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.”