THIS week’s $55 million bailout of the Trio Capital funds — which did not apply to investors in self-managed superannuation funds — is not an argument against having a self-managed superannuation fund.
But it is an argument that those who do not have the interest or the skills to take an active interest in the management of their money would be better off opting for their employer’s default fund, an industry superannuation fund or a major reputable fund.Those considering taking their money out of an established super fund and putting it in a self-managed superannuation fund — who are being convinced to do so by a “friendly” financial adviser offering to take on the hassle of handling paperwork and annual tax returns — should think again.
Having a self-managed superannuation fund can offer a considerable degree of flexibility and control for those who know what they are doing.
This week’s bailout was a timely reminder that the levy system that benefits investors in APRA-regulated funds does not apply to self-managed super funds. “Trustees of self-managed superannuation funds have to be aware that there isn’t any form of compensation for which things go wrong, except for remedial action through the courts,” Sharyn Long, the chairwoman of the Self Managed Super Fund Professionals Association (SPAA), said yesterday.
“If a financial adviser is involved they can take action, but there is limited remedy for them in cases where fraud occurs.”
The bailout is based on the fact that APRA-regulated funds will be levied to cover the cost of the fraud involved. The system does not apply to self-managed super funds. The logic is that why should the trustees of some 400,000 small funds, often operated for only two or three beneficiaries, have to pay up for the investment mistakes of a handful of other small funds (in this case 285 SMSFs) who would have quite happily reaped the upside if the funds had delivered the superior performance?
There may be some change to that situation but this is what is prevailing at the moment.
The collapse of Trio does reinforce the need for all investors to do their homework on the type of funds they invest their money in, particularly funds offering higher than normal returns or which may have unknown international links. “The basic principle is that the higher the return, the higher the risk,” says Long. “One of the main tools to mitigate that risk is diversification.”
No investor should put all, or the bulk, of their investments into one fund or one associated group of funds. And the more exposed one is to a fund, the more need for detailed homework.
It is also a general warning that anyone who uses a financial adviser should not regard this as a reason to suspend all judgment — no matter how competent they appear or how much they offer to take over the burden of financial life.
There is no excuse for not asking questions about where and how the money is being invested.
In the case of Trio, the situation was made worse by the fact that there was a wrap situation where fund managers handed over their clients’ funds, with those funds invested in Trio-related funds such as Astarra.
In the case of wraps, it is vital that the investor has complete confidence in the operator of the wraps — and only after doing some basic homework.
If the fund itself or the wrap provider is not well known, the investor should ask what is it and who are its principals.
The Trio funds were based out of Albury, which is not exactly the funds management capital of the world. Warren Buffett, of course, is based in Omaha, which is not the fund management capital of the world either. But he and his Berkshire Hathaway organisation are well known and have a track record of integrity.
With the ready availability of search engines such as Google, investors can easily do simple online searches from the comfort of home.
The searches should be done on the funds and the principals of those involved to see if there is any “form”, or any questionable activities.
The fact that the fund is offering investment in exotic products using offshore tax havens should also be a red flag for investors to do some extra homework.
In the end there will always be fraud — which is the reason that the default option for anyone with little financial knowledge should be to go with the plain, vanilla-type of investments with plain, vanilla-type managers.
John Hempton of Bronte Capital, who raised the alarm on the Trio funds, also raises other issues of concern about the lack of regulation of broker-dealers and how they are still allowed unrestricted pledging of client assets.
This is another area which needs some government attention. But in the meantime the Trio collapse should be a wake-up call for investors that there is no excuse not to be aware of exactly how their funds are invested and who is handling their money. When it comes to handing over your money to anyone, all questions are good questions.
There are no dumb questions.
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