How much time does it really take to run an SMSF… and what are the real costs?

There’s a fight happening in the self-managed super fund (SMSF) sector as industry stalwarts question figures published by the Australian Securities and Investments Commission (ASIC) that suggest it costs $13,900 a year to run a DIY fund.

The SMSF Association (SMSFA) asked SMSF administrators BGL and Class to crunch some numbers around costs and their figures are very different to ASIC’s.

On BGL’s numbers, based on 2018 data from 180,000 SMSF members, the median operating cost for funds with more than $3 million is $5,700 a year. This includes preparing and submitting the tax return and the audit but excludes advice, the cost of investing and opening or setting up the fund. The median operating cost for a fund with between $1 million and $1.5 million in assets – which is the average amount held in SMSFs – is $3,300 a year. The average cost to run a fund – with this figure including outlier big and small funds – is $4,600 a year.

On Class’s numbers for the 2016/2017 financial year, funds with $2.35 million or more attract a median admin fee of $6,800 a year (excluding the cost of insurance premiums and depreciation). It estimates 75% of funds incur expenses under the ASIC figure of $13,900.

Commenting on ASIC’s numbers, Greg Einfeld, a director of SMSF specialists Lime Super, notes the figures include one-off costs for setting up and winding up funds. “ASIC has also included advice fees, insurance premiums and investment costs. Including these in total costs when comparing the costs of retail and industry funds does not lead to a direct comparison because these are not included when quoting fees for APRA-regulated funds.”

Liam Shorte, a director of Verante Financial Planning who also runs his own SMSF, says the costs depend on the services of which the SMSF and its trustees avail themselves in running the fund.

“There are plenty of administrators that offer a no-frills service and then there’s the other extreme, with some companies offering all the bells and whistles when it comes to running the fund. The trustees must decide what is comfortable for them,” he says.

When it comes to the cost of accounting, tax and audit services, Shorte says expect to pay between $960 and $1460 a year for a basic admin package. A full-service administrator will set the fund back between $1,800 and $3,300 a year. In contrast, a full-service administrator that provides technical and other services, or a local full-service accountant, will cost the fund between $2,200 and $6,100 a year.

“As there are fixed costs, the total fees, as a percentage of assets, are typically higher for low balance SMSFs,” says Daniel Rickard, a financial adviser with the Financial Professionals.

Investing costs money

Aside from the price of admin, the fund will also incur costs to run the portfolio. Again, the fee will vary depending on how the fund invests.

Einfeld notes investment costs vary according to the investment approach. “A fund entirely invested in direct shares and bank accounts will have minimal investment costs. If the SMSF invests in managed funds then the costs could be much higher. Exchange-traded funds sit somewhere in between, and typically cost between 0.2% and 0.3% a year.”

Assuming the fund includes a mix of active and passive investments, Shorte says expect to pay between 0.5% and 0.75% of the fund’s balance each year in investment costs if it holds assets such as shares, ETFs, listed investment companies (LICs), hybrids, mfunds and term deposits off-platform with no financial planner. The fee will rise to between 1.25% and 1.5% of the fund’s balance for the same fund run by a financial planner.

Trustees can expect to pay an annual fee between 1.0% and 1.5% of the value of the fund if the SMSF holds assets such as managed portfolios in the form of separately managed accounts, shares, ETFs, LICs, hybrids, managed funds and term deposits on a platform – but there’s no relationship with a financial planner. This fee will rise to 1.4% to 2.5% of the fund’s value if the trustees receive financial advice.

Bringing costs down

There are steps trustees can take to reduce the fund’s costs – and in turn enhance returns. Although be warned that in the future, auditors may demonstrate additional scrutiny of SMSF investment strategies, so their fees may rise.

Says Shorte: “Trustees can bargain with their administrator for lower fees if they can use services that provide data feeds of transactions and balances direct to SMSF software. If you are keen to save money, see if you could manage some of the duties yourself like ASIC and LRBA reporting, for which additional fees add up.”

However, when considering the costs of an SMSF, trustees should explore whether there is an alternative to an SMSF at a lower cost. Some industry funds might offer the ability to invest in direct shares at a lower cost than an SMSF. But they might also have restrictions on how much can be invested in particular securities. Working out the right option is entirely dependent on the members’ own circumstances.

Time is of the essence

ASIC has said it takes on average 100 hours a year to run a fund. Commenting on this figure, Peter Hogan, the SMSFA’s head of technical, says this number is not high considering it represents just two hours’ time spent running the fund a week.

“Yes, SMSF members do need to spend more time running their fund that people invested in an APRA fund, but 100 hours a year is not excessive,” he says.

It’s important to understand the time it takes to manage an SMSF is an opportunity cost for the trustee, says Rickard.

“Pricing this opportunity cost also varies depending on who you are – it will cost a busy CEO more than a retiree with time to spare. There are services that can reduce the time trustees need to spend on managing their SMSF, although these generally come at an additional cost.”

While ASIC quotes 100 hours a year to run a fund on average, some academics quote half that. A 2018 study by Deakin university noted the median time SMSF members spend on their fund each week is one hour.

Rickard says the two biggest time commitments for SMSF trustees when it comes to running their fund relate to investment decisions and monitoring. “Investment performance tracking is the main time-consuming exercise. In some cases, monitoring becomes a hobby for trustees. Investment portfolio management, including research and rebalancing transactions, also takes up trustees’ time.”

Bookkeeping and staying on top of investment correspondence throughout the year also consumes trustees’ time, he says. “Time is required to compile the necessary documents for tax preparation and responding to investment statements when needed. Staying on top of the job throughout the year, using specialised accounting software and forming a strong relationship with your accountant can save time,” he says.

Ultimately, trustees are primarily responsible for the proper management and compliance of their SMSF. If convenient management and time savings are priorities, other superannuation options may be more appropriate.