Following is a list of some of the misconceptions surrounding SMSFs:
1. They are a more economical alternative to “public offer” funds.
Given the requirement for the preparation of an annual set of financial accounts, an annual income tax return, audit certificate and, where applicable, actuarial certificates and asset valuations, the SMSF typically only becomes cheaper than the alternatives with a substantial account balance, and, even then, not always.
2. SMSF trustees must have extensive knowledge of investment markets.
While it is a requirement of SMSF regulations that trustees are ultimately responsible for all decisions they make with respect to their SMSF, there is no greater need for them to have a substantial “knowledge bank” than any other super fund member, inasmuch as the input of professional advisers can be sought just as readily in either circumstance. You don’t need to qualify as a mechanic to own a car!
3. An SMSF is an effective way to improve the performance of your super.
While it may be true that the performance of the “average” super fund is, generally, uninspiring, active management of the composition of your super fund assets is just as effective in the public offer space as with an SMSF. The amateur who expects to beat the professional is ambitious at best and delusional at worst. While nobody wants “average” performance, proper professional assistance in constructing and maintaining a superannuation portfolio will assure returns exceed the “average” by a comfortable margin.
4. You need an SMSF if you want to buy direct shares.
This is, perhaps, the most widely-held misconception regarding SMSFs. While this may have been true in years gone by, today many good super funds will allow members to choose from an extensive range of ASX-listed securities, some giving full ASX access. Admittedly, management of CGT implications and corporate actions become problematic under these structures. Nevertheless, it is questionable whether these advantages outweigh the additional costs of the SMSF structure.
5. You must have a minimum balance to justify the expense of establishing and maintaining an SMSF.
If the strategy you wish to undertake with your superannuation assets can only be achieved via an SMSF, then you must have an SMSF to adopt this strategy. Having made that decision, the only relevant consideration is whether you have sufficient capital to undertake the desired strategy. In and of itself, there is no “minimum balance” that predetermines the feasibility of an SMSF.
When an SMSF is appropriate:
In essence, the issues are relatively simple: if you wish to do something with your super that you can only do in an SMSF, then you simply must have one. If what you want to achieve can be done other than through an SMSF, why go through the hassle and expense of creating and maintaining one?
So, what things can you only do with an SMSF?
1. Sell an asset to a member;
2. Buy an asset from a member;
3. Invest in direct real estate;
4. Borrow money.
5. Share ownership of an asset with another super fund member.
Thus, if you wish to embark on any or all of the above strategies, you need to have a self-managed super fund to do so. In this case, the only way in which account balance becomes a relevant consideration is to determine if you have sufficient assets in superannuation to successfully undertake the desired strategy, as opposed to whether or not you have enough super to have an SMSF, an issue often raised by other commentators.
In reference to the myth that you need an SMSF to buy and sell shares, admittedly, doing so via a public offer fund limits your capacity to manage capital gains tax implications and control corporate actions. However, it is academic as to whether the value of these “benefits” justifies the expense and other obligations necessary for the maintenance of an SMSF.
In summary, if you think you want or need an SMSF to achieve your objectives with your superannuation, seek professional advice to determine if it is, in fact, necessary for those objectives.
Furthermore, if an SMSF is recommended to you, ask what it is about an SMSF that leads to the recommendation. In short, if you’re going to establish an SMSF, make sure you’re doing it for the right reasons.
Wayne Leggett is principal at Paramount Financial Services Group.
Another thing you can only do with a SMSF is to use contributions to make pension payments. Think about a member who has a TTR pension and is still making contributions. In a APRA regulated fund these are typically separate ‘products’. In a SMSF they can be run from the same bank account.
Have to agree with Stephen minus the ranting. Myths one and two I’ve never come across in 15 years, three is not a myth at all, 4 I do agree with and no one setting up a fund has ever mentioned five to me.
Stephen also makes the valid point that the absolute control is what people who set up SMSF’s really want.
The most successful funds I have seen are generally run by people who also run their own business. They are able to apply their business management experience and skills to their fund successfully.
The growth in smsf is not so much about the cost but more about the peception that managed super has not performed ie the effect on member balances when the gfc hit. A large number of former manged super fund members don’t trust their former funds. Also the unfortunate situation of promotion of residential property through super using borrowings has also led to large increses in the number of smsf’s. ( this bubble will soon burst when smsf members realise that in many cases they have been misguided as to the return and benefits. if the managed super industry has its nose out of joint re the growth of smsf’s then have a look at lifting your game and offering a better alternative.
[quote name=”Wayne Leggett”]I will try to make this point again.[/quote]
At the risk of repeating myself Wayne..Not with the same level of direct control … every parcel of shares in the name of the fund with dividend statements in the name of the fund sent directly to the Trustees…all bank accounts in the name of the fund with only the trustees able to move funds…..etc etc etc …. that’s what people want and amazingly they will pay more or sacrifice return just to be able to do that. Its the elephant in the room Wayne and its what a lot of your mates don’t because they ahve so comoditised what they offer. Absolute control of ones financial future….nothing does it like an smsf because as a separate entity controlled only by the Trustees and it offers a level of legal, financial and operational flexibility unmatched by the alternatives.
I will try to make this point again. You can control your investment mix just as well without a SMSF, if you choose the right superannuation vehicle .
Wayne you ask the question …. “If what you want to achieve can be done other than through an SMSF, why go through the hassle and expense of creating and maintaining one?”
I cant believe that your smsf clients haven’t told you this before now …. quite simple really … Control Control Control …. its the number one reason smsfs are created.
Interesting to hear that, Stephen, because what triggered my column was recent articles which stated the exact points I raised as myths.
[quote name=”Wayne Leggett”]To the commentators (and I use that term with reservation) below who assert that I have a vested interest or an agenda, do your homework or stay out of an (otherwise) intelligent debate. I recommend SMSFs where appropriate and I recommend their unwinding where appropriate. I DO have a vested interest, but only one; optimal client outcomes. Nuff said.[/quote]
Thats great to hear Wayne …. and I apologize for selecting your contribution here to make a lot of assertions that may not be attributable to you.
However given my day one experience withs smsfs I am yet to see or hear of these myths you refer to above from any smsf trustees. After 20 years of dealing with smsfs these myths were quite a revelation. I guess your smsf clients must be completely different to the many I have come across… assuming that your clients are the source of these myths 🙂
To the commentators (and I use that term with reservation) below who assert that I have a vested interest or an agenda, do your homework or stay out of an (otherwise) intelligent debate. I recommend SMSFs where appropriate and I recommend their unwinding where appropriate. I DO have a vested interest, but only one; optimal client outcomes. Nuff said.
One of the more balanced articles I’ve seen on the question of ‘should I, or shouldn’t I?’. You’ve even dared to stab the funds management sacred cow – that all SMSFs need a really, really high balance in order for them to make sense!
They will be offended by the idea that the balance might depend on the individual and their strategy (shock horror, who would have thought?). Thanks Wayne for bringing a voice of reason to the ridiculous media debate.
[quote name=”Bruno”]…..Those who have not provided Advice on or to a SMSF has no place here.
…..[/quote]
Over the past 20 years I have seen more smsfs than most people have hot dinners Bruno …. I am ideally placed to comment here because I have absolutely no vested interest either way (other than actually having a smsf). All you have on this site is a lot of back slapping advisers. While I am at it I have also seen enough adviser trailing commission statements to be alert to the screamingly obvious vested interests of contributors on this site.. LOL!
Wayne, that’s a brave attempt at an obviously touchy subject(see below comments) You dare venture where others don’t. Those who have not provided Advice on or to a SMSF has no place here.
IMO a truly balanced article would take many pages wading through the many stakeholders, product providers, Licencees etc. But a brave attempt.
Reading these comments is the highlight of my day!
Please – keep ’em coming!
[quote name=”the patriot”] The knockers below have vested interests too – guess they wear different glasses.
I agree there are myths around SMSF but the biggest is that accountants know best about who should have one….not many that I come across for sure outside of SSA’s.[/quote]
I have never advised on….set up…..or given investment advice to a smsf but I do have my own smsf. So Patriot … whats my vested interest ?????
Accountants know best …… what errant nonsense …. 90% of all clients come to accounting firms with their smsfs ALREADY established.
Hey Wayne/Russell …. Can I suggest a topic for your next article…..Why 500,000 smsf trustees do not trust the commission driven retail/industry investment sector they came out of and what is that sector/industry going to do about it?
I have been exposed to thousands and thousands smsfs since day one of their inception in the 1990s and I have NEVER come across any of these myths. Where do you get this stuff from 🙂
The smsf industry exists primarily because the pre existing custodians were not trusted by superannuants …. end of story … time to move on Russell and Wayne 🙂
Well Russell I am a 51 year old LOUD MOUTHED Accountant who has never set up/advised on a smsf nor have I ever given financial advice. I have my own smsf because I (and 500,000 and counting other smsf trustees) trust your industry as far as I can kick it.
Who pays your wages Russell ?
I have no confidence is anything written by commission driven salesman which is why I hold most of the vested interest articles written here in contempt?
Wayne, your article presents a very balanced, well thought-through discussion and opinion. You have demonstrated why you have longevity in the industry. As our young ‘whipper-snapper’ friend (stephen) suggests I am positive there is no agenda or ‘vested interest’ there. And if our loud-mouth friend wishes to research any vested interest he should direct himself to your web-site. You are neither bashing SMSFs or singing its praises. You have clearly stated why one should consider an SMSF and when one should consider an alternative. And James, ‘researched’? I think that the article is simply drawing on personal experience. ‘stephen’, before you shoot your mouth off again – my vested interest is in both SMSF (Accredited) and holistic wealth creation using direct and managed solutions. And I don’t work for Wayne Leggett (and I am not related to him). And ‘stephen’, I challenge you to write an article with some of your long-held views. I doubt you have any.
[quote name=”the patriot”]Reasonable comments, Wayne. The knockers below have vested interests too – guess they wear different glasses.
I agree there are myths around SMSF but the biggest is that accountants know best about who should have one….not many that I come across for sure outside of SSA’s.[/quote]
Another day…..Another Dollar…..Another Advisor/Planner who just cant get over the fact that his trailing commission is going south 🙂
Reasonable comments, Wayne. The knockers below have vested interests too – guess they wear different glasses.
I agree there are myths around SMSF but the biggest is that accountants know best about who should have one….not many that I come across for sure outside of SSA’s.
Wayne..Very poorly researched and most of your assertions are incorrect. Just another writer with an agenda.
[quote name=”Terry Hannagan”]Very objective well balanced article. All products/services have plusses and minuses.[/quote]
Fellas ..this is quite an “adviser love in” happening here ….. but when are you all going to realise that 500,000 + horses (smsfs) have already bolted with well over a third of the retirement savings pie … people have voted with their financial feet … build a bridge and get over it … LOL!
Very objective well balanced article. All products/services have plusses and minuses.
How about you declare in detail your vested interest…..then your smsf bashing/bleating makes that much more sense 🙂
How about declaring your vested interest at the start.
Excellent article, I have been pushing this line for 16 years. However with regard to buying direct equities I have had just as much control over the capital Gains Tax implications and corporate actions through my Wrap account as I would in an SMSF.
Excellent article. On direct shares via public offer funds though, the platforms do allow a lot of control of CGT although not quite as much as SMSFs. The latest versions of the platforms currently being rolled out also allow control of corporate actions, DRP and voting.