WHY SMSF’S OUTPERFORMED APRA FUNDS
Promoted by Accounting & Adviser Services.
SMSF’s receive much criticism in the press, but little is still understood about the benefits.
With the recent changes to super and the $1.6 Million cap on pensions, there is once again renewed speculation that the appetite for setting up and administering an SMSF will diminish. We have heard this all before, many times.
Most of this commentary (I suspect) comes from industry experts that either don’t have their own SMSF or who don’t advise clients on SMSF’s and therefore don’t fully appreciate the advantages. Often the question asked is “if a fund doesn’t have property, why have an SMSF”.
The simple answer is performance.
Over the last ten years SMSF’s have out performed both APRA regulated funds collectively by nearly two percent since 2005 and on an annual basis 8 out the last 12 years. “And that the margin would be higher if fees were deducted from returns!” https://www.ricewarner.com/in-defence-of-the-smsf-investor/
In the above article, Rice Warner attributes much of the outperformance of SMSF compared to APRA regulated funds “to asset allocation, patient long term investing and tax optimisation at the member level.
I would argue that there are five simple reasons for this: SMSF’s offer great control, flexibility, tax planning, transparency and investment choice than APRA funds (some might also suggest cost savings but lets leave that aside for the moment).
FLEXIBILITY & TAX PLANNING ADVANTAGES
Examples include the recent super changes which included calculating the transfer balance cap and CGT relief for pension funds over $1.6 million or funds with Transition to Retirement Income Pensions. APRA funds had to do this by 30 June 2017. For SMSF’s this is done when the fund lodges its tax return. This provides a greater opportunity to plan and ensure the best outcome.
Or when a member starts a pension. In an APRA fund this can only happen when the fund lodges the paper work, for an SMSF this can be done via minute which confirms the date and amount.
Or when managing member contributions, such as non-concessional contributions or splitting spouse contributions as members increasingly aim to even up their super balances with their spouse. Or alternatively they increase the super balance of the spouse that is closer to retirement so that they can enjoy a tax free income stream sooner.
Or when maximising estate planning benefits, so tax free and taxable amounts amount are paid in the most tax efficient way to beneficiaries. Managing estate planning benefits is increasingly important given that reversionary pensions now count towards a member’s super balance upon the death of a spouse.
These are just a few of the many SMSF tax planning strategies that members can employ which can equate to saving members thousands of dollars.
And if there is one thing that is certain, you can be sure that the super will rules will change and when they do SMSF’s will be the best structure to manage these.
CONTROL & TRANSPARENCY EQUALS MORE ENGAGED CLIENTS
What is less understood is that members are more engaged.
With an SMSF, there is greater transparency and control in terms of fees and investments. Each year Trustees sign off on the accounts, they see the fees, they see the investments and they confirm the investment strategy (good or bad).
When members are engaged they are much more likely to actively save and manage risk better. SMSF’s are unlikely to invest in things they don’t understand. This is why the average fund balance is over $1 million, and the average member balance is over $600K, as they have contributed more and the power of compound interest takes over.
It is no coincidence that the take up of ETF’s has been greatest amongst SMSF funds for these reasons, they are low costs and transparent. Or that funds tend to investment in blue chip shares that pay fully franked dividends.
In contrast, I recall an investment conference where a fund manager was promoting governments bonds as essential part in any client portfolio. Given that 20% of government bonds currently pay a negative yield (roughly $9 trillion) and at best pay interest of 2%, it is not surprising that many SMSF’ would avoid this sector.
When you’re in control and engaged with your fund, there is a much greater aversion to losing money!
WINDUPS ARE MINUSCLE
If you are still not convinced about the merit of having an SMSF, ask someone who has one. They are not going back. Each quarter and year the ATO releases the statistics around SMSF’s and the number of funds wound up is minuscule. And a lot of these are from members dying, divorces etc, not because of the investment structure.
If there is one criticism about SMSF’s, it is the time and effort to administer the fund and the complexity around the rules. But this is where AAS and the adviser come in!