The true cost of fraud and financial misconduct for the one million Australians who run their own super funds is more than $100 billion over the past 10 years, a new report suggests.
That's more than three times higher than the $30 billion in publicly reported losses from financial misconduct and fraud for the 10 years to June 30, 2017. Superannuation research firm Rainmaker has calculated the damage is actually $103 billion once you include the loss of investment returns from no longer having the money to invest.
DIY super funds are increasingly popular because many people want the flexibility to invest in a wide range of assets, including property. Tax Office records show more than a million self-managed super funds (SMSFs) held more than $700 billion in assets on June 30 last year, making it about 30 per cent of the $2.2 trillion superannuation sector by value.
But unlike members of regular super funds, there's no compensation scheme to protect SMSF owners if they are conned or badly advised. Financial misconduct is where the investment fails or the advice process turns out to be flawed, leading to loss of money.
"Fraud is prevalent across society; however, these alarming figures are particularly concerning for SMSFs considering SMSF trustees do not have the same protection and avenues for compensation as traditional APRA-regulated super funds," says Christopher Page, the managing director of Rainmaker Information.
Trustees of APRA-regulated super funds - large funds that include not-for-profit industry super funds and for-profit retail funds such as those run by the banks - are able to apply to the government on behalf of the super funds' members for compensation if a fund has lost money because of fraud or theft. Compensation is funded by an industry levy on large funds.
SMSF trustees mostly missed out on the government scheme after the collapse of the Trio Group in 2009, the largest superannuation fraud in Australian history, with about $176 million of Australians' investment funds either lost or missing. The Albury-based wealth manager illegally transferred hundreds of millions of dollars of client funds offshore from where it disappeared.
More than 6000 investors were affected, with the federal government triggering compensation of about $55 million to over 5000 investors who had invested in the Trio Group through APRA-regulated superannuation funds.
John Berrill, a director of Berrill and Watson Lawyers, who has represented victims of fraud and inappropriate advice, says the Rainmaker estimate is an "enormous figure". In comparison, mainstream industry and retail funds employ financial professionals who review the investments made and there have been hardly any collapses and scandals.
Berrill points out the losses experienced by SMSFs is a cost to government and to taxpayers. That's because taxpayers provide tax concessions for people to be self-sufficient in retirement.Those with DIY funds who suffer losses can end up on the age pension.
"A significant portion of people [with DIY funds] is going to be relying on people who market themselves as professional advisers and are dependent on their integrity," he says.
If trustees are victims of bad financial advice, they can lodge a complaint to the Financial Ombudsman Service, which is free, but has monetary caps.
Planners have professional indemnity insurance, but there are exclusions and caps on payouts and it probably requires trustees to take legal action against the planner.
SMSFs are also outside of the Superannuation Complaints Tribunal, where disputes over issues such as who receives a death benefit can be resolved at no cost.
Berrill says losses are likely to be less if the government imposed a minimum of amount of money before someone could start their own fund, and mandatory investment education for trustees.
Chris Balalovski, the chairman of the Self-Managed Independent Superannuation Funds Association (SISFA), which advocates for SMSF fund members and practitioners, says the Rainmaker figures are "very disturbing, but we have to be careful of knee-jerk reactions".
He is particularly concerned over the spruikers in the property sector that promote borrowing inside an SMSF to buy real estate.
"They say all that you have to do is to roll out of your industry or retail fund and you only need $50,000 and you can start up an SMSF and borrow the rest," he says.
Balalovski disagrees with the suggestions to have a minimum amount of money and mandatory education before being able to start your own fund
"Size of fund does not somehow magically stop bad investments being made or fraud occurring," he says. "In no other sphere of private investing is there a minimum education requirement.
"We have a world-class governance regime in Australia, but it does not and never will prevent the incidence of fraud or misconduct, and so it is buyer beware and reliance on trusted individuals, but even then things can go wrong."
How to protect yourself
- Beware of high pressure sales tactics, and offerings of unrealistically high returns
- Avoid complex investment structures that you don't understand
- Diversify investments
- Insist advisers disclose any incentives they receive, or conflicts of interests in making recommending.
- Regularly monitor your investments for signs of trouble.
Source: Rainmaker Information