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- At what balance do SMSFs become cost-competitive with APRA funds?
- What about SMSFs with low balances?
- How does holding property impact an SMSFs costs?
- How can SMSF trustees reduce costs within their SMSF?
- Do you have any tips on finding suitable SMSF providers?
- Are there any other lessons SMSF trustees can take from the research?
- What other research does the SMSF Association have planned?
- Meg Heffron’s reaction to the report
In late 2020 Rice Warner released a report on SMSF costs.
In this extended interview John Maroney, CEO of the SMSF Association provides further insight on some of the findings, including at what balance SMSFs become cost-competitive with retail and industry funds, the impact of property on costs, plus tips for SMSF trustees on reducing costs and finding suitable providers.
At what balance do SMSFs become cost-competitive with APRA funds?
So the research found that around the $200,000 mark of total assets for the fund is where self-managed super funds would generally be costs-competitive with large funds – retail funds and industry funds. There’s no hard and fast number because it depends on how trustees want to be involved in managing their operations and the underlying complexity of investments, etc. And so it really depends on the circumstances. And we would always suggest that people take advice before deciding whether or not having a self-managed super fund suits their interests, because it really is a matter of they’re not for everybody.
And it’s not just the amount of assets. There’s a number of other considerations, but the research basically pointed to $200,000 is the point at which for a lot of people that would be a cost competitive situation.
So most self-made super funds have two members. And so that would be $100,000 each on average. It’s the total amount, and similar i f you have a larger fund, three or four, then it’s less per person. And the parliament is considering increasing that maximum number of members up to six. And so that would give more flexibility, particularly for larger families that choose to go that direction.
So the research found that once you get to half a million dollars in total for the fund and often the SMSFs would be the cheapest option available. And that’s because there’s a lot of them run with fixed costs. And so that reduces that as a percentage of the assets as the asset size grows. So at half a million dollars, it’s in most cases would be the cheapest option. And so if you double that and you’re dealing mainly with fixed costs, you’d find that that would be increasingly more competitive from a cost position. Again, that’s only one of the factors. That’s a very important one. But yes, about half a million above a million would certainly be the cheapest option in a lot of cases.
The median costs for self-managed super funds tends to be around the $300,000-$400,000 mark. So at a million dollar fund, that would be in the order of 0.3% or 0.4% of the assets for the operating costs. And for a lot of larger funds, the range would tend to be in the 0.7% to 1.3% sort of costs. And so that would generally be about double the cost on a percentage basis around that million mark. Again, it depends on the cost structure. Some of the larger funds have caps on their cost structures. So it does get down to looking at individual circumstances of the particular self-managed super fund, which administrator they using, what they’re doing with their assets. And so it’s hard to generalise but break even above the $200,000 mark, cheapest one at $500,000. At a million it would often be half the cost for a comparable large fund.
What about SMSFs with low balances?
There’s a number of interesting features there. One was that a lot of cases, even though they small, they’re not eaten up by fees because the fee structures tend to be very accommodating for some of the smaller funds. And that may well be where particularly if an accountant is involved. That may be one element of what the accountant is looking after for the client.
And generally, the research was showing that the fees can be quite low for those smaller balances. But in other cases, either the small funds were fairly new and they tended to grow rapidly above the $100,000 or $200,000 mark, depending on what they started at the start of the research period. And others may well be in the in the wind down stage where people have had the benefit of the fund during a substantial part of their retirement period. And now the assets are getting down to a low level because they have been consumed for providing retirement income. And that’s something where we always encourage SMSF trustees and investors that are in there to to keep an eye on, is it still viable, even if it’s been attractive and viable and suits their circumstances as they reach retirement during a lot of their retirement years. At some stage, it may no longer be cost competitive. And probably more importantly, it may no longer suit their circumstances if a partner passes away or if the the actual stress and strain of keeping up with financial markets, keeping up with the regulatory changes can encourage people to look for a simpler solution once they get into the older age brackets.
How does holding property impact an SMSFs costs?
So the research generally found the cost structures were higher with direct property investments, which there’s a minority of fund that do that, but it’s a significant, important minority. And it’s about 15%-20% of the overall sort of assets, depending on where where you’re looking, and timeframe. And the cost structures are higher there because their direct property has higher costs in terms of establishment, managing the property, any repairs and maintenance, etc. insurance costs.
So while it’s a higher cost structure, people are going for that deliberately, particularly if there’s business real property involved where small business people find it often quite attractive to sell their business premises into the self managed super fund and pay rent to the self managed super fund.
And that sort of protects the business structure, often, and take some cost pressure away. And it means that while small business people can be growing their business, they are also at the same time growing their retirement savings, which a lot of small business people don’t tend to think about because they just rely on the business being their retirement savings. And that can work well in many cases. But having that mixture of retirement savings, partly business property and partly diversified assets it can be a very important way of better preparing for retirement than just relying on the eventual sale of business assets.
How can SMSF trustees reduce costs within their SMSF?
It’s a very interesting question and there’s a number of different facets of the cost. Some costs are unavoidable. You have to pay your annual levy to the ATO for being in the self-funded super sector.
If you have a corporate trustee, you have to pay ASIC for the privilege of having the corporate trust, though that brings certain benefits and efficiencies if things change over time. The areas where there is potential cost savings would be whether investments are done directly. And there’s quite a lot of people that are more financially interested in the investment markets that will have built up a portfolio of particularly direct shares. And traditionally there’s been a bias towards direct Australian share ownership.
And if there isn’t a lot of trading going on, then looking after that portfolio yourself without necessarily paying for the cost of an investment advisor or investment platform would save some costs. But as trustees take on broader portfolios, perhaps become more active in trading, looking at international share exposure and other exposure, it does become more complex to prepare the financial statements to keep track of all the investment records, if there’s corporate actions and preparing the tax return. So in those cases, as the asset structure and the trading activity becomes larger and more frequent, then the benefit of relying on professional advisors, accountants, financial advisors, tax agents is very important.
You have to use an external auditor. That’s not negotiable. That’s a legal requirement. And so that’s an area that is a is a necessary cost. But as I said, a number of the other areas are somewhat optional and it depends on the individual’s financial literacy, their interest, their time availability as to whether that would make sense to do more and pay less, or to do less and pay more in the way of professional support.
Do you have any tips on finding suitable SMSF providers?
Again, it can be difficult to find an ideal service provider. You can start looking on the Internet and looking around there. We would generally encourage people to seek advice, professional advice. We have facilities on our website to go and find a relevant advisor in your area that has gone through specialist training and accreditation. But there’s always word of mouth from friends, family, colleagues that have already got satisfied professional advisers.
Technological developments have been a key feature in the last five or ten years. And so some providers are more at the leading edge of making sure that you have the best technology, having information provided by data feeds from banks and investment managers, which can really speed up the the process, give real time information on apps on your smartphone. And so if if you’re looking for the latest and greatest trends, it can be worthwhile checking around just what is the use of technology and how smoothly is that working?
And again, talking to accountants, financial advisers and the major software or the major administrators in the area are probably a good way to go. As well as looking for information. We’ve certainly got a range of providers on our website. And there’s quite a bit around on other websites and community groups that discuss that. So plenty of options. But, yes, you do need to do a fair bit of research yourself to find the ones that are most suitable.
Are there any other lessons SMSF trustees can take from the research?
I think there’s a number of things. One would be, there are a whole range of different cost structures – low, medium, high – depending on the level of service that is required, but also just in terms of market dynamics. So it shouldn’t be a set and forget area. You should ensure you’re satisfied with the value for money you’re getting with an existing provider, and if not, consider what alternatives there would be.
The property question is quite a big one because, as I said, a significant minority already are investing in property. That brings with it the benefits of property as a different risk return profile, particularly given the investment cycles. It was looking pretty negative this time last year. It’s looking very positive now, as are stock markets in Australia and overseas.
So keeping an eye on just whether the facilities that are provided from your service provider and understanding certain areas like property, there will be higher direct costs. But if that suits your investment strategy and making sure your investment strategy is kept up to date and keeping an eye on just what the opportunities are to meet your needs and particularly moving in the more complex areas of drawing down pensions, and if people are eligible for a full or part Age Pension, that can be an important consideration in making sure the financial advice that’s coming through.
We would certainly encourage people to seek out and rely on specialist SMSF financial advice because it is a complex area and that’s a key function we provide in providing education to keep people up to speed, both with the professionals and also for investors themselves, and to be able to seek out a professional support expertise when they need it, because the world is constantly changing -investment markets, the regulatory structures, and most people seek out a self-managed super fund because they are seeking control and greater involvement, investment activities.
And it’s a matter of just making sure that you’re comfortable, you understand it, you can meet the regulatory requirements. And we hope the report adds to that understanding of just what some of the different options available are and how they how they look.
What other research does the SMSF Association have planned?
So on the investment areas, the research did find that over the past 14 years, the self-managed super funds on average outperformed the large funds in nine of those 14 years, which we think is a good overall indicator that the investors in the self-managed super sector are actually investing in quite a successful manner.
And while the investment performance will be affected by quite a number of factors and it’s hard to compare apples and oranges in this case, and there are issues about smaller funds which often tend to have very high higher levels of cash and bank deposit exposure. And that is either because it’s temporary on the way in or potentially temporary on the way out. We think it is an important area to investigate that further. So we are in the process of setting up some research, looking into what leads to the different levels of investment performance, particularly for the smaller funds below half a million dollars. And we hope to have that published later this year.
But overall, the investment performance is looking pretty comparable would be our take from the research. We think that’s a very positive message that just because you don’t necessarily rely on a professional investment manager doesn’t mean you can’t get a good investment performance as long as you set up a good strategy. Follow that, rely on professional advice where you can. There is certainly good performance across the whole sector.
Meg Heffron’s reaction to the report
In November 2020 Tracey Spicer also interviewed Meg Heffron about her take on the report.
Rice Warner has just released a landmark report on self managed super funds, to update a report it released back in 2013. So what’s changed since then? Meg Heffron, Director of Heffron SMSF Solutions joins us now for some analysis. Hi Meg.
Did this report surprise you, or did it reinforce what you’ve thought for quite some time?
Look, it probably told me what I think most of us working in the industry would have expected. So to that extent, it didn’t surprise me in that it found, broadly speaking, that SMSFs are cheaper than people think, that they’re competitive at much lower thresholds relative to APRA funds than people think. I think what surprised me was the level of depth of the analysis which was actually really important. So I’m very glad Rice Warner did all that. But yeah, the end conclusion probably won’t surprise many people that work in SMSFs.
So is there a magic number where self managed super funds work much better than the APRA regulated funds?
So I hate magic numbers. And look, I hate magic numbers because they assume that you can reduce everything to one number. If you had to pick a magic number, Rice Warner said over half a million SMSFs are almost universally cheaper than the alternative types of funds. So I guess that’s to some degree a magic number. It’s a safe number. But they had other magic numbers in their report. Between $250,000 and $500,000, yes SMSFs were at least competitive and often cheaper.
So yeah, but I do hate magic numbers because I think one of the things that’s really special about SMSFs is the people who have them make an enormous number of choices about what they want to invest in, how much work they want to do themselves, what advice they need, all that kind of stuff. And so all of those factors influence how much it’s going to cost you to run your SMSF. So in a way saying the magic number is $500,000 is a little bit like saying cars cost $20,000. They don’t. But of course you can get a car for $20,000.
Yeah they have very individual decisions, but it seems like the advice has changed over a number of years. For example, ASIC was suggesting for quite some time that self managed super funds with balances below five hundred thousand dollars have lower returns after expenses and tax and, ‘will often be uncompetitive compared with APRA regulated funds’. Has that been changed once and for all now?
I hope so, because I think that rhetoric was actually quite misleading. Ignore my my purist view that you can’t reduce anything to everything to a magic number. If you are going to use a magic number, you should at least use a magic number that isn’t misleading. So I think a couple of things have changed.
The world has changed in the last seven years. So Rice Warner did this report that did a version of this seven years ago. And in that time, even they found that costs have come down. So the world has changed.
But secondly, I think when ASIC were relying on figures from the ATO, which was totally accurate, were not helpful at all. Initially, APRA talked in terms of averages. I’m an actuary so I can’t help myself getting nerdy. Averages are terrible. You should at least look at medians. When the ATO gave medians, the number came down. Even medians though, you’re looking at a huge universe with very different choices being made. If you want to know how much an SMSF is going to cost for you, you need to find the population of people who look like you and look at the sort of average or median for them. So I think, yeah, the world has changed, but also the quality of magic numbers we’re choosing is just better this time.
That is a big difference mathematically. Thank you for explaining that so clearly. What about the time taken to manage an SMSF compared with another fund. Does that make it less attractive or again is it an individual thing?
Look, everything’s an individual thing, but I think you can probably make a couple of observations about time. Some people, and funnily enough, we did a little survey of our own client base. So we look after about 4,000 SMSFs. We did a little survey of our own client base. Now, obviously, not all of those 4,000 people responded, but we got some really interesting results.
So a large part of our client base has an advisor. Not surprisingly, those people reported spending very little time on their SMSF. They’re buying a full service administration service from us and they have an advisor. Those are the people who spend the least amount of time on their SMSF. And they were reporting less than an hour a month.
At the other end we have a lot of people who are doing everything themselves and they spent more like a couple of hours a week. Now that variation is enormous. If you’re doing everything yourself, including managing your own investments and you’ve got millions of dollars, I’d be flabbergasted if you could manage all the research you need to do, all the reading, following markets, whatever those people do. I don’t know anything about investments. So I’m not in that category.
But it must turn into almost sort of a component of their job to actually manage their portfolio. But if you have a couple of million dollars, so you should be in a way, either you should be paying someone to do that for you or you should expect to spend a lot of time on it yourself. It’s an enormous asset.
Think about how much time we all spend on yard work protecting our other big asset – our home. It doesn’t surprise me particularly that some people spend an awful lot of time on their SMSF where they’re doing all that work themselves. But the key there is the variability. So, sure, if you want to have an SMSF and you want to pay somebody else to do most of the work, you will spend very little time on it. If you don’t want to pay someone else to do the work and you wanted to do it yourself, you will spend a lot more time on it. And that could be several hours a week.
And what’s really interesting is I wonder if I had a couple of million dollars in an APRA fund, I wonder if I wouldn’t be doing the same thing. If I have a couple of million dollars, aren’t I interested in learning about what tax planning strategies there are, what should I be doing with my super? Which of the various options or investments in that fund should I be picking?
I’d probably be spending quite a bit of time on it anyway, even if it was in an APRA fund. The fact that it’s in an SMSF isn’t the thing that’s necessarily driving some of that time. Of course, some of the work by definition is being done by the fund. So I wouldn’t need to do all that. But jeez you’d hope that somebody with a couple of dollars million anywhere is thinking hard about how they want to manage that, or how they want someone else to manage it for them.
Aside from the real or perceived opportunity cost when it comes to time, which this report did touch on, it also mentioned the safety aspect around APRA regulated funds because by their very nature, they are regulated. Are SMSFs any less safe?
So there’s probably one really big difference, and it’s important. If something goes terribly wrong in an SMSF, you don’t have access to the to the complaints authorities that you do in an APRA fund. And so we’ve seen examples of that when particular investments that have been marketed very heavily to SMSFs have gone belly up. And SMSFs, really the only way they can pursue that is through the courts. So that is a big deal.
I guess you’ve got to weigh that up against how valuable is it to you. So my SMSF, for example, is pretty simple. It’s got some managed funds, some shares. I don’t have anything particularly unusual. My need for that complaints process is probably pretty modest.
I’m looking after it myself with an adviser and an accountant. If they do the dirty on me, I’ll have to sue them. I think to say they’re not safe implies that there’s some rogue element potentially nicking all your money. And I think that’s probably overstating the difference between APRA and SMSFs.
Meg Heffron thanks so much for your time.
Thanks for having me.