As Australia’s pool of self-managed superannuation funds (SMSFs) swells beyond A$500 billion ($474 billion), some feel the sector is at risk of becoming over-regulated.
Too much regulation can hamper the ability of trustees to diversify their investments and improve returns, says Aaron Dunn, managing director of The SMSF Academy, a provider of training courses to the financial services industry.
“It’s a fine balance between giving funds enough room to invest in riskier assets and achieve higher returns, while also ensuring they are protected from poor advice and investment decisions,” he notes.
SMSFs are individual legal entities with their own trust deeds and rules, where the trustees not only manage the money but are also the beneficiaries. Growth in the sector has shot up in recent years, and there are now more than half a million individual SMSFs in Australia, with an average balance of A$1 million. However, this figure is skewed by a few mega-funds; most are in the A$200,000 to A$500,000 range.
Unlike other industry and public-/private-sector funds, which are regulated by the Australian Prudential Regulation Authority, SMSF’s are governed by the federal tax office and the Australian Securities and Investments Commission (Asic).
“There is a real push by the regulator to make sure people are aware of the risks of certain investments, such as direct real estate, an asset class that has caught the attention of SMSF trustees since the rules were changed in July 2010 to allow funds to borrow to acquire assets,” says Dunn.
So far the focus has been on buying commercial property, with the trend being for SMSF trustees who run their own companies to use their super funds to buy office space and rent it back to the business. But now concerns are mounting that funds will use bank borrowings to buy residential property.
“This is somewhat of an unregulated area,” says Dunn. "A property developer or real estate agent could recommend an investment to a self-managed fund without providing adequate information about the risks.
“Asic released a report in April that found 28% of those funds reviewed with less than $150,000 which had borrowed to buy real estate said the advice they received was insufficient.”
Dunn and others say it is only a matter of time before new rules around direct property investments come in. The regulator has been moving quickly to remove systemic risks in an industry that now accounts for one-third of the country’s retirement wealth. The new laws are focused on the administrators and advisers that service the industry, such as the rule requiring all SMSF auditors to be registered with Asic by July 1 this year.
“The next group being asked to meet new standards are accountants, who have until June 2016 to complete additional training and obtain a licence to deal with SMSFs,” says Dunn.
Dunn doesn’t believe the current regulatory push should extend to compulsory education and licensing of all trustees, but he does see the benefit of improving the level of financial literacy.
“The large majority of SMSFs are dealing with some form of financial advice relationship, so this is where the regulatory focus should be,” he says. “But there also needs to be an increase in the amount of education material and information available to trustees to they can make informed decisions.”
Dunn says the last wholesale review of the superannuation sector conducted by the government three years ago found SMSFs to be robust and functioning well, though he cautions against resting on laurels. “There has been a significant increase in the number of funds launched since then, so it will be an ongoing task to ensure the sector remains healthy.”
One component of this is giving funds the scope to invest in asset classes beyond Australian equities and cash deposits, which are the most popular investments. “Diversification is needed if these funds are to manage longevity risk and provide their members with an adequate retirement.”