Santa comes but once a year. So too does accurate SMSF data, in the form of the ATO annual statistics, released just before Christmas.
SMSFs are a large and fragmented segment, with the only comprehensive – albeit still limited – data coming from SMSF tax returns. These take a long time to be filed, processed and analysed, hence why we are only seeing data from the June 2012 year in December 2013.
What about all the other SMSF data you see during the year? A combination of estimates, projections, small survey samples, guesses and outright propaganda. Sometimes useful, often not, but never comprehensive.
There is lots of interesting stuff in the annual data, but today we’re going to look at the vexed and much debated issue of scale – ie at what balance size do SMSFs become superior to collective funds? ASIC has also been driving at this issue recently in its consultation paper CP216, relating to advice and SMSFs.
Needless to say, there is little agreement out there on the question. Rule of thumb estimates have often been around $250,000. Proponents suggest $100,000 or even lower; sceptics generally go for $500,000. What does the data say?
There are a couple of useful tables which can be compared with collective funds:
1. Average SMSF operating expenses by fund size – although not an exact match, it’s close enough to this with total costs of equivalent account sizes in collective funds.
2. Average SMSF return on assets (ROA) by fund size – again, while not an exact match, we can compare this with average investment income (not reported investment returns) of collective funds.
Let’s look first at costs, via average SMSF operating expenses versus large collective funds:
This comparison is actually flattering to SMSFs given there are increasing numbers of SMSF-like products offered by collective funds with fixed dollar costs of around $250 per year. For a balance of $1 million, this would be a fee of 0.025% (2.5bps).
Now, let’s look at returns, via average SMSF return on assets versus collective funds
A few things are clear – even from just a cursory glance:
– SMSFs are astronomically expensive and inefficient for average funds of under $200,000. They cost triple or more the costs of a typical large collective fund, and underperform by more than 5% per annum. Even worse, the ATO data suggests that costs are rising for funds of less than $500,000.
– The SMSF cost story is not remotely compelling until you get to average SMSF fund sizes of $1 million or more. Up to $1 million, it is line ball at best.
– The SMSF returns story doesn’t appear compelling at any balance. As the above table demonstrates, the only material outperformance by SMSF occurred for SMSFs averaging $2 million or more in 2012. There is an argument that SMSFs should structurally underperform because more are in the pension phase, with higher exposures to cash deposits, but that doesn’t explain all of the differentials above.
Averages conceal many things of course. There are SMSFs which are much lower cost and higher performing than average, and equally there are costly and poor performing collective funds.
But the data above is comprehensive, so it’s hard to argue with. And it shows that the story for SMSFs below $500,000 – well, there really is no story right now. For the average SMSF below $500,000, the current reality is much higher costs and lower returns than members would have obtained in many readily available collective funds.
The irony is that the picture was exactly the same when the Super System Review looked at SMSF statistics in 2009. The tragedy is that those statistics were ignored.
For the industry, the message is also clear. It wants to engage with the SMSF segment as a source of growth in a landscape where organic growth is getting harder to come by. Fair enough. And it should – the data shows there is an urgent need for more cost-effective, better performing SMSF outcomes than those that too often currently prevail, especially if smaller SMSF funds are ever to make sense.
Andrew Baker is managing partner at Tria Investment Partners.
I don’t where he is coming from but I know for a fact that his ideas about the costs of SMSFs and their earnings are a long way from the truth.
I have worked in super since 1977 and can guarantee that SMSFs are by far better than the alternatives.
[quote name=”Greg”]….. A great and thought provoking article ……[/quote]
I didnt realise that relatives could post on this site ROFL ! …. there are a lot of adjectives that come to mind when describing this sort of article … great isnt one of them !
A great and thought provoking article and, based on real data even if we wis to debate how complete the data is or how the analysis supports our own views.
One point to be wary of is the use of averages. Despite the 2012 cost column being populated with many cost average numbers > 1.0%, Table 23 of the ATO source document records that 65% of SMSF’s had costs less than 1.0% and of all SMSFs, 41% had costs
I do not believe the ATO data is reliable. Look at the information in the tax return for a SMSF. It is all about the calculation of the taxable income of the fund. Also the the allocated income for each member is the after tax income, and the tax includes tax on contributions, so the allocated earnings as per the tax return is misleading. How does the ATO arrive at the investment earnings for each fund?
I think the balance arguement may not be too far from the truth, $500k is reasonable in many/most cases.
But, like many posts below, the reasons for establishment and other factors are poorly considered. Eg also consider asset protection, estate planning, owning business related property assets.
One big miss was insurance, you do not want to be dealing with a retail fund trustee and, god help you, an industry trustee in a life or TPD claim. Secondly allocated pension flexibility with life proceeds is crucial in my view.
Stephen, SMSF’s have ‘hidden’ fees too. eg trustee time (which can’t be paid for), ETF and managed fund fees will also not be disclosed.
I think a dollar limit discussion however is a little puerile as without considering all needs and circumstances of a client any of this discussion is really rather pointless.
I fully agree on all points in article & also most trustees don’t fully understand their resposibities
Cui bono? For whose benefit are proposals to limit SMSF minimum size being put forward? Haven’t we heard all this before?
By the way the name “Tria” might be confused with “Trio”.
Not sure the case as stated is as clean as the author would have us believe …
What a rubbish article. The figures are rubbish and bear little resemblance to actual real life experiences from managing a couple of hundred SMSF’s. Junk article with flawed analysis leading to flawed simplistic generalisations. There is no substitute for real analysis, real understanding and real research.
If cost is such an issue why do SMSF’s keep growing in numbers? Because cost and return are not the only factors that motivate people to join a SMSF. They see it as a better product for what ever reason and are willing to pay more for what they see as a superior product.
Whilst I actually agree that, as a benchmark, $500k is about the minimum we look at before recommending an SMSF, Barker’s analysis is significantly lacking:
1. Why compare to collective funds’ Investment Income rather than total return? Is this so he can exclude negative total returns generated in years such as 2011?
2. Given that Tria’s clients are likely going to include large super funds, this is easily a conflicted article, and excludes a simple fact: you are comparing single member funds for the large funds to multi-member SMSFs, thus allowing SMSF members to achieve economies of scale within an SMSF.
Finally, looking at Mr Baker’s other comments on the Tria website indicates a failure to understand the SMSF market. For example, there is an article about the ATO borrowing statistics and the alleged boom in SMSF borrowing in the 5 years to 2012. This is a 5 year period that started shortly after s67(4A) was introduced.
Sadly it is not clear. I suspect selective data has been used and some things are difficult to compare. For example, the costs of the larger funds looks significantly understated. Reporting of costs by the larger funds is not consistent nor complete – half the costs have been hidden away and are difficult to find unless you look real close.
Further, rates of return, since when did the larger funds have a positive return in 2010, 2011 & 2012?? most balanced funds were as much as -18% not +9.2%. Hardly convincing.
Andrew Baker…You are obviously chasing an agenda here. I’ve been running a SMSF since 1974 and can confidently say the figures and charts you quote have been dreamed up by people who believe “Santa comes but once a year” Trust me buddy left to me Santa will never come to you. If you believe your claptrap then I’m glad you’re not my adviser.
Hi Andrew, a very interesting article. What the numbers indicate to me is a group of Mums & Dads who are disappointed with the service they have received in having their super in industry and other types of super funds and turn look to SMSF’s, even though the costs might be higher.
You admit that ‘averages conceal many things’ but why would you even bother using out of date ATO averages which include all those who’ve set up ridiculously high cost funds, leveraged into property etc?
It’s very easy to obtain the actual cost of running a SMSF. Why wouldn’t you just compare the cost of running a fund that is comparable to the typical collective fund?
There’s plenty of people running smallish, simple SMSFs at less than 1% a year in costs and performing better than their old super funds. Using the ATO stats just mixes them up with the figures of those who are paying 5% plus per annum because they’ve been sold a pup.
The true answer is that, like most things, it depends. For some people a $100k fund will make perfect sense and some people with $1m should just stick with an external fund.
The difficulty I have with these stats is I would think when a SMSF member gets advice the bill gets paid by the fund but if an APRA fund member seeks advice from planner who pays the bill?
In the end the whole debate is about what price you are prepared to pay to gain control and how much you wish or need to pay for advice. Paying roughly 1% more than what you would be charged by an APRA fund is probably a reasonable price to pay for control for those who want it.
There are flaws in your analysis. No1 People want to have direct control of their financial future …. hence the “self managed” in smsfs. For this they will pay a premium. People do not trust the large retail/industry funds. This is the number one reason why the sector has and will continue to outgrow and out perform the competition. No2 No one on the planet knows what the real fee structure is the retail/industry sector. There are so many hidden fees/undisclosed charges/reallocated costs its nye on impossible to know what the real costs are. Theres the fees you are told about and then there’s the hidden fees you aren’t told about. Hence comparing the transparent smsf sector to the non transparent retail/industry sector is a waste of space.
I have been in the industry for 30+ years and the above is the way it is.
As Super Fund Auditor of a significant number of Funds, I am amused by this simplistic article. Most Funds I Audit are doing so much better that retail Funds and costs are comparative. At the end of the day, is the Fund member happier and do feel they have control of their retirement savings. Self evident answer, even if the return is a little lower, By the same token, most did not suffer the huge losses of the GFC!.