Something that really bugs me is hearing people saying there should be regulations around who should be allowed to establish an SMSF. Typically they suggest a minimum of $200,000 and preferably think it should be above $500,000. A verifiable knowledge of investment markets is often thrown in for good measure.
I have only two criteria for setting up an SMSF – people need to be genuinely interested in managing their own retirement income and they need the time to do it. In my experience, if they are interested they will find the time. To quote Lucille Ball, “if you want something done, ask a busy person to do it.”
This is why most SMSF trustees are nearing or in retirement; at this stage of their life their retirement income suddenly becomes very important to them and they want to take control of it.
But the small minority of younger people – Gen X and Gen Y – who want to handle their retirement savings earlier in their working lives should not be discouraged. The fact they are assuming this responsibility should be encouraged.
For this reason I believe the current debate about SMSF fees is something of a red herring. Obviously, a person with funds under management of $50,000 will have a higher expense ratio than someone with $500,000, but if they are comfortable with this then that’s no reason to stop them going down the SMSF path.
Remember, too, the latest ATO figures show SMSF fees on a gradual downward path, a product of higher funds under management and greater competition.
In particular, questions have been raised about administrators waiving their SMSF establishment fees. The argument is that the potential trustee is somehow being fooled into thinking it’s a free service. That’s simply not the reality.
I think it reasonable to assume that someone deciding to establish an SMSF will have a keen interest in all aspects of what’s involved, whether its fees, investing, legal, accounting or auditing. They will know there will be fees and provided the administrator spells out what they are in full detail then there can be no misunderstandings.
There’s another aspect to this. Free set-up costs allow a potential trustee to decide whether an SMSF is the right option for them. Although there will be an exit fee, it allows people to sign on at a relatively low cost to determine whether their interest was fleeting or deep-seated, and, most importantly, whether they have the time.
What budding trustees have to do is their homework. It is critical they understand exactly what’s involved in the fee structure involved: for example, will it lock you into more expensive ongoing services?
They should shop around. Compare administrators to determine what they are offering, the cost, both the establishment fee and future costs. Also, consider what I call the human factor. If you have a genuine rapport with a person and believe they will look after your best interests, then that can be worth a few extra dollars. After all, it’s a long-term investment.
Olivia Long, CEO, SuperGuardian and Xpress Super
If I suggest that a client commences a superfund I check the amount of funds that the client has in other funds. If there is a savings in costs I will then explain the benefits of an SMSF.
This is a very simplistic view but the result must be that my advice must benefit the client and reduce costs and also give the client better control. The client is king and I only give advice that will be to his/her benefit.
I think that most professionals would put the clients interests as paramount
Gerard
Tim,
Thanks for the question. Assuming $200k, on that basis you are paying about 1% in fees that would be, at least, on par with the APRA-regulated funds.
That said, that’s not the point I’m making.
Fees are just part of the SMSF package. The real questions you have to ask yourself are do you want to control you retirement savings and do you have the time to do so? If the answer to both is yes, then fees just become part of the broader equation. Remember, too, they will decline as a percentage of your FUM as your portfolio grows.
Olivia
Hi,
My total professional fees are:-
1. Trading information platform $ 1500
2. Auditor $ 450
3. Actuary $ 180
Total $ 2130
What would the writer think the minimum holding should be to justify this?
PS Return is north of 15 % pa
Is this article a direct response to the earlier Andrew Baker article? 🙂
Hard to argue with what you’ve written here although it should be noted that it’s the rare individual who will make a SMSF work with $50k. Although if you’re young and willing to take on a lot of (sensible) risk then why not?
Any assertion that a well informed individual should be discouraged from a higher fee , higher control super plan is Tosh! Thats like saying young people should only be allowed to drive entry level cars (preferably Korean or similar)
A thing / service is only worth what someone is prepared to pay ., and if you are happy to pay..
I drink premium wine, and I am happy to pay the extra.
Yes I know the analogy may be a bit thin, but the principle remains.
I do however feel that many people “think” they know / understand what they are doing, when in reality they are in love with the idea rather than the reality. so some caution is important
$50,000 with a likely admin fee of $3000 = 6% fee…. What sort of returns are your suggesting clients should be trying to attain. All too often I see clients who have been “steered” / “sold” a pipe dream only to find out reality is somewhat different. The only interests being served with such nonsense are the administrators, accountants and advisers all taking their cut. Best interest duty? Fail.
Well spoken – sure, administration costs are a key factor for potential trustees to consider, but on no account should they be the ‘only’ factor!
A free smsf is like a free coffee machine or a printer – but the catch is – that you have to buy my coffee or my toner. SMSF providers and trustees both understand this and yet companies who offer free set up have higher growth than a fully paid set up service. Anything free – our brain tells us – Go for it!
Great article, well said.
We are a generation Y couple which started a SMSF with an initial balance well under $100k. This year alone we are outperforming our previous super fund by over 3 times.
We understand these excess positive returns will not always occur, but we are willing to take this risk and have the satisfaction of knowing exactly what we have invested in and being responsible for our own returns.
The insurance options are much better with the SMSF than before, not to mention the flexibility with investment choice and transparency. The administration fees (which are not very expensive in any case) are definitely not a factor that would prevent us from choosing a SMSF taking into account all these other positives, in our circumstances.
It would be to our significant personal detriment if there were regulation introduced that prevented us from starting the SMSF due to size.
Hi George,
Actually I do have a bias (sorry).
Other than the fact I run an SMSF administration business, I personally established my SMSF 6 years ago with only $50,000. It’s taken 6 years and some time and effort but is nearly at $500,000.
So fair to say, I believe, there are some financially astute individuals out there that should take the leap (irrespective of cost) and many also that shouldn’t.
Ben, I have a number of financially literate clients that have started small and enjoyed significant returns very quickly. What’s important is they had the ‘choice’ of product and investment selection.
I’ll pass your feedback onto them. Olivia
Even if you are “genuinely interested in managing their own retirement income” you don’t have to use a SMSF. There are other options out there – for example a Wrap account gives you control over your money, and would cost significantly less than a SMSF for those with a low balance. I’m afraid that unfortunately Olivia’s vested interest in people setting up SMSF’s has caused yet another biased article to be written and published
While a $50k balance is low – at least there is the option of growing it. bACK WHEN i WAS A Back when I was a muggle I had a corporate fund balance that never really grew beyond $11k in 7 years. By combining this with other larger, but still disappointing retail funds, my SMSF since 2009 has grown and grown and grown. DIY can be a way to get real growth – and the same would be true of a $50k fund if the trustee is active.
My sentiments exactly Olivia. SMSF is a personally controlled investment, and doesn’t need to have a regulated minimum balance placed on it. Provided the trustees can handle their money responsibly and want to put the time into their SMSF, it can be a very worthwhile investment for them.
And if clients are comfortable with increased management costs, isnt that the time to give them advice about cheaper options which will achieve the same outcomes?
If the members are in their late 50’s or early 60’s you are possibly right but if they are in their 30’s or 40’s then I don’t agree. The fee differential is about $1000 to $1500 pa (ie about 1 %age extra) for a couple of years, then that may well be worth while as the individuals learn how to take control of their own finances. (self interest is a great teacher & motivator).
At last: a person with a reasoned voice and no bias. Thank you Olivia!!!!
How is this anything more than an opinion piece by another party with a vested interest?
Furthermore, cases where an SMSF is in the best interest for a client with $50,000 are so rare that they dont bare mentioning, let alone writing an article about. How can it ever be in the clients best interest to increase management costs on a balance of $50k? And if clients are comfortable with increased management costs, isnt that the time to give them advice about cheaper options which will achieve the same outcomes?
Shame.
Here Here. Not everyone is an ignorant innocent who needs protecting – in fact not many of them are.
Where is the ‘LIKE’ button? Well dpone