SMSFundamentals | Nov 26 2020
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In the wake of a report commissioned by the SMSF Association, the competitiveness of SMSFs as compared to retail and industry funds comes into focus.
-What's the appropriate minimum size for a SMSF?
-Start-up and running costs
-Motivations of trustees
By Mark Woodruff
Last year Australian investors were warned by the Australian Securities and Investments Commission (ASIC) of potential downsides to establishing self-managed super funds (SMSFs). In October 2019, the independent regulator noted SMSFs with balances below $500,000 produce lower returns on average when compared to industry and retail super funds.
In a fact sheet, ASIC urged consumers to question whether SMSFs are right for them. It noted the average yearly cost of running an SMSF was $13,900.
A cursory glance at the yearly cost figure and the minimum balance of $500,000 would suggest they both are seemingly too high.
Clearly the SMSF Association agreed and enlisted the actuarial help of Rice Warner to research further. One key aim of their report was to examine the costs of operating a SMSF, in the context of the appropriate minimum size. Whether your interest lies with an existing or proposed SMSF, the key findings detailed below may serve as a useful measurement yardstick.
To avoid – Knowing the price of everything and the value of nothing
Before we embark on a full-blown cost analysis, it’s important to remember the value of a SMSF often extends beyond securing the lowest fee structure.
While cost comparisons are instructive, there are quite often other personal qualitative factors at play. These might include the desire to exert control over retirement income goals and a level of satisfaction in attaining them.
Additionally, the decision by the trustee to take on or outsource some administrative functions will depend upon feelings of expertise and availability of time.
A flyer from the SMSF Association also nominates dissatisfaction with an existing fund, along with tax and estate planning as motivating factors for trustees in setting up a SMSF.
Finally, there may be a strong preference for investing in direct property inside a SMSF, which generally is not possible in an APRA regulated fund.
However, APRA regulated funds enjoy a guarantee of their benefits, which isn’t available to members of a SMSF.
Background and definitions
The Rice Warner report was commissioned by the SMSF Association as an update to a report prepared for ASIC in May 2013, entitled ‘Costs of Operating SMSFs’.
The fees landscape has changed considerably since the 2013 report. There have been reductions in fees for SMSFs and retail funds, and an increase in fees for industry funds. This has changed the relative competitiveness of SMSFs in comparison to the APRA-regulated funds.
APRA regulates retail super funds and industry super funds. Retail funds are typically owned by banks and wealth management companies and are known as ‘for profit’ funds. Industry funds on the other hand are designed to benefit members of particular industries and are not-for-profit funds.
Finally, data used in the the report was sourced from access Rice Warner received to the “anonymised expense, cash flow and balance information” from 100,000 SMSFs. This was courtesy of BGL Corporate Solutions and SuperConcepts.
Establishment Costs and Annual Administration Costs
Establishing an SMSF would cost between $1500 and $2500, according to Rice Warner’s latest research, while annual administration costs would sit at between $1600 and $3300.
The costs of general and strategic financial and investment advice were excluded from the comparison, Rice Warner said.
When quizzed about the ASIC figure of $13,900 (for annual running costs), SMSF Association CEO John Maroney suggested a figure around $5,000 would be more accurate.
Competitive balances
By reference to the above table, one may see how the actuary concludes SMSFs with $100,000 or less “are not competitive in comparison” to retail and industry funds. SMSFs with this balance of funds would only be appropriate “if they are expected to grow to a competitive size within a reasonable time”.
It was found the majority of SMSFs with low balances either grow to competitive size or are closed.
Considerably lower fees than those on pricing schedules are being charged to some SMSFs, notes Rice Warner. This can mean those funds are competitive even at small sizes.
The report states a SMSF with a balance of between $100,000 and $150,000 is competitive if the trustee uses a cheap provider and undertakes some of the administration.
SMSFs with $200,000 or more are seen as competitive with both industry and retail funds. That is, members moving to SMSFs from industry or retail funds with balances at this level could obtain equivalent or cheaper fees.
For balances of $250,000 or more, SMSFs become the cheapest alternative. This is provided the trustee undertakes some of the administration, explains the actuary.
Alternatively, if the trustee seeks to pay for full administration then it would be necessary to choose one of the cheaper services to stay more competitive.
At $500,000 SMSFs are “generally the cheapest alternative”. “For SMSFs with only accumulation accounts, the fees at all levels are lower than the lowest fees of APRA regulated funds,” the report continues.
“For SMSFs with pension accounts, only the highest full administration fees exceed the lowest fees of APRA regulated funds.”
It should be noted SMSF fees are fixed, which means they diminish as superannuation balances grow. This is in contrast to bigger super funds that might charge a percentage fee.
Conclusion
While every SMSF has its own raison d’etre, the findings of the Rice Warner research are a useful guide for SMSF investors.
The figures provided for costs and minimal viable balances can serve as a loose benchmark for either an existing or proposed SMSF.
Technical limitations
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