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Self-managed super funds (SMSFs) are still growing both in number and in assets. According to the latest figures from the Tax Office, the total assets held by SMSFs now exceeds $750 billion shared by 1,118,650 members. Yet, despite the popularity, the average trustee of an SMSF has only a vague understanding of the difference between those funds and public offer funds, which include retail funds and industry funds. Today, I will attempt to clarify the differences.
Investment strategy
SMSF
The good news is that as trustee of your fund you can exercise much more direct control over your investment strategy. You also have a choice of direct shares, unlisted assets and property either directly or through property syndicates. The bad news is that you are responsible for developing, implementing, documenting and reviewing an appropriate investment strategy for your fund. Among other things, this requires you to consider the risk/return profile and objectives of each member, potential risks, insurance needs of the members and the likely return and liquidity of any investment your fund makes. All members should be aware that there are specific restrictions on the type of assets you can acquire in an SMSF.
Public offer funds
Most of the control is taken from you. You can only choose from the investment options offered by your fund of choice. However, many public offer funds offer a wide range of investment options and some funds even allow direct share investment.
Borrowing
SMSF
Provided you adhere to the regulations as trustee, you can borrow to buy assets such as shares and property. However, these regulations are complex and great care is needed.
Public offer funds
Public offer fund trustees do not borrow but some funds do offer investments that are internally geared.
Fraudulent conduct or theft
SMSF
This is an area where there is a major difference. SMSFs do not have access to government financial assistance in the event of theft or fraud. This can have a horrendous financial outcome where the trustees are victims of scams and fraud.
Public offer funds
In a public offer fund, members may be eligible for government financial assistance in the event of theft or fraud.
Members/trustees and responsibility
SMSF
SMSFs have fewer than five members, and generally all members are trustees and all trustees are members. Once you set up an SMSF you take on all the responsibilities of the trustee, which includes administration and complying with all the regulatory requirements. Fortunately, there are administration companies that can help you set up and administer your SMSF. However, the trustee remains responsible for ensuring that any outsourced jobs are completed properly.
Public offer funds
Public offer funds normally have no member limit, and all the administration and investment is performed by an unrelated trustee. This may well be a much better option for people with smaller account balances, or if they are not confident in handling the administration and investment.
Costs
SMSF
The costs fall into the ‘how long is a piece of string’ category. There are costs to set up the fund, ongoing administration and accounting costs, and the internal costs of any managed investments your fund purchases.
I have heard of some SMSFs being charged more than $15,000 a year by their accountant, while there are offers on the internet for full administration for less than $1,000. I have a relatively large SMSF and all the administration is handled by an administration company. The annual fee is usually around $6,000 a year. I believe this is reasonable in view of the work done, and the great job they do.
Public offer funds
There is normally no cost for opening an account with a public offer fund, but their ongoing costs include account keeping fees, administration fees, investment fees and transaction fees. There will almost certainly be management fees in each category of investment you choose in the fund. These fees vary widely between funds. It’s critical that anybody considering investing in a public offer fund do their research and find out exactly the total (as a percentage) of fees being charged. Remember, how much you will have in your superannuation when you retire depends on your contributions, and the rate of return you can achieve after all fees and taxes. Unnecessary fees of say 1.5% per year can take hundreds of thousands of dollars from your final balance.
Complaints and disputes
SMSF
If there are disputes, they are normally resolved through remediation, arbitration, mediation or in the courts. Disputes, especially between members or with potential beneficiaries, can be a disaster for your balance. Only those disputes related to investments and financial advice can be lodged by trustees with the Australian Financial Complaints Authority.
Public offer funds
It’s a simpler process. If a member feels that the trustee of the fund has not satisfactorily responded to their complaint, the issue must be taken to the Australian Financial Complaints Authority.
Regulation
SMSF
The ATO regulates SMSFs and an approved ATO auditor needs to be appointed to examine the fund’s financial reports and confirm compliance with all regulations.
Public offer funds
The Australian Prudential Regulation Authority (APRA) regulates public offer funds. As members are not trustees, they will generally not deal directly with APRA.
Conclusion
As we start a new year, it may be prudent for anybody with an SMSF to take stock of their position to decide if that fund still meets their requirements and whether it remains the best vehicle for them in the years to come. The latest statistics show that 17% of SMSFs have balances of less than $200,000, and half of these have balances of less than $100,000. Ask yourself whether the costs of running your fund make it worthwhile, and whether the returns from your funds match those of the good public offer funds. For example, for the ten years to August 2019 the top public offer funds returned 8.5% per annum in Growth, while Balanced funds returned 8%.
You also need to ask yourself whether the administration of the fund is adequate, and if the remaining members of the fund are capable of running it if one member becomes incapacitated. Having your own fund is a great option for those who are suited to running it, but it can be a nightmare for those who find the administration of the fund is getting beyond them.
