Is an SMSF right for your client?
SMSFs take time to do well – but of course so do many other things in the average client’s life. An expert suggests financial advisers draw on past experience to ensure clients are aware of potential complexities.
For many clients, the attraction of running a self-managed superannuation fund (SMSF) is the ability to take control of their finances, along with the cost efficiencies an SMSF can bring.
But running one well is a serious commitment. SMSFs are not for everyone and financial advisers should be aware of those situations where it is unlikely a client will gain any advantage by using one to safeguard their retirement savings.
For Graeme Colley, Executive Manager, SMSF Technical & Private Wealth at SuperConcepts, best practice in such a scenario would include determining whether the potential trustee understands the full scope of what is required to run an SMSF. An appreciation of the differences between SMSFs and traditional super funds can also be a deciding factor.
“The first thing I’d ask anyone who wishes to start an SMSF is: what are you going to do with it once it’s been set up? If the answer is, ‘I don’t know’ or ‘not sure’ or something similar you could send them away to find out what’s required. Or you could take some time to educate them on what an SMSF is and why it works for some and not for others,” he says.
Colley suggests financial advisers draw on past experience to ensure clients are aware of potential complexities with SMSFs such as trusteeships, benefit payments and consequences around death benefit nominations.
“The trustee issues centre on making sure trustees or directors are correctly appointed to the fund or removed where necessary,” he says.
“Benefit payments usually have to do with making sure the right amount is paid to the right person or if a pension is paid that at least the minimum has been paid during the year.”
“Compliance issues are more of an issue where the fund is involved in related-party transactions.”
Areas of caution
In October 2019 the corporate regulator ASIC identified eight "situations" that made it "extremely unlikely for an investor to gain any advantage from using SMSFs to create and safeguard their intended retirement lifestyle”.
A number of ASIC’s findings have to do with clients looking to outsource the running of the SMSF or the delegation of investment decision making to someone else. Colley believes that broader questions of clients having the time and expertise to run their financial affairs must also be considered.
“Running an SMSF cannot be done by another advice provider, as the client who is the trustee of the fund cannot delegate the responsibility as the trustee,” he says.
“In these situations, the client should be clearly aware of what they are required to do, and what can be delegated to other professionals,” he says. “Once you lose a degree of control you need to keep a keen eye on the situation to make sure your SMSF is managed correctly.”
The key point is that while SMSFs do take time to do well, so do many other things in your client’s life and they may enjoy the process. A valuable discussion to be had is how much time is reasonable for a client to devote to their finances now and as they approach retirement.
“Some higher-wealth clients would consider themselves inexperienced in making investment decisions,” Colley says.
“But they recognise they need help and employ asset consultants and advisers to keep their fund on track.
“The issue here is whether you understand that you are inexperienced and the type of help required to assist in running your fund. There are many who lack experience with investing personally who are in the same situation, so it’s not just limited to SMSFs.”
Common SMSF misconceptions
Aside from the suitability of SMSFs, regulators have also warned about property investment promoter promising consumers that they might be able to access their super earlier if they use an SMSF to invest in property.
“A portfolio with a lumpy asset such as real estate can bring with it issues, especially if it is mortgaged by the fund having a limited recourse borrowing arrangement,” Colley says. “A fund which has a significant proportion invested in residential and commercial real estate may find the property difficult to lease, it may fall into disrepair, or rents may not be enough to maintain the property’s day-to-day operating expenses.”
Just one of these events may cause cash-flow problems depending on whether the fund is in accumulation or retirement phase.
Colley added his own favourite misconceptions around superannuation, which include:
- It’s my money in the end
- If I pay market rent then I can live in the apartment owned by my fund
- I promise to pay it back once I get the money
- It’s only a short-term loan until I sell a block of land I own
- Better to pay off the mortgage now [with my super] than over 20 years
- Off the plan is just as safe as a completed home.