30 June 2018
Australia’s love affair with property might just mean a major reversal is going to hit the flourishing world of self-managed super funds as a new area of scandal looms in financial advice.
We know already that financial advice standards across the market are appalling and we also know that property prices are falling.
But it is only this week we found out that most new investors joining the SMSF sector are doing it to buy property.
Unfortunately, many of these investors are being lured into the area by unscrupulous advisers who have links with property companies.
An ASIC report says 90 per cent of financial advice given on opening SMSF funds is not compliant with the law. It also adds that one in five investors is at risk of what they politely describe as “financial detriment” through bad advice.
Let’s put all that another way: there is now evidence from the regulators that people are being lured into SMSFs by the worst sort of advisers in the market.
At its most appalling, the advisers are doing it to make themselves richer and the investors are left with their entire life savings in a single property investment that is probably third-grade.
It’s a recipe for disaster often among the very people who really would be better off having someone else manage their money.
But let’s make one thing clear — the problem here is not aspiring investors, it is the advisers.
It’s not that self-managed funds are a problem per se … or even that SMSFs can legally put all their eggs in one basket.
Rather, the problem building rapidly is due to two issues:
- Property returns have been so good for so long that investors believe it cannot be beaten as an asset choice. As ASIC explains, new investors see residential investments as “a safe bet”.
- SMSF member numbers have been growing apace for years, now that they have reached the one million mark it may be a natural plateau in a wider population of 25 million
SMSF funds really only started exploiting the rules, which allow them to borrow to buy property since 2009, when the banks began to create tailored products in the sector.
Though the rules are restrictive and the proportion of SMSF borrowing remains small, the attention paid to the area has been intense … and most of that attention has been negative.
In defence of property borrowing in SMSFs, perhaps the best argument is that SMSFs can already invest in everything from hedge funds to bitcoin, so why not the house next door?
But crucially these SMSF investors must be well advised … what is happening is the very opposite.
The SMSF association, which defends the right of investors to borrow for property, suggests advisers must be made to do a specialist SMSF course as part of their qualifications; this would be a useful start.
But the danger right now is that the enemies of SMSFs — and they include most of the big super funds, both retail and industry — will use this ASIC report to lobby for a total ban on geared super in SMSFs.
Big funds hate losing members to SMSFs: they argue that SMSFs need to be protected from themselves; this is the very same line of thinking that makes investors go solo and start SMSFs in the first place.
In his recent Financial System Inquiry, David Murray — who is now chairman of AMP — recommended that borrowing be banned from SMSFs.
The government accepted a range of Murray’s report recommendations but ignored his advice on borrowing in super.
Separately, in the recent Productivity Commission report on super, the issue of borrowing in SMSF funds was given an effective tick of approval with the commission finding no substantial concerns.
Any adviser who can add two and two together will know that an SMSF should be diversified. If they have property it should be a part of a portfolio along with shares, funds, alternatives and cash. If borrowings are made to buy the property the repayments have to be worked out carefully.
Perhaps not every SMSF aspirant knows this but the wider community of SMSF operators should not be penalised for it.
The SMSF sector is in a mature stage of growth — it has been pilloried throughout this past year by larger funds, it has been hampered continually by a range of governments, most recently by the Turnbull government with a huge crackdown on both contribution limits and the introduction of tax on pension income.
Once again it becomes clear the sector has few friends and property borrowing in SMSF is now in serious jeopardy with a damning report from a powerful government regulator.
In a stroke, ASIC has just handed the big super funds a weapon to push their case again in Canberra.
The crucial point is that borrowing for property in a SMSF is perfectly reasonable when done by the book — it is perfectly dreadful when done under the eye of a charlatan adviser in league with a property developer.