Note: This Q&A includes the latest SMSF cost data released in May 2013 by the ATO, and data released by ASIC in September 2013. The next SMSF cost update will be released by the ATO in April 2014.
Q: My wife and I are considering setting up a self-managed super fund to be overseen by a licensed adviser. I asked two advisers for a quote on the set-up costs for a self-managed super fund with a starting balance of $600,000. The first adviser charges approximately $8000; the second considerably less — about $1500. Which do you think would be the better option, and fundamentally, is an SMSF the most cost-effective option for a couple with this level of savings?
A: You ask 2 questions: which adviser quote is the best option, and whether an SMSF is the most cost-effective super option for you?
I will deal with your first question, and later in the response, I deal with your second question.
Based on the information that you have provided, an $8000 fee for advice on $600,000 in assets (assuming they all move into your super fund) works out to be 1.3% of your fund’s assets but I’m guessing that the fee quoted involves set-up costs, annual running costs and perhaps a general financial plan.
For your comparison, around two-thirds of SMSFs have an estimated operating expense ratio of 1% or less (that is 1% or less of fund assets), and just over 40% of SMSFs have estimated operating expense ratio of 0.25% or less, according to the ATO. I detail the actual costs of running a SMSF later in this response.
The question you ask is an important one for anyone considering a SMSF. The difference in quotes is huge, but which service is the better option really depends on what you get for your money. Ask each adviser to itemise the following:
- Advice component (if any).
- Establishment costs (including trust deed).
- Running costs, such as administration, reporting (including annual audit) and lodgement.
- Any other costs that are included in the quoted fee.
- Any other costs that may arise that are not included in the fee.
You can then compare which adviser is the most cost-effective, but cost is only one factor when selecting an adviser and/or an SMSF service. You can check out the total average cost of a SMSF later in this article, and compare your fund’s total costs to this average. The costs of set-up are not included in the annual running costs set out below.
I outline the costs of setting up a SMSF, and also the annual and one-off costs you can expect from operating a SMSF in my book DIY Super For Dummies, 2nd edition (Wiley). Briefly, the start-up costs for a SMSF can range from being free (with strings attached) to up to $2,200, although typically the start-up costs for most SMSFs cost somewhere in between these two figures.
Note: If you want a corporate trustee, then you need to add another $700 to $1,000 to your SMSF start-up costs.
So, how much should a DIY super fund cost?
The cost of setting up a SMSF is not the only key information you need to investigate. The annual running costs of your SMSF are more important to the long-term viability of your SMSF than the set-up costs, and will have a greater impact on your investment returns and the size of your superannuation account over time.
The positive news is that the average operating expense ratio (which is simply dividing the costs of running a SMSF by the value of the fund assets) has declined over time, according to the ATO. The ATO states that the average operating expense ratio for a SMSF has declined from 0.86% for the 2006 financial year to 0.56% for the 2010 financial year, and 0.54% for the 2011 financial year (see ATO report, ‘Self-managed superannuation funds: A statistical overview 2010-11’ (released in May 2013) and its earlier reports, ‘Self-managed superannuation funds: A statistical overview 2009-10’ (released in April 2012), and ‘Self-managed superannuation funds: A statistical overview 2008-09’ (released in December 2011).
The table below outlines the average costs for an average SMSF balance. Note that the annual cost of a SMSF is dependent on the value of the fund assets because many SMSF costs are fixed costs, such as fund audit, preparation of accounts and ATO supervisory levy. Also, the average fund balance (see table below) is reasonably high which means the fixed costs are spread over a larger value of assets.
If you have a small SMSF fund balance, then you can expect to devote a higher percentage of your fund assets to annual expenses. For example, a SMSF with $50,000 or less in fund assets, has an average operating expense ratio of 8.3% (equates to costs of up to $4,150) according to the ATO’s statistical overview for the 2010-11 year.
If you have a large SMSF fund balance, say, $2 million, then your expense ratio will be a lot lower than the average. According to earlier ATO statistics, SMSFs with more than $2 million in assets had operating expense ratios of 0.47% (2006), 0.43% (2007), 0.38% (2008), 0.29% (2009), 0.26% (2010), and 0.23% (2011).
|SMSF: Average operating expense ratio|
|Financial year||Average fund balance ($)*||Average operating expense ($)||Average operating expense ratio (%)|
Source: Extracted from ATO reports, ‘SMSFs: A statistical overview 2008-09’ and ‘SMSFs: A statistical overview 2009-10’, and ‘SMSFs: A statistical overview 2010-11’. *The average fund balance has been calculated by SuperGuide using the average operating expense figures and expense ratios.
The ATO also reports that if you have between $100,000 and $200,000 in your SMSF, then the average expense ratio for such a SMSF is 2.83% ($2,830 to $5,660). Note that I am aware of many SMSFs with roughly $200,000 of assets within a SMSF who manage to keep total costs to about $2,000 (or 1% of fund assets), although with recent increases in the ATO supervisory levy and increases in audit fees, such cost management at this fund asset level is becoming increasingly rare.
If you have a SMSF with a fund balance of between $200,000 and $500,000 then the average expense ratio for such a SMSF is 1.37% ($2,740 to $6,850), according to the ATO.
What is the minimum cost-effective balance* for an SMSF?
You also ask the question: is an SMSF the most cost-effective option?
In September 2013, the Australian Securities and Investments Commission published a consultation paper (Consultation Paper 216) considering specific disclosure requirements when advisers are providing advice on SMSFs, including SMSF costs. As part of the process, ASIC commissioned Rice Warner to examine the minimum cost-effective balance for SMSFs compared with large super funds (which are regulated by the Australian Prudential Regulation Authority). Some interesting points from the Rice Warner report, Costs of Operating SMSFs (May 2013), include:
- Less than $100,000. SMSFs with fund balances of less than $100,000 were not cost-effective in comparison to a large super fund, unless the SMSF could grow within a reasonable time.
- Between $100,000 and $200,000. SMSFs with fund balances between $100,000 and $200,000 can be competitive with the more expensive type of large super funds (typically retail personal superannuation funds), but only if the SMSF trustees undertake some of the administration and investment functions themselves.
- More than $200,000*. SMSFs with fund balances of $200,000 or more, are competitive with both cheaper and more expensive large funds, provided the SMSF trustees undertake some of the administration.
- More than $250,000*. SMSFs with fund balances of $250,000 or more are the cheapest alternative compared with all types of super funds, provided the SMSF trustees do some of the fund’s administration.
- More than $500,000*. If SMSF trustees require ful service from SMSF administrators, then a fund balanceof $500,000 is needed to be more cost-effective than a large super fund.
- Pension funds. The cost analysis is transferable to SMSF pension funds. A SMSF in pension is more expensive to run, but so is a pension account in a large super fund.
For more information on SMSF costs, and minimum cost-effective balances see SuperGuide article, SMSFs: How much money do you need to start one?.