Wealth Intelligence

Self Managed Super Funds– all about cost. Or is it?

The amazing growth in the number of SMSFs has led to a somewhat misleading campaign. However, it focuses on the wrong thing.

What’s this not about?

On almost every measure, SMSFs are easily the most attractive of the range of super alternatives for most investors.

The only three possible exceptions are where:

• the member is unwilling or unable to take on the responsibility for the SMSF;

• the member is unable to obtain the required life insurance coverage in an SMSF; and/or

• the SMSF assets are believed to be too small to be efficaciously managed.

Assuming the member is willing to take on the responsibility for an SMSF and can efficiently manage the life insurances, what is left to decide?

Not much. In spite of some industry funds’ race to the bottom on costs, it is not a question of cost.

What’s the fuss?

The self managed super fund sector is Australia’s largest super sector by both size and number of funds.

It has been growing at an annualised rate of over 20% p.a. [1]

Corporate, industry or for-profit super funds are losing members and cash flow to SMSFs.

The industry super funds (i.e. mutual funds originally based around an industry e.g. Health Super (health)) are great champions of low fees.

They ran a meritorious campaign against commissions (with which, as the initiator of the campaign against commissions in 2000, we fully agreed).

But industry funds are in a competitive market. And they see their lunch, or part of it, being eaten by SMSFs.

And so they are a lot fussed, it seems. As can be seen by the literature they promulgate.

The clear problem they have is their focus almost exclusively on costs. The “only $19,995, drive-away” approach.

There is no mention of the other limitations of SMSFs v industry funds. Perhaps because there are few.

So how cheap are SMSFs to establish and run?

Set up cost of an SMSF

The most expensive form of an SMSF (i.e. one with a corporate trustee rather than individual trustees) costs $800 to establish using an online service.

An SMSF with individual trustees costs even less.

Annual costs

The annual costs for accounting/ auditing are $1,800 for a basic service plus an ATO levy of $150. Let’s call the total $2,000.

Of course, with an SMSF there are investment costs (if you out-source this), as there are with industry funds.

Because of economies of scale these costs in an industry fund will typically be about 0.7% p.a. cheaper than an SMSF.

On the other hand. because the SMSF accounting/ audit costs are fixed, the larger the account balance(s) the cheaper the costs on a percentage basis.

The question you might, therefore, ask is at what point is it worth paying the extra cost to get the benefits of an SMSF? Those benefits include:

• generally lower tax in accumulation phase

• no CGT in moving from accumulation to pension phase

• investment choice of direct investments (e.g. property, shares) as well as managed funds

• higher possible returns from self management

• certainty of testamentary wishes

• greater estate planning choices

• sharing of fixed costs with a family member

And if your SMSF investments are returning at least 1% higher than otherwise might be the case, the entry figure for an SMSF is even lower.

The finance industry seems to have settled on $200,000.

But the reality is that it’s not a cost question.

It is up to the member and his/ her assessment of value. It’s a matter of weighing up both the tangible and intangible benefits of an SMSF.

Some members are happy with an SMSF of $50,000 as they relish the control and freedom.

Others might wait until their fund is $400,000 before using an SMSF.

Summary

My aim is not to beat up industry funds. They have done a great service in maintaining pressure on government about the sinfulness of commissions.

And they are a viable super alternative for anyone with a member balance of less than about $150,000.

But super investors who value all of the benefits of an SMSF will look past the costs (which, incidentally, are not significant past about $200,000).

First Samuel has a minimum investment amount of $500,000 for an accumulation SMSF.

Talk to experts about this. Talk to First Samuel.

IMPORTANT NOTICE:  Any advice contained in this document is of a general nature only and has been prepared without taking into account your personal objectives, financial situation or needs.
Because of that, before acting on any advice in this document, you should consider whether the advice is appropriate for you having regard to your personal objectives, financial situation and needs.