Why the buck stops here with self-managed super

Are there circumstances where the members of a self-managed superannuation fund should be compensated for investments that fail? If so, who should pay? And if not, why not?

These issues have been hotly debated since the collapse of fund manager Trio Capital in late 2009.

This triggered losses totalling $176 million for just over 6000 investors, including 5400 members of APRA-regulated superannuation funds and 285 self-managed super funds. Significantly, the Trio collapse wasn't the result of poor investment decisions but fraud. In effect, the regulatory system let superannuation investors down.

But whereas the members of APRA-regulated funds have been granted compensation worth almost $55 million, under section 23 of the Superannuation Industry (Supervision) Act self-managed super funds are not eligible.

So what, if anything, should be done to provide protection for SMSFs in the future? There appear to be three main options: do nothing, extend government-funded compensation to all super funds, including SMSFs, or provide similar compensation funded by a levy on SMSFs.

The SMSF Professionals' Association of Australia (SPAA) opposes a compensation scheme funded by a levy. "The Trio case was the exception, not the rule, and on this basis SPAA sees no justification in imposing a levy," argues the chief executive, Andrea Slattery. "That would be both overkill and unfair to most SMSF trustees, who make sound and informed decisions."

Slattery points out that SMSFs have a range of legal avenues when fraud and theft occur, adding that any last-resort compensation scheme should apply across the whole financial services sector rather than focus solely on SMSFs.

In fact, focusing on finding ways to compensate SMSFs for losses due to theft or fraud could send the trustees the wrong signal about the need to take a prudent approach to their investment decisions.

In commenting on Trio earlier this year Philip Galagher, head of wealth management at Equity Trustees, argued that investors, including SMSFs, can avoid significant losses due to financial failures by making sure they don't put too much money into any one asset or with a single manager.

Diversification, he says, is the key to risk management, adding that a SMSF should never have so much invested with one asset manager or in one collective investment that a collapse by it would cause major financial problems.

While a SMSF that keeps its exposure to a single product and a single asset manager to less than, say, 10% of its total assets will still suffer financial pain if the product fails or the manager collapses, the fallout will stop well short of disaster.

Anyone with an SMSF has chosen to take charge of their super. Protecting their investment is their responsibility.

Get stories like this in our newsletters.