Protect Your SMSF Assets Against Fraud

According to the Australian Taxation Office (ATO), self managed superannuation funds (SMSFs) held $700 billion in assets as at 30 June 2017. This sector of the superannuation industry has grown steadily and where once the number of funds was counted in the thousands, the ATO advises that there are now more than one million SMSFs, holding almost 30% of the asset value of the $2.2 trillion superannuation sector.

This growth and popularity of SMSFs is fuelled by the desire of many investors to have more control over where their superannuation contributions are invested. However, it may prove to be a double-edged sword if SMSF trustees do not heed the warnings from industry experts to be wary of becoming victims of fraud.

ATO figures show that in the last 10 years, $30 billion has been lost by SMSF trustees and members through fraud and financial misconduct. However, one superannuation research firm suggests that the true losses could be more in the range of $100 billion when the loss of investment returns is factored in. This is very concerning, and fund trustees should be looking at these figures with alarm.

A major issue for SMSF trustees is that there is no compensation scheme available to them should they fall victim to bad advice or deliberate fraud. APRA, the Australian Prudential Regulation Authority, oversees the safeguards in place to protect the assets of regulated funds, which include not-for-profit industry funds and for-profit retail funds.

These trustees can apply to the federal government for compensation on behalf of the members if money is lost through theft or fraud. This compensation scheme is funded by an industry levy on large funds, but no such scheme exists to benefit SMSF trustees and members.

The few avenues open to SMSF trustees come with restrictions. The Financial Ombudsman Service will accept complaints from SMSF trustees who have received bad financial advice, and while the service is free, there are monetary caps in place. Financial planners are also required to have professional indemnity insurance, but this could be a long road for an SMSF trustee as there are exclusions and caps and it would likely require a lengthy legal process with no certainty of success.

SMSF trustees must exercise care when choosing who they approach for financial advice. The integrity and reputation of the advisors will be just as important as their track record, but there are a few things the trustees can do to reduce the risk. One issue they should put to rest first is to secure the services of a reliable company like SMSF Assure to look after the administration and compliance of their fund, so they can concentrate on protecting the investment side.

A good place to start is to ignore over-inflated claims about likely returns and remember that if something is too good to be true, leave it alone. Beware of high pressure sales pitches, and if a scheme is too complicated to understand, give it a miss. Protect yourself by investing in a range of asset classes, and regularly monitor them to check their performance. Lastly, only work with advisors who disclose incentives that they receive from third parties and who will advise conflicts of interest when they make recommendations.

Passive Investments An Alternative To Active Participation In The Market

If you are responsible for the investment decisions of a self-managed superannuation fund (SMSF), you may be in a situation where you have found yourself lacking somewhat in the skills required to manage your asset portfolio actively on a regular basis. Rather than stress over your predicament, there is an alternative to second-guessing the stock market.

Passive investments, as the name suggests, if selected carefully, provide a regular income stream without the constant intervention of the fund trustees. They can be concentrated in one asset class, but it is preferable that the fund portfolio is diversified to spread the risk in the event of a severe market correction.

Exchange Traded Funds (ETFs)

There are some passive investments that are especially favoured by SMSFs, but one that has continued to show remarkable growth over the past few years is the ETF or Exchange Traded Fund. All ETFs are listed on the stock exchange, allowing SMSFs to buy and sell the units when markets are open. They represent a portfolio of securities that track how a specific market index like the ASX 100 performs.

ETFs align with the goals of SMSFs in several areas, which is why they are popular with fund trustees who are looking for a long-term result, rather than getting involved in the hurly-burly of regular trading. ETFs offer a higher level of control over investment decisions, they reduce the costs incurred in regular, active investing, the investing process is simpler and more transparent and the tax outcome of the investments is also improved.

Other ETFs

Listed ETFs also offer opportunities for SMSFs to access alternative income asset classes such as equity ETFs and fixed income ETFs. These both suit investors looking for a consistent income return, which is a perfect result for an SMSF. With equity ETFs, the dividend yield is the key criteria to look at when selecting the stock rather than the traditional method of market capitalisation.

Fixed income ETFs invest in debt securities where the returns are fixed at the time the bond is issued. They suit long-term investors who do not intend to trade and when held to maturity, market changes have no impact on returns.

Real Estate

Real estate offers some opportunities for passive investments suitable for SMSFs. Listed Property Trusts (LPTs) or Real Estate Investment Trusts (REITs) invest in commercial real estate such as office buildings, shopping centres, industrial premises, warehouses and the like. The tenants in these premises are usually on long-term leases offering consistency and predictability for SMSF trustees. These funds are managed by experienced professionals, so they are a good option for SMSF trustees with little knowledge of this asset class

Bank Accounts

With interest rates at record lows, the returns on cash in bank accounts are meagre. However, the up side is the security, and the immediate liquidity it offers. When interest rates do move upward, cash in the bank is the ultimate passive investment.

As with any type of investment, getting professional advice before making a move is always essential. If assistance is needed in the administration of the SMSF, there are always companies such as SMSF Assure available to advise the trustees and they make sure their administrative responsibilities are covered.