When Self Managed Super Funds Go Wrong!

The Australian housing market is currently in a time of downturn, dropping 4.8% in the last year. In context, that’s the most significant fall since the Global Financial Crisis. While a slip in the market will affect many homeowners to some degree, those who have purchased investment property through a self-managed super fund (SMSF) may be especially at risk.

Buying property through a SMSF can concentrate risk by moving money from a portfolio into a single investment. In short, if the property doesn’t do well, the SMSF doesn’t do well. At a time when the property market is in decline those with investment properties geared in their SMSFs are particularly vulnerable.

When this can be classified as ‘bad advice’ is when a financial adviser has not acted in the best interest of the client when providing financial recommendations. One of the reasons that properties are being recommended to clients is that sometimes a financial adviser or their associate may be paid a commission for selling them, meaning it shifts from being in the client’s best interest to being a commission driven sale, which, in some cases, is a fact that clients aren’t made aware of.

Oftentimes property will be bought ‘off the plan’, meaning the property is yet to be built and are regularly sold with commission. Off the plan properties carry a certain amount of risk due to the property being valued and purchased prior to construction. There are a couple of main factors to consider in this instance; one is that there is potential for the property to be overpriced, particularly if large commissions are being paid to the person selling it to you. Secondly, if the property market happens to fall, the client will absorb all losses and costs in their part of the investment. Lastly, everybody who borrows money will pay interest and it is yet another element to consider when calculating potential losses in the event of a market downturn.

Someone may potentially have a claim if they’ve been advised to set up a SMSF and buy property that has subsequently dropped in value, resulting in a significant loss of superannuation. In this case, chances are that the advice was not appropriate for the clients in the first place, creating the opportunity to challenge the recommendations provided and to say “I need to be put back in the position I would have been had I not used your services”.

If you have found yourself in a situation where bad financial advice has resulted in significant losses, you may have a claim. Contact Financial Rescue for an obligation free case assessment.