Industry funds cite ‘poor quality advice’ on LRBAs
Industry funds have reminded the Government that the most recent report of the Council of Financial Regulators has cited evidence of “conflicted and poor-quality advice” being provided to individuals regarding the use of Limited Recourse Borrowing Arrangements (LRBAs).
Having raised allegations about financial advice firms being involved in “hawking” to superannuation fund members, the Australian Institute of Superannuation Trustees, has used its pre-Budget submission to re-argue its case for a general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.
Beyond referencing the recent Council of Financial Regulators report, the AIST said evidence presented to the Royal Commission along with findings within the Australian Securities and Investments Commission’s Report 575 dealing with self-managed superannuation funds (SMSFs) had “raised concerns with the number of funds that had entered into a LRBA because of poor and/or conflicted advice”.
“The regulators agree that the presence of leverage in SMSFs through LRBAs has significant implications for the security of individuals’ retirement savings,” it said. “Other than the regulators’ preferred option of removing the exception to allow SMSFs access to LRBAs, some potential policy interventions could address these concerns.”
It said these interventions could range from truly limiting the recourse of the lender over the asset by prohibiting the use of personal guarantees, to reducing high leverage and concentration risk within the fund by creating prudential responsibilities for the regulator.
“Where the regulators’ preferred option to remove the exception to allow LRBAs is not accepted, further monitoring to track the future growth of leverage and identified risks within the SMSF environment is recommended, which the Productivity Commission also recommended.”
“The superannuation industry – currently $3.3 trillion in assets under management, with only $63 billion in borrowings in September 2021 – is now so large that exogenous shocks, such as the global financial crisis, or shocks created within Australia, may be cushioned to a large extent by investment in unleveraged assets,” the submission said.
“This stabilising influence is reduced as leverage increases. Superannuation’s unleveraged nature meant that the GFC was not as pronounced in superannuation and may have had a role in protecting the economy during the pandemic. This acts as a stabilising influence on Australia’s financial system and the effect of interconnectedness was not magnified.”
This is supported by the most recent report of the Council of Financial Regulators in September 2022 which found that:
“There continues to be evidence of conflicted and poor-quality advice being provided to individuals regarding the use of LRBAs which could potentially put their retirement savings at risk, including inappropriate advice provided through property one-stop-shops.’ &
‘This is notwithstanding evidence LRBAs are used in inappropriate ways by some individuals and can be a high risk to their retirement savings and, by extension, increase the risk of higher fiscal outlays through the Age Pension’”
“We submit that an unleveraged superannuation sector assists management of systemic risk and that there should be a return of a prohibition on leverage in superannuation,” it said.
“evidence of “conflicted and poor-quality advice”” – I’ve never seen a statement of advice from an adviser / call centre recommend an external super fund.
Oh poor Industry Super, cry me a river of massive amounts of SGC gold you manipulate.
Yet any other option to not use Union / Industry Super like SMSFs and it’s a constant WHINGE, grow the hell up ISA.
LRBA’s are minuscule in quantum and nature with virtually zero problems.
How about take it too an election ?
That went really well for old mate Shorten didn’t it.
Go feather your Union/Industry Super nests some more and stop bloody WHINGING if some people want to do their own thing via SMSFs and some of those with LRBAs too.
Pathetic sooking Industry Super, really bloody pathetic, now 2 weeks in a row.
…but all of our money is going to fly out the door when people use it with an LRBA to buy property through an SMSF”.
LMAO
Notwithstanding the fact that AIST is a lobby group that spreads lies and misinformation designed to favour the commercial and political interests of union (“Industry”) super funds….. they are actually right about LRBAs.
I tend to agree with you on that, but then I doubt the people IS are complaining about are your average advisers. They like to include property spruikers in with advisers to make us all look bad. A bit like the media calling Melissa Caddick an adviser despite the fact that she was unlicensed and was as much an adviser as I am a physician. No doubt some LRBAs have been sold by those wanting to sell real estate on huge markups but adviser they are not.
Unlicensed accountants and mortgage brokers are also well represented in the LRBA promoter ranks. Even when the union super PR machine comes out with a genuinely good suggestion, they still package it in their usual adviser vilification garbage.
This is the real problem you are 100% correct. Agents and brokers spruiking LRBA not SMSF accredited or specialists, who ISF fail to segregate.
Yep, they are right about property spruikers entering the “advice” space via LRBA’s and selling SMSF’s to the financially llliterate.
A bigger issue for the entire superannuation industry is the vast sum of money held in IFM with its lack of transparency and ineffective valuation process. Daily withdrawals and inevstments occurring when the unit price cannot be properly calculated because of the lack of transparency, because of the lack of a daily pricing mechanism.
Another ploy by industry super funds to take on more market share from a growing SMSF sector…. I’m sure there would be mass outcry by the Australian public when they are told by the Labor Government that we’re limiting what you can do with your retirement savings by stripping you of the most high growth strategy currently in the market. Let’s compare the return on the NSW national average capital return for residential property of 7.53% (source ABS 2011-2021) with the use of borrowed funds (i.e. after interest loan costs and fees with a 50:50 debt ratio @ 7.56%p.a.) over 10 years which amounts to an average annual return including income of 14.1% pa (rental income assumption of 6.6% of purchase price) to that of a High Growth Australian Super Fund who reports average earnings of 11.37%pa. Better yet, lets compare the failed outcomes of LRBA’s against those who have great success and then determine the risk vs reward outcome for all Australians.
It must be qualified and professional advisers giving poor advice, not the unlicensed Accountants, Mortgage Brokers, Real Estate Agents, Property spruikers, or the Online DIY sweatshops. Having said that, I think some measures should be put in place to restrict residential property as an investment within SMSF, which would probably hinder the unlicensed cohort.