SMSF: How much does a DIY super fund cost?

Note: This Q&A includes the latest SMSF cost data released in April 2012 by the ATO. The next SMSF cost update will be released by the ATO in April 2013.

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?

A: 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.

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, 2^nd 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 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 0.54% for the 2010 financial year (see ATO report, ‘Self-managed superannuation funds: A statistical overview 2009-10’ (released in April 2012) and its earlier report, ‘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 7% (equates to costs of up to $3,500) according to the ATO’s statistical overview for the 2009-10 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), and 0.25% (2010).

Source: Extracted from ATO reports, ‘SMSFs: A statistical overview 2008-09’ and ‘SMSFs: A statistical overview 2009-10’. 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 about 2.41% ($2,410 to $4,820). 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).

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 1.24% ($2,480 to $6,200), according to the ATO.