Are you one of the 1.1 million Australians with a self-managed super fund? The marketing hype is pretty hard to resist, with promises of greater control and better returns.
This would all be great if it were true. But analysis released by the Productivity Commission indicates that for most people it isn't.
The average self-managed fund needs a balance of at least $1 million to perform better than an institutional super fund. And only 16% of self-managed funds have that sort of scale.
Getting this wrong comes at a huge price – the difference in performance between the smallest and largest SMSFs is as much as 10 percentage points per annum.
Much of this comes down to running costs. If your fund is small, you've got to have insanely good performance to have a chance of beating the returns from a well-run institutional fund.
And that points to the other key problem: the importance of highquality professional advice, because the decisions about whether you should have an SMSF and, if so, how it should be invested, are complex.
ASIC recently looked at the quality of financial advice given to people with self-managed super, analysing 250 client files.
In 91% of cases, the financial adviser had failed to comply with some aspect of their obligation to act in their client's best interests. In 19% of cases, the self-managed fund was invested in one type of asset – often property – which is unlikely to be a good investment strategy.
ASIC also examined the views and experiences of people with SMSFs.
Many lacked a basic understanding of how their fund operated or what they should be doing to manage it. Some 33% did not know it must have an investment strategy.
Many saw their self-managed fund as an opportunity to invest in property, motivated by fears of being locked out of the market or the desire to help their children. That's fine while the property market is rising but as we're now seeing, it doesn't always.
There probably is a role for self-managed super for people who have the resources to make it work. But when we know that this option won't work for the majority of people, we've got to ask whether we're doing enough to protect consumers.
Super is a mandatory system, and super contributions enjoy significant tax concessions. That's because super plays an important role in our economy – to provide a source of retirement income to replace or supplement the age pension.
It can't do that if super balances are being eroded due to poor investments, based on shoddy advice.
Alan Kirkland, CHOICE CEO