Rainmaker launches support service to defend SMSF investors

Industy fraud and misconduct has prompted a new effort to insure SMSF operators.

Looking at the one million Australians who have taken the risk to run their own DIY superannuation accounts it’s easy in the wake of the election to view this group as a privileged set.

But a new report this week highlights just how much risk this group has taken up in going it alone. It may come as a shock, even perhaps to many SMSF operators, just how little protection they have from the system if anything goes wrong ... especially if they are exposed to any fraud or misbehaviour.

For a start there is the following:

• DIY funds are not regulated by the prudential regulator APRA, rather they fall into the unlikely sphere of Australian Taxation Office responsibility;

• As an operator of an SMSF you do not have access to the key overseer — the Superannuation Complaints Tribunal;

• In effect you are operating as a sophisticated investor, though there is ample evidence even from studying the breakdown of asset allocation among the DIY brigade that they are far from sophisticated, keeping the bulk of their money in cash and Australian shares.

Worse still, the supreme irony of DIY fund operators is that while they are most likely among all investors to take financial advice (three times more likely to take professional advice than other investors), this behaviour exposes them to even more risk.

Note this remarkable quote from a new research “white paper” from the Rainmaker financial information group: ‘The higher usage rate of financial advice by SMSF members has made them more vulnerable to the financial scandals that have engulfed sections of the wealth management industry.”

“It’s a paradox, that’s for sure”, says Christoper Page the managing director of Rainmaker, the specialist financial information group which has taken the ambitious step of launching a support service for SMSFs for an annual fee ($696 pa for DIY funds with under $1 million under management and $995 a year for those with more than $1m).

It’s much too early to give anything even approximating a review of the service for the simple reason it is unprecedented in the local market — in fact it may be the first of its kind anywhere in the world. “We are not aware of anything else like it,” says Page.

According to Page, the service will offer protection and mitigation strategies, but where it really gets interesting is where Page also promises to offer to financially support funds in accessing legal services — in other words litigation funding for SMSFs who are fighting against financial institutions that have let them down.

Rainmaker even goes as far to mention a “discretionary compensation fund” for troubled DIY funds. And there is certainly a potential demand for the service: The most common sources of fraud against DIY funds are:

Financial misconduct

This is defined by Rainmaker as a situation where an SMSF is involved in an investment and something goes wrong such as the investment fails or the advice it receives turns out to be flawed leading to the fund losing capital or being placed at a considerable risk of disadvantage.

Identity theft

Remarkably this is seen as the second most common type of fraud among DIY investors. You might reasonably expect DIY fund operators to be smart enough to see through deceptions of this sort, but clearly this is not the case. Rainmaker points out fraudsters will regularly gain direct access to SMSF assets.

Whether this idea from Rainmaker is a fizzer or whether it becomes an excellent new enterprise which effectively creates not just a new company but a new business only time can tell, but hats off to Page for at least trying to fill the gap where regulators have failed.

Separately, it’s also worth pointing out that in collating a range of research on the DIY market before launching the product the Rainmaker group has challenged notions of what the DIY brigade looks like. DIY operators now control no less than $591 billion in assets, almost a third of all superannuation assets. Yes, they are older — on average 57 against an average of 40 in the broader superannuation system and of course they have more money with a per capita average of $553,000. But here’s a twist: the average age of a person opening a DIY fund is 46, which suggests the brigade is getting younger.