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Why I’m not ready for an SMSF

Editor's note: Morningstar Australia's podcast series, Investing Compass, has just released its 100th Episode. Congratulations to Mark and Shani on creating a valuable and accessible source of investment know-how.

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Recently, we released an episode on our podcast Investing Compass about my decision to switch super funds. Faced with a marked increase in fees, I jumped ship to something cheaper.

A question that naturally popped up was why I didn’t opt for an SMSF, especially considering their increasing popularity with investors. The ATO released figures for the 2021 financial year showing the largest increase in the number of SMSF establishments since the 2018 financial year. Why didn’t I join the over 25,000 new funds established?

SMSF suitability for my circumstances

The answer requires a bit of background. I’m currently 29, and I started working full-time seven years ago. Prior to that, I worked in retail jobs part-time while I was at university with default insurances eating away at relatively small contributions. Since joining the full-time workforce, I’ve salary sacrificed each year since graduation to build my super balance. I’ve recently reached an account balance of $77,000.

I’ve put that $77,000 in an industry super fund that has comparatively low fees and the ability to customise my exposure to each asset class. Both features are important to me because of the length of time I have until retirement. My long-time horizon warrants an aggressive asset allocation but also higher fees will compound and negatively impact my end balance.

Both reasons, however, are also why SMSFs are attractive to investors. They allow almost unlimited investment choice, including direct equities, funds, ETFs, antique cars, fine wines, and even Swiss Chalets (although be warned, you can’t enjoy them*). An SMSF is as customisable as anything in superannuation world. Most of the fees, excluding on the underlying assets, are flat fees. Depending on the balance, an SMSF may be the lowest cost option.

And it is this part of the equation that doesn’t add up at the moment for me. My balance isn’t enough to justify the flat fees inherent with a SMSF. A percentage-based fee model works best for my relatively small balance.

A report released by Rice Warner looked at when an SMSF made sense from a cost perspective. They found that around the $200,000 mark, it becomes competitive with industry and retail superannuation funds. At $500,000 or more, SMSFs are generally the cheapest alternative.

The cost and administrative choices

The popularity of SMSFs has expanded the choices for investors. Sensing an opportunity, fintech firms have embraced the challenge of making a no-frills alternative that is low-cost for those that want to set up a SMSF. They are hoping to replicate the successful model from the brokerage industry.

An overview from the ATO showed that the median operating expenses of an SMSF are about $4,000. Low-cost SMSF administrators are offering an alternative for around $1,000 a year. However, in exchange for the lower fee, the no-frills option comes with less support. Not only will users miss out on an annual review by professionals to ensure everything is running smoothly, but there is little capacity to answer questions.

With an SMSF, it is common to have a tax and administrative specialist plus a financial adviser for support. The accountant or SMSF specialist helps with the administration of the fund as well as ensuring that the trustees are operating in the most tax-effective way subject to super regulations. They also prepare the annual tax return. The financial adviser may provide a review of the investment holdings and assist with compliance as part of a broader advice relationship.

It may seem counter-intuitive but there is a lot of assistance required for a ‘self-managed’ super fund. Usually, complexity increases with lifestage transitions (for example, operating both accumulation and pension accounts in retirement) or the addition of more trustees. The ability to have six members means that flat fees can be spread across multiple people, lowering the per-person balance required to make an SMSF cost effective. However, this also adds even more complexity. There may be four different retirement goals, trustees with four different ages, lifestages and perspectives to consider. This is where professionals may add value.

A possible move when balances are higher

I am not ready but I think an SMSF makes sense at a higher balance. To accelerate my SMSF timeline, my husband and I can combine balances and reduce the SMSF administration work and cost. He is roughly the same age and we expect to retire at the same time.

My rough guideline is to wait until I reach a balance of $250,000, which means that my husband will also contribute around the same amount.

I realise that the flat administrative and other fees such as establishing a company to be the trustee are only setting up an empty vessel. I still need to hold investments, and that means incurring brokerage to hold direct shares and management fees to access professionally-managed vehicles.

SMSFs can really add value as you approach retirement. During this transition, the flexibility and control over investments is valuable for investors that want to take a more active role in managing their portfolio. It’s also useful in retirement to design a portfolio to achieve growth and support withdrawals.

Morningstar's Director of Personal Finance, Christine Benz, has written multiple articles about bucket strategies supporting retirees, as linked below. The basic premise is that they can commit to long-term holding periods for some assets to give growth and income, while holding cash to support near-term withdrawals. Not having to sell growth assets at inopportune times to fund withdrawals means making retirement savings last for longer.

SMSFs allow complete control to do this, whilst also allowing the choice to directly own unlisted assets such as residential property, a wider range of funds, bonds and alternatives.

Ultimately, the case for an SMSF at higher balances is compelling. I’m not there yet but I am anticipating an account balance that justifies the cost. Until then, I’ve just got to convince my husband I’m with him for love, not sharing an SMSF.

 

Shani Jayamanne is a Senior Investment Specialist at Morningstar Australasia.

The Bucket Approach to Retirement Allocation – Christine Benz

Retirement Bucket Basics – Matthew Coffina and Christine Benz

Listen to the full episode on Investing Compass here.

* The Swiss Chalet case is part of SMSF folklore where an SMSF purchased a Swiss Chalet and members used it for holidays and wine and dine friends and family.

 

21 Comments
Brad
August 23, 2022

I moved into SMSF around 5 years ago. At first went with a financial manager who frankly delivered paltry returns and was not worth his fee. So thinking this couldn’t be so hard, I decided to try my hand, tapping into Morningstar ratings. As the best performing funds at the time were International funds I poured my money into them. First couple of years I did really well expanding my SMSF by 30%. Then Covid and Vladimir Putin came along, and the fund retreated 25%. I am sure SMSFs are suited to knowledgeable investors, but I am clearly not one of them. I fly aeroplanes, so maybe I should stick to that. I am currently looking around at options. Either a suitable manager, or perhaps returning to a Super fund.

Harry
August 24, 2022

Taking a cue from Warren Buffett quote "money travels from impatient to patient", after burning fingers, most SMSF money will eventually end up in Professionally managed funds. It will be better if we start calling SMSF funds as "Self Mismanaged Super funds"

Ian
August 22, 2022

I am a stockbroker, personally I don’t agree with the point that SMSF can save you money when your balance reach certain amount, in addition to the accounting and auditing fee of around 3000-4000, if you invest in the managed fund, you will need to pay management fee, while with industry super such as Australiansuper, you just need to pay a small amount of admin fee and the management fee is just 0.71% p a for balanced option. I don’t think smsf can beat it in the cost even you keep everything in cash. Please correct me if I am wrong.

Rob
August 22, 2022

Sorry Ian, however your assumptions are not correct (in my instance anyway).
My SMSF is ~$2m and my accounting costs are $3000 pa, audit $700 pa, ATO fee $400, so MER is 0.20% pa.
If I invested in managed funds, my MER would be ~$20,000 pa or ~1% pa.
If I invested in Aus Super my annual admin fees, etc. would be ~$15,000 pa or ~0.71% pa (using your number).
But it's not just about fees, I can control the timing of everything, when to take capital gains/losses, pensions, investments, etc.
Also, contrary to things you might read, running a SMSF is not onerous at all, provided you have some knowledge of the structure, and is actually quite fun.

Dudley
August 22, 2022

"accounting costs are $3000 pa, audit $700 pa, ATO fee $400":

Minimal are SMSF accounting license $110, actuary $110, audit $330, ATO $259 = $809 / y.

Capital value 1% costs:
= $809 / 1%
= $80,900

Jason
August 22, 2022

Rob. I think you forgot your trading fees and/or admin fees for any ETF you purchased. My super fund only charges 0.16% over and above these fees, or a bit more like $250 a year for direct share ownership plus a slightly elevated broker cost.

David Owen
August 21, 2022

We had a SMSF from around 1980 (they had a different name then) until around 2019. Then, we saw the light, and switched to a superannuation fund structure provided by a wrap account provider. Best decision ever!

Adequate choice of investments, we do not want property, exotics etc, amazing control over fees with an upper limit and family fee aggregation across multiple superannuation and non-superannuation accounts. And, no trust or administration responsibilities.

Leaves considerably more time to do really enjoyable things.

SMSF Trustee
August 21, 2022

David there are ways of having an SMSF that is structured the same. Mine is with an SMSF admin platform that does all the accounting, tax and auditing, as well as turning all my notes about investments into proper meeting minutes. The investments are mostly on the North AMP platform giving me a great choice of funds or direct ownership of listed assets.
So you could have solved your issues within an SMSF after all. Great that you're happy with your solution, but it's not the only way for others to manage the admin burden that SMSFs can entail.

stefy
August 19, 2022

My SMSF has a fee structure of exactly $0.

Graham Hand
August 19, 2022

Stefy, please explain as this article is a comparison between SMSFs and large funds. So how do you avoid admin or accountant fees, ASIC fees, investment management fees, broker fees, etc. Or do you self administer and hold nothing but cash?

Harry
August 18, 2022

SMSF were primarily a bad idea made respectable. Worst situation is when Speculation is dressed and sold as Investment and small SMSF Mum &Dad investors pile into them via real estate and alternative investments.

Best professional fund managers with ample resources at hand are not able to deliver consistent results, how can Mum & Dad investor can do better. Secondly 200k to start SMSF is totally inadequate. You can't even accommodate your yearly expenses from the paltry investment returns.

I have not seen any SMSF among my acquaintances even keeping with average results produced by professional fund managers. When you ask your friends about their investment result, they look side ways or keep quiet. People have unfortunately become SMSF prisoners. They are scared of closing them because they have to realise losses during closure. If they keep them, then losses keep mounting due to poor investments.

Rob
August 18, 2022

What a lot of unsubstantiated rot!
I've had an SMSF since 2006 and been through GFC, covid downturn, etc. and still averaged over 12% pa on 10 years and over 10% pa on five years - with no exotic investments or property - just ASX shares and LICs.
The MER is 0.20% pa (and reducing) since 2006. There is nothing wrong with the SMSF structure, perhaps it is the so called "advisors" pushing the wrong people into them that is the problem.

Trevor
August 21, 2022

Totally agree Rob! With a good accountant and a good stockbroker, personally running a SMSF is a doddle! Hi Shani! Good article but I hope that you and your husband are busy paying off your own house first! Regards , Trevor.

Peter Vann
August 17, 2022

Regarding Shani’s reference to SMFs and the bucket approach.

The bucket approach can be implemented in some public offer super funds, so you don’t have to have a SMSF.
For example in ART’s retirement account, you can choose how much to put in cash and then specify that regular mandatory withdrawals be taken from the cash component. Then you can invest the remaining funds in growth assets. Very easy to set up and ongoing management is very low, eg half an hour at most once or twice a year, to reallocate some of the growth assets earnings (when they occur) to the cash pool or it can be automated.

Hence more time to be enjoy retirement!

Jack
August 17, 2022

Yes, I spoke to Unisuper and they allow pensions withdrawals 1. Your choice, where the retiree can specify the fund (in which case, it could be cash) or 2. Prorata across accounts.

Graham Wright
August 17, 2022

Some further questions to consider re SMSF: 1. Do you want to be fully and always up to date on Trustees Responsibilities, ensure you maintain full compliance at all times and then deal with the unclear issues that can arise with some investments? 2. Do you want to be constrained by your investment plan that must meet the approval of ATO? In short, you as trustee may not be as free as you may wish to be in your investing. 3. Have you considered how to deal with all the issues if a trustee becomes incompetent, or unable or unavailable to function as trustee? Health, age and accidents can bring unexpected incidents that cannot be ignored. RE your own SMSF, there are pros and cons but always obligations and responsibilities and accountability.

John Fletcher
August 17, 2022

Unfortunately as a financial planner, I see that most people who have a SMSF, shouldn't. It's time everyone started thinking about the name of it. Self Managed. If you are not capable of making the investment decisions yourself (and most people aren't) and don't want active involvement in the runnning of it, or don't want direct property investment, you probably don't need a SMSF. All the wrap accounts out there now give so much investment choice, commonly have cheaper brokerage costs than you can get through an online broker and have capped admin fees (with family fee aggregation) that cap out at less than the cost of running a SMSF. And that is without even considering all the legal obligations that you take on as the trustee, whether as an individual or a corporate. Most trustees have no idea what they are meant to do, which is actually breeching the rules straight away. Unfortunately, for want of a better term, there is still a lot of 'wank factor' invloved in people wanting a SMSF. Most people don't actually need one and shouldn't have one.

EtB
August 17, 2022

I have had a SMSF since 1995 and am about to switch it to an industry fund. I've done OK and the time taken and costs have not been onerous. However, with some industry funds achieving close to 10% pa over 10 years, and now with a 'self directed' options, with hindsight this is the way I would have gone from the start.

John De Ravin
August 17, 2022

Shani, I would pretty much endorse everything you say. (I'm an actuary and I wrote a book on personal finance so hopefully I have at least a teeny bit of credibility here!). Strategy 70 of my book "Slow and Steady: 100 wealth-building strategies for all ages" is "Set up a self-managed superannuation fund (SMSF)". The five key points I mention as central to whether this might be a good idea are: 1. You (and your spouse if you have one) have combined superannuation balances of at least $200,000 (and preferably $500,000 or more). 2. You are reasonably knowledgeable about superannuation and investments. 3. You would like to minimise the fees you are paying on your superannuation investments and administration. 4. You are prepared to commit some time to managing your own investments and your own superannuation fund. 5. You would like more control over your superannuation fund and its investments. Pretty much everything that you said!

David
August 17, 2022

Unless you wish to hold bizarre asset classes like fine wine, Swiss chalets and antique cars - and I'd be prepared to hazard a guess that most of us don't - you can get a pretty good investment selection by taking out one of the various "self-directed" superannuation products, available from both industry and professional super companies, for a whole lot less stuffing around, and importantly, cost, than setting up and administering an SMSF.

Yes, they're for individuals only, and you don't get to invest in absolutely anything, but they'll probably meet the needs of people who don't want to leave their future fortune in the hands of whatever "balanced fund" happens to mean to individual super companies, and who want to choose specific investments - LICs, ETFs, individual shares - instead.

Alpha123
August 17, 2022

Biggest problem with SMSF is inadvertent poor investment decisions.
I feel most SMSF's will end up doing badly when it comes to results vs the effort equation.

 

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