When the people you pay to manage your SMSF can't be trusted
Do-it-yourself superannuation is a misnomer, because not everyone does it themselves. Instead, DIY or self-managed funds (SMSFs) rely on a range of service providers. They commonly use professionals, from accountants to administrators to financial planners, because they don't have the skills, experience or time to do it themselves.
Finding the right professionals who know what they are doing can be challenging. Sometimes the experts end up being anything but expert.
Take the case of Dixon Advisory, one of the biggest financial advisory groups in Australia.
Founded by Daryl Dixon and later run by his son, Alan Dixon, who was CEO, the Canberra-headquartered firm looked after 4700 SMSFs.
It was the fourth largest superannuation advisory firm in Australia. But it all went horribly wrong when Dixon Advisory branched out into running its own investments, recommending clients place their retirement savings into them.
One of the funds, a US property fund, the US Masters Residential Property Fund, plunged nearly 90% in value while the New Energy Solar Fund slid nearly 50%. Dixon's clients' SMSFs were also loaded up with shares in Evans Dixon, the parent of Dixon Advisory as well as Evans Dixon's own property funds.
In September 2020, the financial regulator, the Australian Securities and Investments Commission (ASIC), commenced proceedings in the Federal Court against Dixon Advisory and Superannuation Services, a subsidiary of ASX-listed Evans Dixon. It alleges that Dixon Advisory representatives failed to act in their clients' best interests and had a known conflict of interest.
But where does this leave the SMSFs? Will they get their money back?
One of the downsides of running an SMSF is that you are personally liable for all the fund's decisions even if you engage a professional or if another member of your fund does all the work. If you lose money through theft or fraud, you won't have access to compensation or to the Superannuation Complaints Tribunal, according to the federal government's MoneySmart.
This contrasts with funds that are regulated and approved by APRA. They pay a levy to the regulator. If one of their providers defrauds the fund, they can apply to the government for compensation. The responsibility for all investing, administration, legal, auditing and accounting requirements is held by the trustee of the APRA-approved fund and not the individual members.
If you are a trustee of an SMSF and have had fraudulent advice and lose your money, you have limited options to claim it back. In the case of Dixon, Shine Lawyers are looking at a class action lawsuit to get compensation.
But class actions often don't benefit SMSF investors greatly.
Take, for example, the 360 investors with financial planner Bradley Sherwin, who defrauded them of their life savings, totalling $60 million. An ASIC investigation subsequently revealed Sherwin set up a Ponzi scheme using investor funds for purposes of which the clients were unaware.
Sherwin was playing a frantic game of Russian roulette with clients' money, using it to fund whatever came up - pension payments, investment returns to clients, tax bills, client redemptions and risky property construction costs. Then there was his extravagant lifestyle.
While Sherwin was sentenced to jail for 10 years with a non-parole period of four years, investors received no financial compensation from the ASIC trial. They had to band together and take a class action against the Bank of Queensland and its agent, DDH Graham, which Sherwin used for his Ponzi scheme.
The class action delivered them only $12 million, a payout that was almost matched by the $11.75?million bill from their lawyers, funders and administrators.
The dudded investors, who had been in the courts for six years, felt screwed over once again, according to Beth Spence, who together with her husband Mick lost their retirement nest egg of $500,000. She said the first time they lost their money it was to Sherwin and the second time it was to the very people who told investors they were "on their side".
How much do you need?
There are other contentious issues around an SMSF too. One is the cost of running it. Is it economic to run if you don't have $500,000 or more? Currently more than a third of SMSFs have less than that.
The reason costs are being debated is that APRA-regulated funds are seen to be cheaper for most members. Many APRA-regulated funds, such as industry funds, compete with SMSFs by offering members an extensive direct investment option that includes the top Australian 300 shares, a range of Australian and overseas exchange traded funds and term deposits.
The cost of running an SMSF varies widely. It depends on how much work you do yourself, how much you outsource to providers and what you outsource, according to Rice Warner's research, commissioned by the ASIC in 2013.
A number of reports over the past decade have examined the cost question, with Rice Warner saying in 2013 that SMSFs with balances from $250,000 could be competitive provided the trustees undertook most service functions themselves. Similarly, SMSFs with balances above $500,000 were competitive at all service levels and were the cheapest alternative if trustees did most of the work themselves.
Then came the review of the super industry by the Productivity Commission in 2018. In late 2019, ASIC calculated that the average annual cost of running an SMSF was $13,900 and said SMSFs with less than $500,000 weren't viable. The SMSF industry claimed that this was misleading because the $13,900 included insurance and complex investments that smaller funds didn't hold.
But ASIC's current advice is to have at least $500,000. "On average, SMSFs with balances below $500,000 have lower returns after expenses and tax, and will often be uncompetitive compared to APRA-regulated funds," it says.
"In many cases, a recommendation for a retail client to set up an SMSF with a balance of $500,000 or below may not be in their best interests as they may not be in a better position when compared to using an APRA-regulated superannuation fund."
If you do have less than $500,000, ASIC warns that it's more likely to look closely at the advice to establish an SMSF and whether it complies with the legally binding best interest duty and other obligations.
The latest cost comparison came out in November 2020 and was commissioned by the SMSF Association and carried out by Rice Warner. This time it says fees and costs have changed across the superannuation market.
The cost of services provided to SMSFs has fallen while industry fund fees have risen and retail funds fees have fallen to align with those of industry funds. The result is that SMSFs are more competitive than they were in 2013, but they still face a wide range of potential costs so their suitability needs to be considered carefully.
SMSFs with asset values of $500,000 and above are generally the cheapest.
What the numbers tell us
It is easy to get confused by the various fee comparisons. Administration and investment are the two main costs examined in the Rice Warner report for the SMSF Association. For SMSFs the real cost of investment is obscured because people don't take into account the time they spend researching and monitoring their investments.
The report includes indicative costs for running an SMSF at different fund sizes, but you need to be alert about assumptions regarding investment costs. The other key variable is the number of members, as on average SMSFs have only two.
The most relevant comparison to SMSFs is the investment direct option available from a number of large APRA-approved funds, including AustralianSuper, Cbus and QSuper. With these options you do the share trading - just as in an SMSF - and the fund takes care of everything else. The average of these three funds' total administrative and access costs is shown in the table below. The figures for both SMSFs and large APRA-approved direct investments do not include brokerage.
If all you want to do is trade your own shares and ETFs, plus hold cash and term deposits, then you may be better off in a large fund with a direct investment option. For example, if a couple have combined assets of $1 million in an SMSF they would pay a combined $3476 for the management, admin and auditing, according to Rice Warner. Alternatively, it would cost only around $1350 each to do that through a direct investment option with a large fund. This includes administration charges.
Once the combined assets increase towards $2 million the costs draw approximately level. In the 2018-19 financial year, around half of SMSFs were below $1 million in size.
One reason some people prefer an SMSF is that they want to hold property directly, which they can't do through an industry or retail fund. In that situation an SMSF may make sense.