Super switching sees billions flow out of traditional funds, at a risk

A significant shift in retirement savings is occurring in Australia, with billions of dollars flowing out of traditional superannuation funds into self-managed super funds (SMSFs) and other less-regulated investment schemes. This trend, while offering potential benefits for some, is raising serious concerns among financial regulators about the increased risk to consumers' retirement nest eggs.

For many Australians, superannuation becomes a focus in their 40s, as accumulated savings approach levels that could fund a comfortable retirement. While retail funds dominated inflows for years, the past decade has seen a surge in money moving into SMSFs. These funds now hold over $1 trillion, a substantial portion of Australia's $4.4 trillion in total superannuation assets. Crucially, money in SMSFs is not overseen by the Australian Prudential Regulation Authority (APRA), leaving the Australian Securities and Investments Commission (ASIC) as the primary watchdog.

Financial advisors and "lead generators" are playing a key role in facilitating this migration. Telemarketers, often using social media ads, initiate contact with potential investors, promising super savings checks or help finding lost super. They then employ hard-sell tactics to persuade individuals to move their savings from APRA-regulated funds into schemes that face less scrutiny. Subsequently, financial advisors guide clients through the switching process, often involving substantial sums.

Regulators are particularly worried about the potential for investor losses, a concern amplified by the recent collapses of the First Guardian and Shield managed investment schemes. These failures saw approximately 11,000 investors lose over $1 billion of their retirement savings, with many still struggling to recover their money. ASIC has initiated legal action against several financial advisors involved, alleging they did not act in their clients' best interests. The focus is also turning towards the superannuation platforms that house these investments, ensuring they conduct adequate due diligence.