Going beyond the cost debate in SMSFs

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There is increasing debate in the industry around what minimum balance should be required in order to make an self-managed superannuation fund (SMSF) effective, writes Xpress Super chief executive Olivia Long.

In short, there is no minimum balance required for an SMSF to be an effective retirement savings vehicle. I know that's not the view of the Australian Prudential Regulation Authority-regulated funds, but I think it's fair to say they are hardly objective when it comes to this issue.

They argue that $500,000 should be the starting point. They also argue that potential trustees should be the font of all knowledge when it comes to investment and the regulatory environment. The concept of setting in stone qualifications for people wanting set up an SMSF has even been mooted.

As you would expect, I couldn't disagree more. My starting point is that cost is the wrong way to approach this issue. But even if you accept that the cost of running an SMSF should be the guiding principle, then the argument that advocates a $500,000 minimum simply can't be sustained.

Let's have a look at some numbers produced by actuarial firm Rice Warner. Taking a $100,000 balance, they estimated the average cost of running an industry fund, retail fund and SMSF at $936, $1,608 and $1,594, respectively.

So, an SMSF is competitive already with a retail fund.

Increase the balance to $250,000 and the industry fund costs $2,136, its retail counterpart is $4,540, while an SMSF is $1,750 – 18% cheaper than the industry fund and a whopping 61% cheaper than its retail equivalent.

At $500,000, the statistics are even more damning for the APRA funds, with the industry fund costing $4,136, retail at $8,940 and SMSF at just $1,999.

On these numbers, the figure of $500,000 is simply nonsensical – if you wanted a cut-off point based on cost, then clearly it should be $250,000 compared with an industry fund and just $100,000 for a retail fund. Some "expert" just thought of a number and doubled it!

But to my way of thinking, focussing on the cost of running a fund – important as it is – misses two critical elements to the debate. First, it often means there is a lack of analysis on the rate of return, surely a critical consideration for a long-term retirement savings vehicle.

After all, if a fund's rate of return is not important, why do our industry and retail counterparts trumpet their good years and give a good imitation of a Trappist monk in the bad years?

On the basis of return, SMSFs are competitive with the industry and retail funds. Over the past decade, retail funds have delivered, on average, 3.4%. I am quite certain many SMSF trustees have outperformed that average return.

Second, it tells those people - often younger people - that they don't have the skill set or knowledge to take control of their own retirement savings. Surely in today's society we should be encouraging people who want to take responsibility for their retirement to do so.

Provided these people do their homework and have a full understanding of what's involved in running an SMSF, then there is no reason to set an arbitrary limit to warn them off.

But don't just take my word for it. In 2010, the Cooper Review, which took the last definitive look at our superannuation system, reached the same conclusion.

Article first published by Morningstar.
  • Concerned on 16/01/2014 2:41:01 PM

    I keep saying that an SMSF is set up for other reasons than the balance. What does the client want .... control for one. Why can't a fund be setup for any figure. It is beyond belief that if a person wants a SMSF they can't have it because the industry says so.

  • Louise on 16/01/2014 2:51:49 PM

    Where do these figures come from?!
    The retail fund and the industry fund costs would also take into account investment management costs (ICR's) as well as the trustee costs.
    The SMSF running costs would only take into account accountancy costs and I have seen many accountants charge much more than this. The SMSF costs you quote don't take into account investment management costs for fund managers, potential brokerage fees, or if owning direct property the associated costs with this type of investment.
    And lets not forget that so many clients get put into these structures don't understand the ongoing requirements, and as trustees they are ultimately liable for the day to day running of the SMSF and ensuring it is compliant.
    Additionally I don't know many full time working people accumulating for retirement who have the time and/or inclination to research investments in an effort to outperform the index.

  • Phil on 16/01/2014 3:01:09 PM

    Wow what retail fund is charging $8,940 on a $500,000 balance?

  • Rob on 16/01/2014 3:11:12 PM

    Olivias FSG makes interesting reading - hope there is advice with that Olivia?

    https://xpresssuper.coretrading.com.au/media/70787/xpress1035_fsg.pdf

  • SMSF owner on 16/01/2014 3:30:50 PM

    The sooner advisers educate clients that superannuation is a tax structure and a SMSF gives trustees the ability to cherry pick their investments the better people will be. Back in 2010 I had $50,000 in super and went to 5 financial planners to seek advice on superannuation as I was not impressed by the returns, all of these advisers were 100% against SMSF's and told me that the costs were to expensive. After my own research I created a SMSF in 2010 even though the fees were much higher ($2000 a year). With my own research I purchased my own investments and made nett returns of over 20% for the first 2 financial years. Now I've purchased property through an LRBA and could not be happier. I guess the main point I'm trying to make here is it should not matter what superannuation balance you have as it comes down to sound knowledge on what you can and can't do. Even though the percentage cost to run a low balance SMSF is higher the choice on what you can invest in is much more broader than any other super fund in this country.

  • alleycat on 17/01/2014 7:51:45 AM

    Dear @ Phil,
    You'll probably find that the retail fund cost probably relates to a bank/insurance company owned product that caters for adviser remuneration and products manufactured by the Licensee.
    Unfortunately despite various commentary on the obvious conflicts of interest this presents, ASIC are only just waking up to the fact.

    @ SMSF owner
    Yes, the opportunity to have control over what and where your investments are invested is correct.
    However, no one bats a 1000. Professional fund managers don't get it right 100.0% of the time and sooner or later neither will you.
    I've been in this business some 38 years, so I've seen the good the bad and the ugly over that time. My education and experience allows me to do OK for both my clients and myself with our investments.
    Late last year it was widely reported that super funds on average returned 15.0% for the year. My clients and I have returned 30.0% for the same period.
    Returns are not the be all and end all to investments.
    Investment time frames, tolerance to risk (losing money) needs, and perception are different for every individual.
    It often surprises me when I see married couples that are assessed with identical risk profiles by others.
    My experience says 99.0% of the time that's not the case and couples often think differently when it relates to how their money is spent or invested.
    By the way I don't get it right 100.0% of the time because "GOD" is not tattooed on my forehead.

  • Pat on 17/01/2014 9:00:52 AM

    Given Olivia Long is CEO of SuperGuardian, a SMSF administrator, one must take her comments with the appropriate grains of salt. Looking at her company's fees, the minimum fee that a trustee will get away with, for a portfolio that has a bank account and not more than 9 other investments, is $2,078 p.a. This is before you start to add on investment costs.

    Her comment: "Surely in today's society we should be encouraging people who want to take responsibility for their retirement to do so." should be interpreted differently.

    I believe there is a difference between being engaged in and taking responsibility for one's retirement (amongst other financial matters) and controlling the entire process, particularly the investment process.

    There is sufficient research to show that, on average, the lay-investor gets it wrong. The trade at the wrong time and chase past returns. They consistently achieve below market returns.

    So, the answer is advice. Advice costs money. Those costs add to the ongoing cost of running a SMSF that blows Ms Long's comments out of the water.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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