(03) 9020 2905PORTFOLIO POINT: Is it possible that Jeremy Cooper actually really loves SMSFs? The jury’s out, but he has promised not to be the “cane toad” of SMSFs.
Turns out the DIY super fund industry might not be broken after all and therefore doesn’t need fixing, according to none other than the man in charge of the review of Australia’s superannuation industry.
In fact, it’s possible that SMSFs are actually filled with well-educated, over-achieving, investors, who are not as prone to getting swindled in sucker schemes as the mass media would have their audiences believe.
While this will be little surprise to Eureka Report readers, it’s the first major public utterance that Jeremy Cooper has made since just before Christmas, when he released the terms of reference for the third phase of his review – the one that will cover the SMSF industry. My column on that report can be found here (Dec 16, 2009).
And given the weight that is being afforded to Cooper’s review of the superannuation system, his public utterances are important.
In an under-the-radar speech to the Self Managed Superannuation Fund Professionals Association of Australia (SPAA) in Melbourne last week, Cooper said fear-mongering about the sector had been overdone.
“Stories about investor losses, dangerous investment products, non-compliance, bad advice and general mayhem were often bandied around as ‘truths’ about SMSFs – yet there was very little hard evidence to go on,” Cooper said.
It was this that led Cooper’s panel to develop the SMSF statistical summary, probably the most comprehensive collection of data on SMSFs put together in the one document, which was released late last year.
“On the whole, the statistics show that the SMSF sector is in pretty good shape.”
That’s a far more positive attitude to the sector than we had previously been led to believe.
Cooper says that the sector has become far cheaper for trustees to run. And, while not directly comparable to other sectors of the superannuation industry, appear to be doing as well, if not better, than the rest of the industry when it comes to returns.
“So, how has this data informed the panel’s thinking about SMSFs? One approach might be to say: ‘The SMSF sector isn’t broken so it doesn’t need fixing.’
“Another view is that the sector still has a way to go in improving both its image and its pedigree as an optimal retirement savings vehicle.
“The ultimate vision for SMSFs should be as a leading superannuation vehicle: compliant and well-managed; able to innovate quickly and efficiently; largely free of the asset-based or percentage fee model for services; and well-placed to achieve net investment returns that are at least as good as other sectors.”
Cooper then went into the reasons that he believes are the potential reasons for SMSF outperformance. Again, not so much surprise for Eureka Report readers, but a reinforcement of the benefits of why you probably started a SMSF in the first place.
- SMSFs can pursue asset allocations that other super funds really could not do.
- They can have longer term investment horizons and are not driven by short-term table comparison to peers.
- They can act more tax-efficiently when investing or switching to pensions.
- There is a better alignment of interests in SMSF – the trustee is the member and their interests are perfectly aligned.
Given he started calling for submissions into SMSFs last December, Cooper has had some time to have a look at them. (The submission deadline actually closed last Friday. However, several interested parties have been given extensions.)
So, what’s he looking to achieve for SMSFs? He believes complexity could be reduced, as could start up costs, and there could be access to better information for trustees. Greater use of technology could help reduce ongoing costs.
Cooper has suggested that one of his largest concerns is around asset allocation. He’s worried that 20% of SMSFs are invested in just one asset class, while a total of 59% hold only Australian shares and cash. His concern is that they might not understand asset allocation as well as they should. But he also admits that he might be wrong on this.
Importantly, Cooper gave a strong indication that he understood the concern of just making change for the sake of change. He likened “the curse” of “the unintended consequences of intervention” to the introduction of cane toads.
“Cane toads were introduced to Australia from Hawaii in 1935 in an attempt to stop cane beetles from destroying sugar cane crops in North Queensland. They were unsuccessful in controlling the cane beetles and the disastrous consequences of their well-intentioned introduction are well known. The Review is mindful of this story in its work and will do its very best not to release a policy cane toad into the SMSF sector.”
Very, very promising.
*****
A major ongoing concern, due to some utterances from Government, has concerned potentially raised education requirements for trustees, prior to starting a super fund.
(I believe some educational requirements aren’t such a bad idea. It certainly couldn’t hurt. At the extremes, trustees who are already competent investors and understand the responsibilities of being a trustee would probably breeze through exams. Trustees who have never had any interest in investing and were simply opening an SMSF on the recommendation of an accountant or financial adviser, would not. Believe me, plenty of them exist.)
Cooper noted that, in general, SMSF trustees are older and have higher incomes and balances.
“Does older and richer mean more knowledgeable? Do we expect SMSF trustees to be experts on all aspects of super? Realistically, that’s simply not feasible,’’ Cooper says. He then goes on to claim that, possibly, the SMSF industry could probably be helped by increasing the competency of the professionals who help them – accountants and advisers.
The issue of education of SMSF trustees was also taken up by advice group, Dixon Advisory. Run by Darryl Dixon and one of the older advisories catering to SMSF trustees various needs, their argument goes that others in comparable situations – directors of businesses, other trustees and business owners – do not have to sit exams to perform their roles.
Dixon’s submission to phase three of Cooper’s review is clearly not without self interest. It is a service provider to SMSFs. But it does make a strong argument of the self interest of those pushing higher education. Dixon claims the main proponent is The Association of Super Funds of Australia (ASFA), whose directors are not required to complete training or hold licences.
“SMSF trustees are largely business owners, managers and senior executives in the public and private sectors. In our experience, SMSF trustees are frequently tertiary educated, financially literate and very capable of makikng prudent commercial and financial decisions,” Dixon argues.
“Due to the hands-on nature of SMSFs, it is unlikely that Australians without these characteristics even consider setting up an SMSF.” They are largely receiving advice from accounts, advisers or other specialists, Dixon claims.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.