The allure of the self-managed super fund is control and freedom. The freedom to choose the path to retirement riches. There’s also the freedom to make mistakes and according to a new report those mistakes have cost SMSF investors $103 billion over the past 10 years.
Delving into Rainmaker Information’s report “At What Price: The Hidden Cost of Financial Fraud for SMSFs” it’s clear SMSF investors haven’t quite blown $103 billion outright. The $103 billion is a combination of $30 billion in lost funds, 25 billion in frozen funds, $1 billion in fines and what they’ve calculated to be a $47 billion opportunity cost of not being able to get a return on the other losses. That figure is calculated based on the average super fund return in the same period.
Some notable examples where investors have done their dough: Storm Financial, Westpoint, Opes Prime, Trio/Astarra, Sonray Capital, Timbercorp, Great Southern, Banksia Financial and CharterhillGroup, while there are plenty of other smaller scale disasters like Nant Whisky.
One of the most recent disasters was Guvera, an unlisted music streaming start-up marketed to sophisticated investors through their SMSFs by accountants. $185 million was raised in that instance, with the promise it would eventually list on the ASX and investors could cash out. Never happened. Money gone.
Aside from Rainmaker’s findings there are the other disasters SMSF investors get themselves into, as a recent letter to Fairfax’s ‘Ask Noel’ showed.
I am 48 and have a self-managed super fund with my 46-year-old wife. About four years ago our SMSF bought $240,000 worth of Arrium shares. Unfortunately, they have gone bust and we have lost all our money from this investment. We are obviously devastated by this financial loss to our superannuation funds. How do shareholders ordinarily get rid of worthless shares in their portfolios? We have never had this occur and are too embarrassed to ask our accountant. Can you give some advice of a general nature?
Advice is the key word in the last sentence and something that should have been sought out before dumping almost ¼ of a million dollars of their money into one company. And despite losing almost ¼ of a million dollars, the value the SMSF investor places on advice is obviously near zero because he’s now writing into a newspaper column to get what advice he can for free!
No matter how much was within the fund, the allocation of $240,000 to one company shows a terrible understanding of risk.
This can be an issue for SMSFs that are guided by inexperienced investors without strong advice guiding them. Money, which was previously fenced within a vanilla super fund, is let loose and there can be a windfall mentality. The investor has never had access to the money before and they have a 20-year time lock to play, so they feel it’s time to “take a few risks.” In almost every occasion where money is lost it (scam or not) involves pursuing risks that are purely speculative, poorly diversified or have never shown a proven reward.
If an investor can’t easily identify a scam or isn’t judicious enough to weigh sensible risk against speculation and gambling, then they shouldn’t trust themselves to run their own retirement fund without significant oversight.
All easier said than done, but none of this is understood until the devastation stage. Something that isn’t focussed on enough. The pain of a loss is always felt more pointedly than the joy of a gain. However, losses when they involve managed funds or ETFs investing in capital markets, are mostly temporary. Distributions are still paid and markets, within time, recover to forge new highs on price and/or an accumulation basis.
An outright loss, be it through scam or misadventure, can take a massive emotional and physical toll. As noted by the investor above, the pain of an outright loss can be devastating. The toll on health and wellbeing is sometimes a bigger cost than the money itself.
For some, the value of advice will always be hard to quantify when nothing goes wrong, but for those SMSF investors who lost that $103 billion over the past 10 years, it’s now very easy to quantify.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.