Video: Reactions to the Rice Warner report on SMSF costs

Tracey Spicer

How much does it really cost to run a self managed super fund, and do you get good bang for your buck? Well, Rice Warner has just released a comprehensive report on this issue, an update to a report released back in 2013. It was commissioned by the SMSF Association, whose CEO, John Maroney joins us now. Hi, John.

John Maroney

Morning Tracey, how are you?

Tracey Spicer

Really well, thank you, John. The research is partly aimed at determining the minimum cost effective balance for self managed super funds. What’s the magic number?

John Maroney

Well, it’s a very good question, Tracey, and the broad answer is it depends. But to generalise, as long as you have at least $200,000 in a self managed super fund, it’s usually two people, then that fund can be cost competitive with larger superannuation funds. And once you have over $500,000 it can be the cheapest option available. And that’s very much different to a lot of perceptions in the marketplace.

Tracey Spicer

And why were those perceptions in the marketplace previously?

John Maroney

Well, I think most recently and about a year ago, ASIC updated its guidance and changed what had previously been advice based on a Rice Warner report in 2013. So they had increased their guidance from $200,000 to $500,000, as an indicator, not a not a hard number, but an indicator that if you have less than that, then maybe a self-managed super fund may not be appropriate.

Whereas we commissioned Rice Warner to update their research using more extensive data and looking at what have been the cost trends over the past seven years just to do a real temperature check, a real assessment of what the reality was now. And we’re quite pleased to see their report come through and say, no that $200,000 figure still applied and in fact, there were fewer conditions to make that a relevant number now than there was in 2013.

Tracey Spicer

And what about opportunity costs, given the time spent managing self managed super funds?

John Maroney

I think that’s a very important point. And there have been surveys that have indicated it can take a lot of time. We’ve recently done a survey which we’ll be releasing later this week, which indicates that a lot of trustees find they only need a few hours a month to cover off most of the required obligations. Some of them spend more time or a lot more time, particularly those who retired, interested in investment markets and are keen to read the financial papers every day and to really study things closely.

But at the other end of the extreme, if people have a good accountant, a good financial adviser that helps them substantially, then it may be only a few hours a month is required. And so the opportunity cost depends a lot on how people want to actually run their fund.

Tracey Spicer

Just out of interest, is there a correlation between the time taken researching whether you do it yourself or you do it through an external body and the returns you get on your SMSF?

We haven’t seen any research that indicates, though, but I think it would be in part, though, one of the conclusions we’re drawing is, is that some larger SMSFs do generally have higher investment returns. And and we think there’s a number of reasons there. One would be a number of the smaller funds, people in retirement that are potentially very much focused on capital preservation and have low risk appetite when it comes to taking investment risk.

And also the benefit that comes from using a specialist SMSF adviser to help focus on ensuring good diversification of the portfolios, of ensuring that people can sort of manage over volatile markets like we’ve seen this year. And there has been a higher allocation to cash in the SMSF sector compared to the larger fund sector. Some of that is probably very logical and rational for those that are older and risk averse.

But I think some of it is where people come into the sector thinking they’re going to go and make a lot of investment decisions, and they find that there is some reluctance to actually make the decisions on income. And so maybe sitting on higher cash allocations than is optimal. And having an adviser can really help them work through their goals, their strategies, the options and actually help that whole coaching side of how do you actually turn the plan into reality.

Tracey Spicer

The report also points out that APRA regulated funds enjoy a guarantee of their benefits which members of self managed super funds do not. Does this indicate that SMSFs are by their very nature riskier?

John Maroney

That would be one perspective. But the risk on the APRA side is that any of the guarantee is actually paid for by other members of APRA funds. So the guarantee is essentially from one group of APRA regulated fund members to other APRA fund members, and that transfer doesn’t apply in the self managed super fund area. There are other protections in terms of ability to go to the financial complaints authority if it’s eligible under their arrangements, or the courts are always there.

So it’s not as though there isn’t protection, but it is primarily up to people to wisely choose their own investments, to monitor them. And that is a differentiating feature for the SMSF sector and one that people should be quite upfront about in realising that, yes, when they decide to purchase a particular investment, if that goes bad, then they are responsible. Similarly, if they get  very high returns from astute investment picking, they benefit fully from the gains, rather than sharing that in a pooled arrangement.

Tracey Spicer

John Maroney, thanks so much for your time.

John Maroney

My pleasure. Tracey, I hope that’s helpful for your listeners.

Tracey Spicer

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.

Meg Heffron

Hi Tracey.

Tracey Spicer

Did this report surprise you, or did it reinforce what you’ve thought for quite some time?

Meg Heffron

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.

Tracey Spicer

So is there a magic number where self managed super funds work much better than the APRA regulated funds?

Meg Heffron

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.

Tracey Spicer

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?

Meg Heffron

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.

Tracey Spicer

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?

Meg Heffron

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.

Tracey Spicer

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?

Meg Heffron

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.

Tracey Spicer

Meg Heffron thanks so much for your time.

Meg Heffron

Thanks for having me.