What makes a good financial adviser?

A simple question with many different answers. And different answers when you’re a widow navigating those first big financial decisions.

But one characteristic I believe every good financial adviser holds is robust, professional scepticism. An ability to see through the marketing noise and cut to the only question that really matters when it comes to making recommendations:

“How does this help my client?”

That simple question is the noise-cancelling headphone on your long, distracting flight through advice.

It’s your North star, your light on the hill, your golden rule, your rallying call.

And it’s by repeatedly asking this question that I became an avowed SMSF sceptic.

I’m Probably Not Your Guy

Which is a good point to pause and highlight that if you’re:

• Looking for someone to help you set up a new self-managed superannuation fund (SMSF)
• Needing help to squeeze the last bit of juice out of your own SMSF lemon
• After somebody to charge you five-figures a year to validate your desire to have your own, bespoke financial vehicle,

I’m probably not your guy.

Because while I appreciate there are benefits to SMSFs, like:

• Control over your retirement arrangements.
• Scope for complex and cool strategies.
• Unmatched flexibility.

I’ve also seen far too many cases of these things being sold to people who don’t understand them, never should have had them and have experienced devastating losses because of them.

They’re potentially powerful and useful tools people can use to achieve what they need.

But so are chainsaws.

Or motorbikes.

And, unfortunately, there’s a long history of people tossing the keys for a new Ducati to somebody that’s never ridden a postie bike – then being surprised when things go wrong.

So – if you’re looking for an SMSF cheerleader, like I say, I’m not your guy.

If you’re looking for a straight answer to your SMSF question, though, maybe I can help.

I Just Want to Buy an Investment Property

The most common issues I’ve found with SMSFs tend to follow a bit of a script:

1. People are nervous about their financial future / annoyed with their current superannuation fund / can’t afford to buy any more properties in their own name / want to do things themselves.
2. They speak with their current trusted adviser (financial adviser, or frequently, their accountant).
3. Or they do some online research and then get bombarded with ads for ‘wealth creation advisers’ or ‘how to build real wealth with your super’.
4. Then they find themselves on somebody’s conveyor belt that helps them:
   1. Set up a new self-managed superannuation fund.
   2. Flick their retirement savings from their current super fund over to the new one.
   3. Find a property – often provided by a party related to the conveyor belt owner.
   4. Arrange a loan with the fund to buy the property.
   5. Buy the property.
5. Be deeply disappointed by the property.

It’s equal parts enraging and saddening for us financial advisers to see the marketing out there that blatantly preys on people’s nerves and worries.

Because that’s what most of this loophole-threading nonsense does – it plays on peoples insecurities and financial mindset to drag them into a pipeline designed to profit the pipeline provider.

There’s very little consideration of people’s personal, financial and future needs, wants and desires.

It’s all about putting a shiny face on nauseating terms like ‘maximising share of client wallet’ and ‘clipping the ticket’.

When this eventuates in Ombudsman-claim-after-Ombudsman-claim, there’s no joy in that. It’s like watching the person sweeping up the broken glass after a car crash.

A car crash that tends to come about because of two common, but dangerous beliefs:

• That owning property is a guaranteed path to creating wealth.
• That they’re missing out.

But let’s take a breather there – I think my scepticism is coming through a bit strong!

Let’s Look At The Pros

Because there are actually some pretty decent benefits in owning a property through your SMSF.

Benefit 1: Familiarity

First off, the idea of owning a bricks-and-mortar, direct, residential property is incredibly appealing to many Australians. Besides bank accounts, they’re probably the assets people are most familiar with.

We all know somebody that has an investment property. And we’ve probably all paid rent to a landlord before.

We’ve all seen the kind of growth investors have seen with their investments properties, where they bought that quarter acre block in Bentleigh 35 years ago for $7 and a bag of potatoes, and now it’s worth $5,000,000.

So the first benefit is that it’s an idea we’re intimately familiar with.

Benefit 2: It’s Real

It’s also a tangible asset – you can drive past it, you can touch it, you can work on it, it’s real.

This can be a powerful benefit, especially if you’re disillusioned, or sceptical, about your current superannuation arrangements.

Benefit 3: It Can Help Spread Your Eggs To Different Baskets

A key investment discipline is diversification – spreading your money across different assets to reduce the overall risk of your entire portfolio. It caps your upside, but should also – when done properly – reduce your downside risk.

Owning an investment property in your SMSF can have this effect.

Of course, this presumes that you have enough in the fund to properly diversify your holdings. If you don’t, and all of the capital is tied up in the one asset, then that’s literally the exact opposite of diversification and exposes you to all sorts of risks.

Personally, I like to see no more than 30% of a fund’s capital allocated to a single asset.

If you can accommodate this kind of mathematical restriction, then having an investment property in our fund can work pretty well. What does this actually mean? Say the investment property is worth $500,000 – then, using this 30% as a guide, you’d need around $1.5m in there to buy it outright and still hit near that mark.

Benefit 4: Control

The most persuasive reason to have an SMSF, in my opinion. An SMSF gives you granular control over the investment decisions for your superannuation savings.

You can choose the property, the tenants, the colour of the carpet – pretty much anything. The flipside, of course, is that you also carry all of the responsibility, but we’ll put that down in the Downsides section.

You also can’t invest this way via any other type of super fund.

Benefit 5: Tax

This is often the first benefit many of the SMSF spruikers highlight when ranting about controlling your own superannuation.

Because superannuation – regardless of whether it’s an industry fund, or retail fund, or an SMSF – is one of the greatest tax havens in the world.

Income is taxed in the fund at 15%, capital gains can be tax as low as 10%. And when you retire, you can flip it all into pension mode and get rid of even these lowly rates. That’s right – for most people, retirement means tax-free income, capital and payments from their superannuation.

This powerful benefit isn’t limited to SMSFs, but they do offer a unique ability to juice a bit extra from it all.

 

But, and here’s where my scepticism can shine through, it’s not all rainbows and unicorns.

I mean, nothing in the financial world is. Every single financial decision has pros and cons. What grinds my gears about SMSFs is how often they’re pitched as a happy, shiny solution with no downsides or risks.

Because it’s simply not true – though it benefits the people pushing their own interests to make you believe it is.

Instead, let’s run through some of the negatives that come with owning property in an SMSF – which I’ll cover in my next post.

 

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The information contained on this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.