A stunning 90 per cent of financial advice given when investors open self-managed super funds is not compliant with the law, as controversial “one-stop” property shops boom, according to a survey from the Australian Securities & Investments Commission.
ASIC said financial advisers were targeting aspiring property investors who often had little or no knowledge of the risks and demands of running their own super.
The regulator suggested naive investors, who are often cold-called by salespeople, were lured by the promise that property was “a safe bet”.
Releasing the report, “SMSFs, Improving the Quality of Advice and Member Experiences”, ASIC said: “Many members said they felt property one-stop shops took away the hard work of having to deal with the details of setting up and running the SMSF.”
SMSFs have been able to borrow to buy assets including property since 2009, when the major banks began to create products in the area. The activity has flourished as property prices lifted strongly in recent years.
Though geared property remains a small segment of SMSF assets, property is ranked by the ASIC survey as the primary area where new SMSF members wish to invest. There are roughly one million Australians in SMSFs at present.
Larger super funds have suggested borrowing for property should now be restricted, while AMP chairman David Murray has campaigned to have it banned.
The SMSF sector is already under pressure from a recent Productivity Commission report that found funds holding less than $1 million are disadvantaged due to high administration costs. SMSF funds have also been regularly criticised for lacking diversification.
The SMSF sector has undergone massive growth; from 2010 to 2017 the number of funds grew at an average of 5.2 per cent a year and the average value of SMSF assets increased 10.1 per cent a year.
The growth coincided with the property boom and a concerted push by the financial services industry to tout SMSFs.
ASIC found some people had moved to SMSFs in order to get into the property market and were using it solely for this purpose without a wider investment strategy. From 2015 to 2017, nearly one in four new SMSF members set up their funds in order to invest in property.
Two in five SMSF members surveyed first started thinking about setting up their own fund because of a financial professional, most commonly an accountant. The report identified the growing use of “one-stop shops” where the adviser has a relationship with a developer or real estate agent whose products the person is encouraged to invest in.
The one-stop shops tend to promote a gearing strategy, where the fund borrows in order to buy property. A number of members that used a property one-stop shop reported setting up an SMSF after being cold called, raising the possibility of widespread property spruiking.
ASIC said it would work with the Tax Office to share information about one-stop shops and take enforcement action where it sees unscrupulous behaviour.
ASIC’s report also found that:
- 29 per cent of survey respondents mistakenly believed SMSFs had the same level of protection as retail and industry funds, which are protected by prudential regulation against fraud.
- 38 per cent of respondents found running an SMSF more time-consuming than expected.
- Running an SMSF fund was more expensive than expected for 32 per cent of respondents.
- 33 per cent did not know the law required an SMSF to have an investment strategy; and
- One in five SMSF funds are at risk of “financial detriment” due to a lack of asset diversification.
ASIC is now planning to work in tandem with the tax office to stamp out “unscrupulous behaviour” among advisers.
New co-operative efforts between ASIC and the ATO will include sharing data and intelligence prior to enforcement.
Self Managed Super Fund Association chief executive John Maroney said the association was “very concerned about these ‘one-stop shops’ and are keen to see the regulators intensifying their efforts in his area”.
Investors with an SMSF looking to gain exposure to property make up just over 80% of the investments in the CFMG Land & Opportunity Fund. The fund specifically gives investors exposure to the residential property asset class, without the need for complicated lending within the SMSF environment. The key differences in these investment strategies are highlighted in this article and other considerations when considering purchasing property through your SMSF are highlighted here.
Major Source: The Australian