SMSF costs higher than thought

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Self-managed super funds are being set up without the full costs being understood by trustees, say two industry bodies.

The costs of setting up and running an SMSF are higher than previously estimated, according to a submission to ASIC from Industry Super Australia (ISA) and the Australian Institute of Superannuation Trustees (AIST).

They say regulation of advice provided to people considering setting up an SMSF must be tightened, so people understand the real costs involved.

Earlier this year, ASIC commissioned Rice Warner Actuaries to investigate how much SMSFs cost to run. Investment fees ranged from 0.35% to 1.20%, it found.

But the ISA and AIST submission says Australian Taxation Office data from more than 70,000 SMSFs over a three-year period provides a more accurate analysis of the average costs of SMSFs than what ASIC puts the costs at.

In 2010, one in five SMSFs had assets of less than $100,000.  The smallest funds, with assets of up to $50,000, had costs on average of over 7% p.a.

Funds of between $50,000 and $100,000 had costs on average of 3.7% p.a – higher than a major not-for-profit fund with costs of less than 1% p.a.

 “Many SMSFs are established with small accounts, and their costs to earnings ratio are unacceptably high, especially when compared to industry and other not-for-profit funds,” said ISA chief economist Dr Sacha Vidler.

“This new research shows that for all but the very largest of SMSF balances, industry funds are a more cost effective option and also shows that two thirds of SMSFs have a very low level of diversification, with most assets in one asset class.”

Setting up an SMSF is one of the most important financial decisions a person will make in their lifetime and required careful consideration, he said.

“People need to make sure setting up an SMSF is the right thing for them after considering things like set up and exit costs, loss of insurance coverage for theft and fraud and disclosure of costs and benefits compared to the fund they’re already in.

“The advice people receive is critical to helping them making sure, and should be in their interest – and not the interest of the adviser or accountant.”

 

  • Michael on 21/11/2013 3:11:45 PM

    Good to see such unbiased one dimensional advice from the experts. Absolutley no sign of self serving comments. Thank heavens Sinodinos seems to have some real world knowledge and a healthy scepticism of such helpful advice.
    People enter into an SMSF for lots of good reasons. Many of which are not shown in ATO statistics. They also are smart enough generally to work out what it is costing them and accept that cost because it is achieving their objective, whatever that may be. For some it is buying their business premises, others want better risk insurance coverage, some have a short term plan to build up a balance quickly and are aware that as you get older the ability to contribute on an undeducted basis is greatly diminished.
    There is a place for all forms of superannuation and trying to fight for the existing retirement savings of Australians is not helping with the problem. All stakeholders should be promoting their services to the 2/3 of Australians who are currently not providing sufficiently for their future needs because they think it wil take care of itself.

  • James Smith on 21/11/2013 3:16:50 PM

    ISA and AIST you also need to take a look in your own back yard. When are you going to stop the practise of industry funds quoting to members admin fees of $1 per week and then in the fine print explain that admin costs are deducted out of fund earnings. It has been acknowledged by the industry funds themselves that these quoted admin fees do not cover all the costs so why does this practise continue other than to mislead members ? How also are the salaries of your advisers and advertising costs allocated to clients accounts ? ASIC over to you as ISA and AIST show no signs of fessing up but are quick to point the fingers at others.

  • Stephen on 21/11/2013 3:25:53 PM

    I wonder how many of those SMSFs were created purely to purchase real estate. The costs associated with limited recourse loans are extensive if the SMSF has low funds. Then if the SMSF person just shoves their funds into managed funds, that is also going to make it more expensive for lower fund SMSFs. The admin fees for SMSFs are coming down quite dramatically with online companies doing everything for less than $1000 but changing like wounded bulls to set-up extra services like an additional account based pension. Perhaps it should be mandatory that anyone wanting to set-up an SMSF has to have the advice of a lawyer or another qualified advisor (who is not going to make any money out of it) so as to knock some sense into them. I can understand ASIC and the ATO getting concerned about SMSFs.

  • Robert K on 21/11/2013 3:31:32 PM

    This article is clearly aimed at Accountants and is assuming that the only reason the trustees set up a SMSF is because if cost . The main reason trustees set up a fund is 1/ Investment choice 2/ Control 3/ Pension Strategy 4/ Estate planning .I feel the trustees of SMSFs are intelligent enough to know a good superannuation platform when they see one. I am an accountant and act in my clients best interests .

  • Alistair on 21/11/2013 3:40:40 PM

    First, most would agree that you would need at least $200K to even begin to think about an SMSF being established.
    As to fees, why is it okay to allow the institutions to charge an MER WITHOUT THE ADVICE TO MEMBERS of say between 1.00 to 2.00% per annum on funds where an adviser who gets this down to less than 1% most times using ETF's, Index funds and direct equities along with physical property and cash is deemed to be expensive by the holier than thou lot in this article.
    Are we expected or willing to work for nothing as that does not sound like good business sense to me or should we give up and hand the funds over to the institutions.
    Who says what price is your advice - surely its value of advice in the interest of the client. All this commentary from a bunch of intellectual derelicts who probably have never run a business making thought bubbles about the cost of advice is another sickening attempt to devalue advice given by professionals.
    Now where is that hammer and sickle ?

  • Brian Hade on 21/11/2013 4:54:53 PM

    I have to agree with Industry Super Australia on this point. SMS is heavily promoted by accountants and in some cases the size of the investment does not warrant the ongoing accountant and statutory costs.
    However, I believe the Industry Super Australia's concerns are not about caring for unaware investors , but more about a growing super area they are not involved in. I'm sure if Labor had won the last election Industry Super would be pushing for more "regulation" in this area.

  • James Smith on 22/11/2013 9:05:43 AM

    These comments by ISA and AIST demonstrate the ulterior motives of them creating a united lobby group. They are clearly in it for themselves and it is critical that they are not seen to represent the industry. The industry funds began their attack on the industry by making claims that it was structurally corrupt because advisers that recommended a fund were associated with a fund and were paid by the fund to service fund members. They are now paying advisers ( out of fund members accounts but not disclosing how much ) to service members accounts and not give advice on any other product but their own. The reality is that super fund members need ongoing service and advice and advisers that provide this advice need to be adequately remunerated. This has always been the case. The industry funds ambition to remove advisers from the super funds (except their own) confirms this reality and their claims that other super funds are products and their own super funds are a comprehensive investment solutions is simply not true. There are legitimate concerns of the cost/benefits of SMSF but ISA and AIST have no credibility to make any assertions while this blatant hypocrisy continues.

  • Pat on 22/11/2013 11:04:24 AM

    I wonder if all those commenting here would have a different view if the bodies commissioning the research were not associated with industry funds. If it was SPAA or Cavendish, for example, I am sure the defensiveness would diminish considerably.

    I think it goes without saying that:

    1. Average accounting/audit fees for a SMSF are about $3,000 p.a. (and likely higher);

    2. For a fund with even $300,000, this means admin fees of 1% p.a. before a dollar is invested;

    3. To think a strategy of buying a term deposit and a handful of shares is the solution to the cost issue does not account for the considerably higher risk associated with a concentrated equity portfolio and lack of diversification across equity markets;

    4. For many SMSF members, there are many super fund wrap platforms that will provide a cost effective alternative to SMSFs with the same investment options without the excessive cost and responsibility burden (I am ignoring the platforms that are in bed with advisers/dealer groups that pay kick backs - oh, wait, that would be a vertically integrated investment solution);

    5. I believe anyone promoting a LRBA property strategy to a SMSF with less than about $500k of member benefit in it is irresponsible - for anything less, you are taking a highly concentrated, leveraged, expensive structure arguably for the benefit of the person(s) selling the structure.

    I believe we need to realise that SMSFs are still an expensive option for small benefits and, apart from some specific insurance/BRP strategies, are unnecessary for many people.

    This is coming from a SPAA specialist adviser.

  • Innocent Observer on 26/11/2013 11:25:39 AM

    @Pat is spot on.

    The rise and popularity of SMSFs has perpetuated itself into accountants (and financial advisers) jumping on the band-wagon.

    Robert K - your approach echos what we hear from most SMSF owners we meet who have been cornered into setting up a SMSF by their accountant. However there is very little than a SMSF can do that an APRA regulated superannuation fund can't. And in most cases SMSFs cost the client more (both in the short and long run).

    Irrespective of cost though my main concern is I reckon that less than 5% of the SMSF owners we meet actually understand their responsibilities and liabilities.

  • Matthew Ross on 26/11/2013 8:30:08 PM

    Agree with Innocent Observer. Reckon 95% of trustees would have no idea how much they can allow members (themselves) contribute to the fund...

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