Self-managed superannuation funds (SMSFs) are not only demonstrating impressive investment performance, often outshining their larger, professionally managed counterparts, but they are also facing the prospect of an ill-fitting government levy. Despite the sector’s robust growth and the fact that the majority of SMSF trustees do not engage financial advisers, a proposal is reportedly being considered to impose an additional fee on SMSFs as part of a controversial compensation scheme for financial advice failings.
This potential imposition arrives at a time when SMSFs are consistently proving their mettle. Recent research highlights a compelling trend: SMSF investors are outperforming large super funds across multiple rolling five-year periods. On average, SMSFs tend to edge ahead of their larger rivals by approximately 1 per cent per annum. However, a deeper dive into the figures for the year ending June 2024 reveals an even more striking disparity. The top quartile of SMSFs achieved a remarkable rate of return of at least 13 per cent, significantly higher than the 9.5 per cent recorded by large APRA-regulated funds during the same period. While larger funds might occasionally show better performance on specific metrics, as was noted for 2024, the overall trend points towards SMSF superiority.
SMSF Performance Under the Microscope
The latest comprehensive research, conducted by Adelaide University and supported by the SMSF Association, provides a valuable insight into the performance of the SMSF sector. This extensive survey monitors the financial performance of an impressive 410,000 SMSFs, a substantial portion of the approximately 660,000 SMSFs operating in Australia. This research corroborates findings from a separate report by Yarra Capital Partners, which indicated that SMSFs have achieved “comparable or superior asset growth compared to larger professionally managed super funds, despite their more conservative investment strategies.”
This sustained strong performance is attracting new investors to the SMSF space. A notable trend is the significant influx of rollovers from large super funds into newly established SMSFs. Data from the prudential regulator APRA reveals that the amount of money flowing from industry funds into SMSFs has quadrupled over the past four years. The rolling 12-month total for assets moving from industry funds to SMSFs currently stands at a substantial $7.2 billion, a stark contrast to the $1.6 billion recorded in the fourth quarter of 2022. Colin Williams, founder of Padua Solutions, observes that “Industry funds continue to lose assets to SMSFs at an increasing rate,” underscoring the growing appeal of self-management.
A Misguided Levy Proposal
Despite this golden era for SMSFs, the government is reportedly contemplating a new revenue-raising measure that appears to be misaligned with the sector’s characteristics. The proposed levy is linked to the Compensation Scheme of Last Resort (CSLR), a program designed to reimburse investors who have been victims of financial advice misconduct and whose advisers subsequently become insolvent. This scheme has faced criticism for its inadequate funding arrangements.
The critical issue is that the CSLR is primarily intended to protect investors who have engaged with financial advisers. However, according to insights from Class Software, a significant majority of SMSF operators – over two-thirds – do not utilise financial advice. This means that if the CSLR levy is imposed on SMSFs, a large proportion of unadvised SMSF trustees would be compelled to subsidise a scheme designed to compensate for financial advice failures they have not experienced.
Alternative Funding Solutions
Peter Burgess, CEO of the SMSF Association, has pointed to an alternative and arguably more appropriate funding avenue for the CSLR. He notes that the government has recently collected substantial fines from individuals and entities involved in significant financial misconduct, such as those linked to the First Guardian and Shield failures. These fines are currently directed into consolidated revenue.
“This revenue just goes straight to consolidated revenue,” Burgess stated. “We think there is a strong argument that at least some of this revenue should be redirected to the CSLR. This would certainly help bridge the funding gap.” This proposition offers a logical solution: why not tap into the funds already collected from misconduct within the broader financial services industry to bolster the CSLR? This approach would be far more equitable than imposing a levy on SMSFs, the vast majority of which operate independently of financial advisers and therefore do not contribute to the very issues the CSLR aims to address. The sustained success and growth of the SMSF sector warrant encouragement, not the imposition of ill-conceived financial burdens.
