he biggest risk facing your investors is that their retirement savings will be inadequate. Recent studies suggest that 76.1 per cent of singles and 41.9 per cent of couples aged 41-65 will run out of savings in retirement. The median single will have to live a whopping 17 years without savings.
In that context, the current debate on borrowing within SMSFs (aka ‘Limited Recourse Borrowing Arrangements’ or LRBAs) is a sideshow. Here are three facts about LRBAs.
1. Gearing is a useful tool for some investors
Gearing is an investment strategy that magnifies gains and losses. It benefits some investors and is totally inappropriate for others. Ideally, investors who gear should do so with the assistance of a good financial adviser.
2. SMSFs are NOT rushing into gearing to buy property
Contrary to some media speculation, SMSF investors are NOT borrowing in large numbers to purchase property. The latest ATO SMSF figures are from 30 September 2013. They show that LRBAs are just 0.49 per cent of SMSF total assets; actually down from 0.53 per cent at the same time a year earlier.
What’s more, SMSF exposure to both residential and non-residential property is also down on the previous year (sitting at just 3.50 per cent and 11.72 per cent respectively).
3. The regulators are still playing catch up
The purchase of property is excluded from the AFSL licensing regime by s763B of the Corporations Act. This creates an opportunity for unlicensed property spruikers to take advantage of investor ignorance to their own benefit. Serious thought needs to be given to how the exclusion should apply in the brave new world of SMSFs and LRBAs.
3 steps to growing your advice business through LRBAs
- Accept that both gearing and direct property investment are valid investment strategies for investors. Have a clear view as to when their use is appropriate.
- Build close relationships with trusted accountants, loan brokers and lenders. This will create a ‘virtuous circle’ of business referrals and ensure comprehensive professional assistance for investors.
- Don’t forget the review. An LRBA is a long-term investment strategy and property is an illiquid investment. But SMSF trustees and advisers are still obliged to “regularly review” the investment strategy. The review will frequently identify either when a strategy is failing or when it needs to be finessed.
Providing the right advice on LRBAs presents the perfect opportunity to showcase your expertise and value proposition to your clients.
Chris Andrews is the vice president, head of funds management at La Trobe Financial.
