SMSFs have recently come under the microscope. ASIC have issued a warning ‘red flagging’ key risks which people should consider before setting up an SMSF – even prompting existing SMSFs to consider closing down.
This list will also be mailed to people setting up a new SMSF from November 2019.
The decision to establish an SMSF is not one that should be taken lightly. As with all investment decisions the benefits of managing your own super fund need to be weighed up against the costs and risks.
We agree with ASIC clamping down on SMSFs being set up to buy investment properties or engage in other high risk strategies. However, we disagree with the idea that SMSFs under $500,000 are not viable and we’ll explain why.
Here we review 5 of these ‘red flags’, and show you how an SMSF with $200,000 can actually outperform most retail super funds and industry super funds.
We also detail how an SMSF trustee can address the majority of these red flags by obtaining independent advice, investing in transparent, low cost exchange traded funds (ETFs), and using a low cost online administration service for reporting, compliance and tax obligations.
SMSF Red Flags
- Low balance (under $500,000)
- Simple investment strategy
- Desire to delegate / be hands-off
- Lack of time to devote to your SMSF
- Lack of investing experience
1. The SMSF has a low superannuation balance and limited ability to make future contributions
This issue was ‘red flagged’ because the upfront cost to establish an SMSF, annual fixed costs in administering the fund, and fees paid to fund managers and other providers eats away at the returns earned by the SMSF.
One of ASIC’s more controversial statements was that the average cost of running an SMSF is $13,900, meaning the fees for an SMSF with smaller balances is prohibitive.
ASIC suggests that only SMSFs with over $500,000 can compete with industry and retail super funds when taking these high fees into consideration.
We agree that fees do make all the difference when it comes to your retirement savings! We’ve said it many times before in our annual Fat Cat Funds Report.
However, the broad assertion that SMSF setup fees and annual running costs are too expensive for smaller balances ignores the range of companies that provide low cost setup fees and admin costs.
If you use a low cost SMSF Admin and invest in our ETF portfolios, it’s possible to outperform the majority of retail and industry funds (and have lower costs) even with a balance of $200,000. Our SMSF clients have earned average investment returns of between 10% to 12% per year regardless of their balance. Even once you add in fixed costs of ~$1,000 p.a, a simple SMSF owning low-cost ETFs with Stockspot would be ahead of most other funds.
This red flag also ignores the fact that many retail and industry funds have been increasing their administration fees. For example, Australia’s largest super fund, Australian Super recently increased their member annual administration fees by 50% for even the most basic of funds.
Find out how SMSFs can beat the largest super funds in Australia.
2. The SMSF wants a simple superannuation solution
For most SMSFs, complex investment strategies are not in their best interest since complexity almost always attracts more fees – and more risk. As we say at Stockspot, boring is brilliant.
Our returns show why SMSFs are better off in a simple, low-cost strategy.
In the past 5 years the *simple* Stockspot portfolios have returned between 7.5% per year to 10.0% per year after fees. That’s better than around 99% of more ‘complex’ investment funds as well as most retail and industry super funds, after fees and tax.
Over the shorter 1 and 3 year timeframe, the returns of the Stockspot portfolios are even higher still. Our investments portfolios are diversified across a wide mix of different ETFs for exposure to different sectors, countries and asset classes.
A mix of growth assets like shares as well as defensive assets like bonds and gold is important for providing ongoing liquidity as well as cushioning against good and bad times.
A note on transparency
One of the reasons people are attracted to SMSFs is the ability to have more visibility and control in managing a simple, effective strategy. Most retail and industry funds fail to provide transparency on what investments they hold.
Even ‘indexed’ options within these funds are not transparent. An SMSF allows investors to know exactly what they own at all times, as well as enjoy the tax benefits without inheriting the tax consequences of other fund members.
These are benefits valued by SMSFs, even if their underlying investment strategy is simple.
3. The SMSF wants to delegate all of the investment decision making to someone else
Stockspot was started to help make professional-quality investing easy for people – and this extends to running an SMSF. We take on the responsibility, time and hassle of managing investments on behalf of a SMSF trustee at a fraction of the cost of a traditional (face to face) advisor.
Most people should be delegating the decision making when it comes to their investments (both inside and outside of super).
Just as you should delegate health decisions to a doctor or the wiring of your house to an electrician. The decision to delegate to a professional is not a reason to close down an SMSF and move the funds to an industry or retail super fund.
When you invest via your SMSF with Stockspot we gain a clear insight into your investment needs through the questions we ask in our sign-up process.
We determine the most suitable portfolio of diversified assets for you based on your current situation, timeframe and risk capacity. The most important investment decision that needs to be made is asset allocation, which is driven by your stage of life and your capacity for risk.
By contrast, industry and retail super funds don’t provide a personalised investment strategy at all. They can only provide a product.
The desire to delegate investing decisions to an expert shouldn’t be discouraged. Delegating this actually gives SMSFs a better ability to earn consistent returns and safeguard their intended retirement lifestyle.
4. The SMSF does not have a lot of time to devote to managing their financial affairs
ASIC suggests that the average SMSF trustee spends more than 100 hours a year managing his/her SMSF. The complexity of the SMSF would have a lot to do with this.
Complexity kills returns, so rather than closing down an SMSF because of the complexity of the investments, a better course of action is to place the money in low cost, well diversified investments which require little ongoing tinkering. Investing in low-cost index funds or ETFs offers that benefit.
SMSFs are also better off choosing an adviser who can provide value-for-money investment advice and annual reporting.
Many SMSF trustees that come to Stockspot used to spend a lot of time trying to pick individual shares for their SMSF. They now realise it’s actually much safer (and easier) to invest into diversified ETFs.
5. The SMSF has little experience making investment decisions / the SMSF has a low level of financial literacy
Financial literacy should certainly be a consideration when you’re setting up any sort of investment, including an SMSF.
However, the most important decision is to invest into a blend of asset classes which corresponds to your investment horizon, capacity to take risk and future need for liquidity.
Once that decision is made, the choice of products within asset classes is an area where more knowledge or experience doesn’t always lead to better results. This is why the majority of professional fund managers do worse than the market.
We believe that all an SMSF really needs to learn is that low-cost diversified funds gives them the best chance of reaching their retirement goals.
After that, their choice of a retail fund, industry fund or SMSF comes down to other factors like their desire for more transparency and control, tax benefits and their interest and willingness to take more responsibility.
Stockspot SMSF clients get the benefits of transparency and control, as well as the added benefits of speaking to an investment adviser, having an annual review, and preparation of annual financial statements. And it’s all done online.
We help SMSFs ensure they’re well diversified, have the right risk/reward in their portfolios, and ample future liquidity to pay benefits when members retire.
This has helped our SMSF clients achieve great investment outcomes, irrespective of their financial literacy or experience. See our 1, 3 and 5 year portfolio returns for yourself.
Stockspot’s view on SMSFs
The decision to set up an SMSF is a big life decision and the benefits need to be weighed up against the costs and risks. For those who have decided it’s right for them, SMSFs can be a rewarding way to have more visibility over your investments, and more control over your retirement.
An SMSF that’s broadly diversified across asset classes, countries and sectors – keeps costs low – and has the discipline to stick with their strategy can beat the best funds on offer.
Any advice contained in this article is general advice only and has been prepared without considering your objectives, financial situation or needs. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.
