I could just say 30 seconds on that, Tony – it’s certainly a key issue, there are public hearings underway from the Standing Committee of Economics that’s doing a parliamentary inquiry into what the impacts would be and they’ve held hearings in Queensland last week and New South Wales this week and they will be holding hearings in all the other mainland capitals I understand.  If people are interested in that, please look at the dates on the committee’s public hearing page and if you have an opportunity, go along and express your view in person or send them a submission.

Thanks very much for that, John.  I’ve been speaking to John Maroney, the CEO of the SMSF Association.  Thanks for joining me, John.  

My pleasure, Tony.  Any time.