Self-managed super is not Do-it-yourself

Glenn Freeman  |  03/07/2017Text size  Decrease  Increase  |  

Glenn Freeman: I'm Glenn Freeman for Morningstar. I'm joined today by Bryan Ashenden, head of financial literacy and advocacy with BT Financial Group.

Bryan, thanks for joining us today.

Bryan Ashenden: Pleasure to be here.

Freeman: Now just firstly, Bryan in the past you've spoken quite a bit about the risks and challenges that SMSF trustees face. What would you see as the number one risk.

Ashenden: I think with the amount of change that is being going on particularly from the 2016 Federal Budget. The biggest risk that most SMSF funds would face today is actually those who aren’t getting the appropriate advice and are almost thinking that a self-managed super fund is DIY fund. Now there is complexity in legislative changes, let alone the normal day-to-day functions of running a fund. But it really is complex and so people who aren’t getting the right advice and haven’t been getting along the way, right now are probably facing the biggest challenges, about trying to get themselves ready for the first of July and what that actually means for them.

Freeman: And how much understanding is there exactly what SMSF trustees can legally hold in their SMSF and what they can't.

Ashenden: I think most SMSF trustees probably got a good idea about what it is they can and can't, because I think there is a lot of literature out there that says a self-managed super fund, you've got fairly wide range as to what you can actually invest into. The biggest issue for complexity that probably comes up and spices around property and what type of property you can invest into and actually what you are going to do with it once you've invested into it.

Freeman: In your experience is there an over-exposure to property within SMSF's in Australia and how diversified are SMSF portfolios?

Ashenden: Well, certainly there has been I think a lot of talk about how self-managed super fund seemed to be heavily invested into the property market, and is that part of the issue that’s leading to concerns around property (bowls) and sales around the prices and so on. If you look at statistics that the tax office puts out self-managed super funds aren’t actually overweight into property themselves. But it does come back more to an individual fund by fund analysis because there will be some self-managed super funds where maybe the only asset or the most significant asset they have is property. And not that that’s not all out but it comes back to the question of when you look at things like the investment strategy for the fund. Is there appropriate diversification which doesn’t mean you have to be diversified, but you also need to make sure that you have got enough liquidity to pay the bills of the fund or pay up pension payments when they are required.

So, it's not I think about having too much of an exposure to property, but people really need to understand what implications are. Because if you need to sell an asset it's lot easier to sell shares and managed funds you can get your money back a lot quicker than it is to sell a property. And if you are forced into quick sale are you getting back the real value for the property that you otherwise would have wanted to have.

Freeman: Now Bryan the federal government has devoted quite a bit of time in recent years to keep an eye on the level of gearing held by SMSFs. What's your view on this?

Ashenden: It has always been a focus, since the government changed the rules and allowed superannuation funds and particularly its self-managed super funds to actually borrow to invest. There has been a lot of focus about have the rules gone too far and should they be tightened up or are they being used for the right purpose for the intended purpose that they were brought in. Now I think the government's pretty much been on record at saying. They are not looking to get rid of the ability of funds to borrow, but they want to make sure that the rules are bit tighter or there is more control over there. So we don’t see super funds getting to a position where they have overleveraged. And that’s really critical that we don’t get to that because this is people's retirement funds. And whilst in a self-managed super fund you can chose as to how you want to invest your money it's still important to remember that that money is there for retirement purposes. I think that’s the big concern that the government has been focusing on. Not the fact that funds can borrow, but making sure that they don’t over borrow and that everything is done on a market basis.

So, I think we'll always see the government focusing into that space a little bit. They made some announcements in the 2017 federal budget about how some rules will change if you have your own borrowing within a fund but that’s the sort of change that will impact people in terms of how much they can actually contribute into super. And how much they can transfer across into a pension and some of these are rules that the government is still talking about. The rest of them to the extent they being legislated. They only relate to new borrowings from the first of July.

Freeman: And Bryan just going back to that first question what are some of the other risks that SMSF trustees face.

Ashenden: Look I think there is a few things that trustees need to watch out for. One of those is to always make sure that your funds documentation and here we are particularly talking about things like trustee and the investment strategy are up to date and reviewed on a regular basis. So if we look back to again the 2016 federal budget there are lot of changes that were announced and it's really important for trustees to have a look at their trust and see does anything need to change. Because the government's saying we're going to change legislation in one way doesn’t necessarily reflect well into your self-managed super fund if it’s got some sort of rule that says you can’t actually do that. So, number one you are going to make sure you trustee and your investment strategy and how you invest is up-to-date.

Part of that goes back to the don’t think about self-managed super fund as a DIY fund. So if you are getting the right advice along the way these things should be addressed on a constant basis. You shouldn’t be facing into major hurdles at this time of the year. And one other one I think that a lot of trustees really need to think about is actually around the estate planning or succession planning within their fund and when there is always a lot of focus on how do we get death benefits right. And do we put in place binding nomination. Do we need to have binding nomination that says when I pass away my money is going to go to my spouse or to my kids.

But with an SMSF one of the other things that’s really critical to understand is how is the fund going to operate after you pass away. Because the remaining members of the fund if there are other members might want the fund to continue, but in terms of appointing new trustees making sure the fund can continue to operate and its not an extra burden left behind for those who stay. It's really critical to make sure that there are right plans in place to address that.

Freeman: And just finally is it becoming more or less complex to run an SMSF.

Ashenden: Well running a self-managed super fund is always a complex environment there are lot of rules, lot of regulations, lot of obligations that as a trustee you are responsible for and you need to understand it. So, I don’t think it's going to get any less complex. But also I don’t think it's becoming more. I think it's really a case of just working at how do you actually look to run your fund, to make it the most efficient process that it can be. So is that the use of certain types of investments we can get to consolidate reporting coming through. Is it just a question of how many different types of investments you have what sort of expertise do you bring in to actually assist you along the way. Those things can make a difference to I guess the day-to-day efficiency of running the fund. Complexity will always exist, it's just how do we manage that in the best way.

Freeman: That’s great. Thanks very much for your time today, Bryan.

Ashenden: Thank you.

Freeman: I'm Glenn Freeman for Morningstar and thanks for watching.

Video Archive...

Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 3
20/07/2017  Insights on Australia's housing market, China's effect on domestic banks, and cyber-security readiness, in the final instalment of Brian Hartzer's interview with Morningstar's David Ellis.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 2
13/07/2017  Westpac CEO Brian Hartzer joins Morningstar banking analyst David Ellis to discuss digital disruption, regulatory change and Australian banks' social license.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 1
06/07/2017  Brian Hartzer, CEO, Westpac joins Morningstar senior analyst David Ellis to discuss his role leading Australia's oldest bank, how Westpac can continue to grow value, and its commitment to sustainability.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared
How to guard against retirement threats
16/06/2017  As retirement approaches, even the best-laid plans can go awry, as Tim Steffen tells Christine Benz, Morningstar US.
PIMCO Global Credit Fund
07/06/2017  The PIMCO Global Credit strategy receives a Morningstar Analyst Rating of Silver due to its sizeable and highly capable credit research team.
PIMCO Income Fund
07/06/2017  Morningstar's Tim Wong looks at the strengths and competitive advantages of this Silver-rated strategy.
3 pockets of opportunity in fixed income
07/06/2017  The head of PIMCO Australia portfolio management explains his views on active management in fixed income and outlines where he sees most value in this space.
Trump administration biggest macro threat for investors
05/06/2017  Even as European political volatility subsides, the US Government remains a considerable threat to financial markets, says Colleen Barbeau, director of equity portfolio management, Franklin Templeton.
Antipodes Global Fund: Class P
01/06/2017  Antipodes constructs this portfolio based on three major objectives--capital preservation, inclusion of attractively priced businesses, and investment resilience.
Investors Mutual WS Future Leaders Fund
01/06/2017  Investors Mutual Future Leaders is a capable strategy focused on investing in Australian companies outside the top 50.
Why the time is right to invest in India
25/05/2017  Indian stocks rallied after the appointment of Narendra Modi as Prime Minister--but then subsequently fell. UK-based investment manager Jonathan Schiessl says now is the time to buy.
When should you pay active fund fees?
23/05/2017  When is it worth paying higher fund fees for active fund management? The single most important factor effecting a fund's relative performance is its price.