Will new government regulation hurt self-managed superannuation funds?

A prominent ex-Liberal is lobbying in the interests of the big superannuation funds.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are some genuine concerns that the ability of self-managed superannuation funds (SMSFs) to borrow to buy property could over-inflate property prices. It's also possible that if people are not careful, they may be ripped off by unscrupulous financial advisers. Taking advantage of this, John Brogden, the former leader of the NSW Liberal Party, is pressuring the government to increase the regulatory burden on SMSF trustees.

Speaking to the Australian Financial Review, Assistant Treasurer Arthur Sinodinos noted that "since the global financial crisis there has been an upsurge in interest through investing in self-managed super funds." He continued: "In the super space we need to make sure it's a level playing field and that you get appropriate competition between the different funds, the industry funds, the self-managed super funds and that's the starting point,"

The government seems intent to ignore the real reason people are abandoning retail funds. During the GFC, such funds lost their members billions of dollars, yet still charged hefty management fees. If there is any part of the superannuation system that needs tougher regulation, it's the big funds that pay commissions to advisors and charge perverse fees.

Most funds charge "management fees" that are based on a percentage of the funds under management (FUM). This incentivises managers to grow funds under management, but is a very weak incentive to perform well. In order to market their fund, such funds seek to avoid volatility, which they confuse with risk, and stick closely to the index. During the financial crisis, many of these funds lost their members significant proportions of their wealth, but still helped themselves to management fees, usually in the range of 1-2% of FUM.

Some superannuation funds simply add an additional layer of fees. For example, members of Colonial FirstChoice Superannuation who choose the Fidelity Australian Equities Fund option pay a 1.54% management fee, a $60 a year "investor fee" and 0.2% transaction fees. In comparison, the Fidelity Australian Equities Fund charges investors a 0.85% management fee and 0.25% transaction fees. Colonial therefore takes a 0.69% management fee without adding much value. Why wouldn't you just set up your own SMSF and invest directly?

One notable impact of the increase in self-managed super is the popularity of dividend paying shares such as Commonwealth Bank (ASX: CBA) and Telstra (ASX: TLS). This is partly due to the favourable tax treatment of superannuation funds and the ability for SMSFs to pay out dividends as a pension.

Foolish takeaway

New restrictions on SMSFs might address the amount that such funds can borrow. This makes sense, because leverage can be very dangerous in investing. Investors should generally avoid borrowing money to invest in shares because the stock market can stay irrational longer than borrowers can stay solvent.

Looking for a dividend-paying stock trading at a better price than Telstra and the banks? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading


Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »