Running an SMSF without a financial adviser: What are the risks?

Around 80% of new SMSFs are now set up without financial advice. For parts of the advice industry, that figure is a worry. People are taking on legal responsibility for their own retirement savings, and in most cases nobody qualified is checking their work.

The data on how these funds actually operate tells a more nuanced story. Of the SMSFs established through administration software provider Class in the last financial year, 98% chose a corporate trustee. More than 90% of SMSF members over 65 have started a pension in their fund, compared with a take-up rate at or just below 50% in APRA-regulated funds. Whatever else non-advised trustees are doing, they are not deciding in the dark.

In this interview, Tim Steele from Class and Meg Heffron from Heffron discuss where the real risks sit, and Meg’s answer is not the obvious one. Trustees who set out to break the rules are a small minority. Those who intend to do the right thing usually have an accountant keeping them compliant, and compliance, as she puts it, has very little to do with financial advice. The gap is the absence of someone proactively saying “at this life stage, you need to be thinking about this”.

Meg’s example is starting a pension. An accountant can explain how to do it. What they generally can’t do, unless they’re licensed, is tell you whether you should. Plenty of trustees never learn it was an option.

They also cover the investment side, where the bigger danger is missed opportunity rather than catastrophe, why so many trustees start with something deliberately unexciting, and why the trigger for getting advice is too often the size of your balance rather than the complexity of your situation.

Transcript

Robert Barnes

Around 80% of new SMSFs are now started without financial advice. Why do you think that’s happening?

Tim Steele

I think, well, the panel, we had a really diverse group of experts on the panel. I had the easy job of facilitating, and I think the panel’s view is not consistent with what we’re seeing broadly around SMSF establishment and people being more engaged and wanting to take control of their super. And so the largest spike we saw actually in growth over the last half year has been in Millennials, which is that 30 to 44 cohort, and that’s grown from sort of 37 to just over 40%, and Gen X have sort of remained sort of fairly constant at about almost half of all SMSFs established by Gen X, which probably makes sense just demographically based on age, interest, and the size of what your super balance would have gotten to over that period of time and stage of, stage of life. So I think there’s some common threads around control and more engaged. What was interesting through the panel discussion is that there are in fact cohorts of people who establish with a very specific asset class in mind. So they’re saying, look, I want to invest in property as an example, and the only way to do that through direct, at least direct property, is through a self-managed super fund.

And so asset allocation or investment choice does seem to be part of the driving, at least factors in influencing people’s decisions. Crypto also is an interesting, albeit a very small percentage of funds are established with crypto. Based on our analysis, it was under 4% in the last financial year, but it’s still an area of real interest for people in thinking about are there particular asset classes that are driving choices around SMSFs?

Robert Barnes

What are the biggest risks for trustees running an SMSF without financial advice?

Meg Heffron

They are putting a pressure on themselves to keep up to date. I think, to be honest, most people who go into an SMSF have thought about that to some degree before. Now, maybe some are pleasantly surprised that it’s not as hard as they thought, but some are probably, surprised that it is harder than they thought. There’s often this concern that people new to SMSFs will not understand how they work and will break all the rules. And certainly there’d be a cohort that go in intending to break the rules, like take the money out. But I think the cohort who go in intending to do the right thing, they’ve usually got the help of an accountant. And compliance and getting it right That’s nothing about financial advice really. That’s all about what the accountant is telling you you can and can’t do. So if they want to go off and buy a property, the accountant will help them with the guardrails around what they can and can’t do. The accountant, unless they’re licensed, is obviously not going to give them investment advice. And the real grey area and the real challenge I think is that, you know, they get to a point where they could have a pension.

And, you know, technically— well, not technically— the accountant can’t necessarily say to them, “Hey, I recommend you start a pension.” But again, these guys are used to doing their research. I think a lot of them come to their accountant and say, “So I’m 60 now, you know, what do I have to do to start a pension?” It’s more, “How do I do it?” necessarily than, “Should I do it?” There’ll still be plenty who don’t realise it’s even possible, and that’s the risk they face mostly about not having an adviser in their court who is proactively prompting them, you know, okay, at this life stage you need to be thinking about X, Y, Z.

Tim Steele

The data around things like corporate trustees, the structure of ownership was probably a contradictory data point to, hey, unadvised does not equal uninformed. And on our, at least our data, 98% of funds established in Class in the last financial year had a corporate trustee, which means they’re getting their information from somewhere. And then similarly, and actually Meg Heffron made this point on the panel, that we think about actually establishing a pension. Again, our data shows that more than 90% of those over the age of 65 have established a pension in their SMSF, and that’s in contrast to APRA-regulated funds that are still hovering at or just below 50%. So quite a stark contrast. It means that they might not be as advised, but they are certainly not uninformed and they’re seeking information and/or expertise, you know, from either other professionals in relation to compliance obligations, or it might be from other sources like the internet and AI engines and ChatGPT and the like to get insights.

Robert Barnes

What are the investment risks for trustees managing their SMSF themselves?

Meg Heffron

You’ve got to remember I don’t know much about investments either. That’s why I have an adviser. But look, I suspect knowing their limitations would be one of the things that they should know. And, you know, if they’re not going to spend a lot of time and effort doing all of the research that’s necessary to actively manage their investments, maybe they’ll pick something tamer, which doesn’t feel as sexy as taking control of your investments and doing amazing things. But it’s still a very valid way to get started in an SMSF. To be honest, a lot of the people that we see coming through as the next generation setting up funds, they often come in knowing exactly what they’re going to do. They’ve taken a year to make the decision usually, and that year has often been about, well, you know, how would I manage it and all those kinds of things.

I think the risk people often talk about, or the concern people often talk about, is missed opportunity. So it’s really common when markets go down and large super funds, you know, post poor returns. It’s really common for people to think, “Oh, I can do it better myself.” And that’s often wrong in that, you know, even if they’d been managing the money, it would have gone down as well. So I think maybe the risk of missed opportunity, given that you’re exiting out of the professionally helped investments. I think though, I mean, lots of SMSF trustees probably also know their own limitations. So they don’t start out trying to mimic the investment prowess of the big funds. They pick something like, you know, a diversified ETF or something that will help them, you know, get used to managing their own fund before they leap into something exotic.

Robert Barnes

Most SMSFs are now started by Gen X and Millennials. Are they approaching SMSFs differently from previous generations?

Tim Steele

I think the fact that they have access to so much information today, that if you think about, you know, SMSFs have been around 25+ years, 25+ years, they just wouldn’t have had anywhere near access to information and insights, be it the volume of educational material that’s available through places like SuperGuide and online. Again, we think about AI and the role that it will play over time. I think that is going to be profound. And I did half-jokingly share that I actually looked over the weekend in Copilot at saying, hey, I’m establishing an SMSF, should I have a corporate or individual trustee? And the information it brought back was really well-structured, thoughtful, it referenced back to ATO and other sources. It was very comprehensive. And so, you know, if people have access to that type of information today, you know, they’re more likely to be making better decisions. I think the key thing for us is that people are making informed and educated decisions and that they’re not being irresponsible and frivolous with what is such an important asset to them. And if you’re a younger generation and you’re thinking about, you know, it’s the opportunity cost, you want to make sure you’re setting this up for the long term.

And if you’re 30, retirement is still 35+ years away, it might feel like you’ve got forever, but the fact that they’re actually establishing means that they’re— an SMSF means that they’re more engaged, more interested, and we hope by default more informed and educated on their responsibilities and the opportunity of making good decisions regarding their superannuation.

Meg Heffron

And I wonder if as a generation they’re just more comfortable doing their own research and then backing themselves that they’ve done the right research. Certainly they’ve had, they’ve got far more access to information than, than say their parents did. I mean, we were talking before we started this, SuperGuide’s been around for 18 years, so putting out great content in all that time. Heffron’s been around for nearly 30 years. We’ve probably started putting out good content 20 years ago. And so all of that is available now for them to do their research, and they have grown up in an environment where that’s common, and then they back themselves.

Robert Barnes

What are some of the typical triggers for unadvised trustees to finally seek advice?

Tim Steele

I think we do expect that although the majority of— well, a majority of 4 out of 5 are being established without formal advice today, that at some point they will seek out advice. They are the future generations of potential advised clients because we know as their needs become more complex, their balance becomes more significant, that they may seek, and they should seek, to get professional financial advice to ensure that they’ve thought through all the considerations they need to be assessing to optimise their retirement outcome.

Meg Heffron

Look, I think the trigger for the need for advice is usually a life stage, or even, you know, and maybe this is a life stage, you get to a point where you think, “Oh right, I can kind of, I still need to pay off that mortgage, but I also should be thinking a bit about the future.” So that, I suppose, is a life stage. I think unfortunately our industry, the trigger is balance size. So, you know, it’s kind of if advice is unaffordable, if your balance is less than X, advice is affordable if your balance is more. And I imagine those two don’t often line up. So, you know, we need to evolve to be ready to meet people where they are really when it comes to advice. And the only way the industry is going to evolve is if the regulatory settings make it possible to run a profitable business doing that.