At what point does a self-managed superannuation fund (SMSF) become viable against the big funds?
It’s one of the age-old questions of superannuation: at what point is it viable from a cost and performance perspective to transition to a SMSF?
In years past, a general rule of thumb was that you’d need to have $750k-$1 million under management to make it worthwhile.
But a new study from the University of Adelaide’s International Centre for Financial Services found that the investment performance of a typical SMSF improves as the fund balance approaches $200,000. Once this threshold is reached, the fund achieves comparable investment returns with APRA regulated funds.
The University used data provided by BGL Corporate Solutions and Class Limited from over 318,000 SMSFs between 1 July 2016 and 30 June 2019. Using the data, they identified the minimum amount of capital required for an SMSF to achieve comparable investment returns with much larger funds.
$200k is the SMSF sweet spot
Research by the actuarial firm Rice Warner in late 2020, also found SMSFs with balances of $200,000 or more were cost-effective compared with industry and retail superannuation funds.
But both these studies seem to contradict ASIC guidance to licensees and advisers on the disclosure of SMSF costs (INFO 206), which states that “on average, SMSFs with balances below $500,000 have lower returns after expenses and tax than funds regulated by APRA”.
SMSF Association CEO John Maroney says: “The research data revealed no material differences in performance patterns for SMSFs between $200,000 and $500,000. So the notion that smaller SMSFs in this range deliver materially lower investment returns, on average, than larger SMSFs in this range, is not supported by the research results.”
But you need to be diligent about managing a SMSF
Look, I know a lot of people are attracted to self-managed superannuation funds because they can have a great say in where to invest, but SMSFs comes with a lot of restrictions on investing, plus onerous administration and tax obligations.
Yes, done right, they can be good, but it’s not all wine and roses. As the trustee of an SMSF, you’re responsible for everything from regulatory compliance to paying benefits. This makes good management essential.
To sharpen your approach, here are four tips for managing an SMSF like a pro.
Take an active interest
Being trustee requires much more than sound knowledge of financial markets or a knack for picking stocks: you’re required to run the fund to provide for its members in retirement.
This means setting the fund’s investment strategy, organising insurance, complying with relevant legislation and managing the administration, among other things. Needless to say, taking an active interest is crucial.
Trustees need to learn as much as possible about their fund and the industry in general. You also need to budget to spend time each week on administration and upkeep. How long exactly will depend on the complexity of the fund, the investment strategy and other factors.
You may think you’re a savvy investor and invest like a pro… but are you? Especially when your entire retirement lifestyle depends on the quality of your decision making. It’s a scary prospect.
Good investment managers:
- set a strategy and have the discipline to stick to it.
- base their decisions on detailed research and objective analysis… they take out the emotion.
- use other experts and fund managers to plug any of their weaknesses.
- never take unnecessary risks… they don’t “bet the farm” on a risky investment.
Ask yourself whether you can stick to these fundamentals.
Sharpen your documentation
Keeping paperwork accurate and up to date is one of the most important tasks when managing your own super fund. And to keep you honest, SMSF regulations are set and enforced by the Australian Taxation Office.
Every year there are a range of reporting requirements that the trustee has to fulfil, including lodging an annual return, paying the SMSF supervisory levy, maintaining comprehensive records and engaging an ASIC registered auditor.
Penalties for non-compliance with any aspects can be severe. They include fines, loss of super tax concessions and freezing of assets.
And there are member implications, too. There’s been an increase in SMSF litigation appearing before the courts. This is generally because invalid documentation has made it uncertain as to who is entitled to a benefit from the fund. This is essential legal stuff that you’ve just got to be across.
Stay on top of regulatory changes
It’s crucial to be across any changes to relevant super legislation that impact your legal obligations. Especially as super is a complex and highly regulated area that’s been tweaked countless times by successive governments.
The ATO and ASIC websites are a good source of information on super in general and any changes that are coming through. And, of course, follow the financial media, both for super updates and to inform investment decisions for the fund.
Your accountant, financial adviser and industry figures are another great source of information, so check if they have a regular newsletter and get on the distribution list.
Know when to seek professional help
In such a complex area it makes sense to get experts on board.
A specialist accountant can set up and structure your SMSF. They can also help in drawing up annual reports, record keeping and much of the other admin.
Once the fund is established, a financial adviser can play a pivotal role in helping set an appropriate investment strategy for the fund. They can also assist with issues like transitioning to retirement, not exceeding contribution caps, insurance and investing in alternative assets.
In certain situations it may be necessary to consult a lawyer, particularly around issues like estate planning or changes to important documents like the trust deed.
It sounds simple, but getting these crucial aspects right is what the pros do well. It’s central to how quality funds perform.
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