SMSFs not suitable for everyone

The Australian Securities and Investments Commission (ASIC) has identified eight red flags which would make it ‘extremely unlikely’ for an investor to gain any advantage from using self-managed super funds (SMSFs) and warned that Australian investors who consider this option should be aware of the potential downside to such a strategy.

The regulator said that SMSFs might be an attractive option for only those investors who wished to have more control over their superannuation investment strategy and who had real skill, care and diligence to manage it.

According to ASIC, SMSFs were not an appropriate investment option for people who wanted a simple superannuation solution and who had a low level of financial literacy.

The remaining potential red flags, identified by ASIC, included:

• the client has a low superannuation balance, and would have a limited ability to make future contributions;
• the client wants a simple superannuation solution;
• the client wants to delegate all of the running of the SMSF to a paid advice-provider;
• the client wants to delegate all of the investment decision making to someone else;
• the client does not have a lot of time to devote to managing their financial affairs;
• the client has little experience making investment decisions;
• the client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee); and
• the client has a low level of financial literacy.

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ASIC Commissioner Danielle Press said, “ASIC believes that consumers are all too well aware of the potential benefits that might stem from using a SMSF, but are not equally alive to the considerable risks and responsibilities that come with the deal.

“SMSFs are not for everyone simply because not everyone can meet the significant time, costs, risks and obligations associated with establishing and running one.”

According to the Australian Tax Office figures, as at 30 June 2019, there were 599,678 SMSFs in Australia holding nearly $748 billion in assets, making total assets held in SMSFs larger than those in either industry ($719 billion) or retail ($626 billion) funds.