Ready to DIY? How to find out if an SMSF is right for you
Huge dissatisfaction with financial institutions telling them how to invest drives around 60,000 Australians into the arms of self-managed super funds (SMSFs) annually. However, many who have chosen the DIY option end up being punished for their efforts with relatively high costs and low returns.
Despite the headaches associated with running one, a recent Productivity Commission report found that large SMSFs earn broadly similar net returns to funds overseen by the Australian Prudential Regulation Authority.
But an estimated 200,000 smaller ones, with less than $500,000 in assets, perform significantly worse on average.
Given that around 42% of all SMSFs are deemed too small to make a reasonable return, compared with MySuper products, the commission maintains that self-managed funds need a minimum of $1 million to be viable.
But what's often overlooked when reviewing the lower investment outcomes achieved by the SMSF sector is that they're much more risk averse with their asset allocations, says Rainmaker's Alex Dunnin. When trying to analyse SMSF performance, Rainmaker research discovered that a major indicator of how an SMSF invests its funds is size.
For example, small SMSFs are heavily invested in cash, medium ones have a mix of cash, property and some shares, while large ones have a regular mix across asset classes, which tends to explain their superior returns.
It's evident from this analysis, says Dunnin, that SMSF members as a group, even those in the pre-retirement accumulation phase, often undermine the freedom associated with being DIY investors by behaving conservatively.
In light of these results, the Productivity Commission wants investors to focus less on the fees associated with SMSFs and look more at the returns they should deliver.
Dunnin urges people to ask themselves why they're choosing the DIY approach to investing in the first place. "If you're going to set up an SMSF you've got to do so as an investment, not just as a means to minimising tax," he says.
Know what you want
To help you discover whether an SMSF is the right structure for your retirement savings, the regulator ASIC says you need to clearly understand what it means to run your own fund, the responsibilities associated with being a trustee and the consequences of getting it wrong.
For example, if you put money into a dud investment, you're on your own.
To work out if an SMSF is right for you, Kurt Ohlsen, senior financial planner with Profile Financial Services, suggests investors ask themselves what a successful outcome looks like.
He says that while running an SMSF may deliver a worse financial outcome, it may still be a better overall result if it's meeting the members' minimum financial goals and covering the all-important "sleep at night" factor.
Most clients who approach Ohlsen about an SMSF want greater transparency on fees and their underlying investments than a black-box super fund provides. Or they want to buy an investment property.
However, if the super balance is low and the cash flow poor, he says property can be one of the most overused drawcards of an SMSF and it may not stack up if something goes wrong.
If you struggle to identify what a successful SMSF outcome looks like, Ohlsen recommends running a spreadsheet to identify whether the benefits are real or at best marginal. Compare the accounting, audit and actuarial costs of an SMSF versus the admin, trustee and cost recovery fees listed on your annual super fund statement.
"Instead of making the decision on fees alone, ask yourself, 'What am I losing going from super to a SMSF - like insurance and other benefits, cheaper fees and/or access to wholesale investments - and what do I gain - like greater investment flexibility and next-level transparency?'" says Ohlsen.
"Remember, an SMSF is a trust that requires onerous amounts of time to manage, so ask yourself if added transparency is worth the extra paperwork."