Patrick Jackson explains why trustees should look before they leap when considering a self-managed superannuation fund.
The reasons people cite for starting self-managed superannuation funds (SMSFs) are often to do with control, which can be interpreted to mean control of the superannuation fund, investment selection and fees.
If they knew what was really required as a trustee and the many risks involved, control of a super fund would hardly be desirable to the average Australian.
Australian Prudential Regulation Authority-regulated funds have responsible managers, skills matrices, regulator visits, internal audits, risk management plans and all sorts of other policies and procedures with which they comply to ensure the trustees are protecting the benefits of their members and themselves.
However there is some latitude allowed with SMSF trustees, since the only real penalty is a sledgehammer upon the assets of the fund.
Whether this is the case in the future remains to be seen, however a range of penalties would certainly get the attention of trustees and put pressure on administrators and financial planners to review their service offerings to cater more thoroughly for trustee compliance.
Certainly trustees would also need to be far more diligent than is currently the case.
Investment selection is always an interesting one for the SMSF trustee.
I always challenge the trustee to tell me what their investment return was for the previous year, and predictably this question is met with a blank stare and a murmuring of how well a particular stock they had the wisdom to select had done.
The latest figures from the Australian Bureau of Statistics indicate there is still clearly a trend to cash for SMSFs, with 26 per cent of funds still in cash-like products, including term deposits.
The investment selection mentality seems to have created a competitive landscape between managed funds and SMSFs that simply should not exist.
Managed funds and SMSFs are complementary — how else is the trustee of a super fund to get exposure to international assets?
Yet only 0.79 per cent of assets are in overseas investments — this could be slightly understated as there are 9.4 per cent of SMSF monies held in unlisted trusts, in other words managed funds, some of which may have international exposure.
To some, starting an SMSF then investing in a managed fund is counter intuitive — however superannuation fund trustees can either access the fund on a wholesale basis, or maybe pool the assets through a wrap service.
The avoidance of wrap services is another unnecessary tendency of SMSF trustees — probably due to the influence of their accountants.
Just as a managed fund can provide diversification, a wrap can provide simplicity, quality reporting and tax consolidation for financial assets. But there is a fee for this service.
Of course this leaves fees.
I won’t pretend I have broken any new ground with the observations in this article, as most of these subjects have been discussed ad nauseam, however it is interesting to balance the popular views with both the data and the reality of the transition to SMSF and the trusteeship.
So are SMSFs cheaper? To answer this question requires an extension to a question that is often overlooked: cheaper than what?
Again it is generally compared with a corporate super fund, a public offer super fund, an industry fund, a managed fund, or a super wrap or superannuation platform.
Industry funds are cheap, yet offer limited investment selection and have a lack of transparency in terms of assets, fees and tax.
Managed funds, as stated, are actually complementary to an SMSF and should be considered as a tool in the overall asset allocation.
Therefore a fee comparison with this vehicle is generally unnecessary.
Public offer superannuation funds, including superannuation ‘wraps’ and baby wraps may represent the only true alternative for price comparisons.
However again there is a large element of the formula that is missing: time. Professional SMSF administrators can relieve a lot of the burden of running the fund, however the trustee still has a number of decisions to make — particularly the strategic asset allocation for the fund.
It is now well known that the strategic allocation has more impact on a return than the tactical asset allocation, but when you are not measuring returns what does it matter?
It is hard to say where industry funds and corporate super funds sit in the grand scheme of things. Many members suffer from inertia and elect to invest in the default fund.
These people are hardly the type to run out and start their own super, regardless of fees.
In reality many people want to run their own super because it makes them feel good and in control. Either that or their accountant suggested it — or Harry down the road told them over a beer he was doing it and it was great.
Even if returns and fees are basically unmeasurable, so what? That becomes irrelevant when you are doing it yourself.
Of course there are many for whom an SMSF is an appropriate option — provided they use a professional administrator who can help them track fees and the investment returns in a meaningful way, provided they seek the services of a financial planner to help them with their asset allocation, and provided they have time to fulfil the role of trustee under a potentially more onerous compliance regime.
But I do think before jumping into the role of trustee, people should stop and think about what they are actually doing, otherwise they face a future of below average returns, hidden fees and no control at all. Sound familiar?
Patrick Jackson is head of operations and business solutions at Fiducian Portfolio Services.
