Who's running your SMSF?

Joseph Schumpeter, in Capitalism, Socialism and Democracy, coined the term ‘creative destruction’ to describe the way in which development arises from the breaking down of a prior economic order.

It’s an apt description for the SMSF administration landscape, where a growing number of options have risen to replace the traditional choice: the accountant. SMSF trustees have benefited greatly, as both trustee workload and annual costs have fallen.

Trustees now have a range of choices from discount online administration providers right through to large institutions, each with their own ‘bells and whistles’. But which option is right for you?

Background

When it comes to helping them manage their SMSF administration – accounting, audit and ongoing compliance obligations – trustees have three basic choices: an accountant, the ‘online SMSF administrator’; and the ‘specialist SMSF administrator’.

We haven’t mentioned financial advisors because we’re focusing solely on the administration. Advisors typically don’t do this themselves; they also rely on one of these three options.

A key difference between the choices is the use of technology and price. Price will lead some to choose one option over another but it will also act as a guide to what you can expect in the way of the services included.

There are four key components to SMSF administration:

• Processing– getting the fund’s transactional data (eg bank statement data) into an accounting system and producing a set of accounts, member statements and tax return;
   
• Review– reviewing the accounting system’s output and identifying and rectifying compliance, accounting and tax issues for the SMSF trustee (as well as arranging and project managing the audit process);
   
• Trustee interface – the ability of the trustee to access data on the SMSF’s investment portfolio, pension payments and other key information; and
   
• Strategic oversight– providing support and regular assistance to the SMSF trustee during the course of the year so all of their opportunities are maximised and any threats highlighted and mitigated where possible.     

Table 1 shows what each option gives you, in terms of these components.

Each of these components bears a cost, and the total price of the administration service will be the first indicator as to which of the above inclusions you are getting. The processes used by accountants can be overly manual (making them more expensive) and in a lot of cases your fee will be reflective of the manual processes and the lack of automation in their practice. While this is gradually changing, it’s a key reason why accountants no longer cut it from a cost perspective.

Let’s consider each of the options in detail.

Accountant

The family accountant has been the traditional choice for administration and it’s historically been a year-end manual process. While this is gradually changing, we suspect there are very few SMSF trustees who are choosing to use an accountant on the basis of cost or ease of accessing key information.

The more typical situation is that SMSF trustees are using their accountant because they value the relationship or because it’s what they’ve always done. This is fine, but it’s worth keeping in mind that every dollar you’re paying over $2,000 (and every minute spent chasing your latest asset allocation or pension account balance) is the cost you bear for the value of the relationship.

If there’s no history with your accountant (for instance, if you’re just setting up a SMSF) we wouldn’t recommend using an accountant for the administration unless, for instance, you’ve got a very simple fund and an acquaintance happy to do it on the cheap.

Online administrators

Let’s turn now to the cheapest administration option: the online administrator. Examples include E-superfund, Xpress Super and CleverSuper.

The benefit of online administrators is that they’re cheap. E-superfund, for example, will do the set-up for free, give you your first year free and then do your accounts, audit and tax return for $699 a year.

The basic online administrators will often impose restrictions on the investments you can hold or who you use as your bank or broker. This simplifies the processing and enables them to earn commission (the key reasons why they can offer such a low annual cost).

Apart from the restrictions (which won’t bother many people), the main negative associated with this option is the lack of support and oversight. If you want to know what to do to start a pension, or minimise your tax bill, you’ll need to work it out for yourself (or ask us). You may not even be able to get someone on the phone (if everything’s done online).

This lack of support and oversight is the key difference between the online and specialist administrators. The question for you is whether it’s worth paying the extra?

As a rule of thumb, the smaller your fund, the simpler your investments and the more hands on you are (both financially and in terms of technology), the more likely you’ll be able to get by with a basic online service. But if you’ve got a large fund, want to look at more complicated investments and strategies, or want a personal relationship with your administrator then you might need to go with a specialist administrator.

Specialist administrator

Specialist administrators (for instance, Heffron, Cavendish and Super Guardian are more of an alternative to the traditional accountant. You get the cost benefits of efficient data processing and online access to your fund’s details, but you’ve still got someone to pick up the phone and call if you need help.

For instance, if you do something unusual with your contributions, you’re likely to get a call to help make sure you don’t end up with an excess contributions tax notice or claim a tax deduction that isn’t available. There have been examples where those using online only providers are first made aware of a contributions cap breach when they get a penalty notice from the Tax Office.

Specialist administrators cost a lot more than the basic online providers – typically between $2,000 and $3,000 – which is the price of having the extra flexibility and a person looking after you.

One thing often overlooked by SMSF trustees is the level of oversight applied to your accounts and tax return. Specialist administrators will do a review, whereas online only services will rely on the strength of their data processing and send you the documents produced by their system sight unseen. The difference is subtle but important, since it means you’re missing a layer of review. This might be appropriate for a simple fund but some won’t be comfortable with this arrangement. Remember, as trustee you’re on the hook for your SMSF’s compliance.

Weighing up the options

In the choice between online and specialist, it mainly comes down to how much the personalised service and extra flexibility is worth to you – which comes down to how proficient you are (or how much help you’re already getting) and the size of your fund. If you’re completely on top of the rules and strategies on contributions caps, or you’re running a small fund with contributions well inside the caps, then you might not value the help you’ll get from a specialist administrator.

Choosing between an administrator and the traditional accountant (and shoebox) arrangement is a slam dunk win to the administrator if non-financial factors are disregarded. But keep in mind that some accountants are starting to adopt the online services themselves, acting only as a strategic advisor, rather than an overly expensive transaction processor. CleverSuper, for instance, promotes this approach and provides its clients with contact details for an accountant or advisor, if they require strategic advice. This ‘package’ (of online administrator and accountant or advisor) is probably better thought of, and compared to, a specialist administrator.

We’re not looking to bash accountants (after all, one of us is a Chartered Accountant), but we want to emphasise that the traditional model of junior staff working through all the paperwork, followed by a review by a senior, is a terribly inefficient model. There are plenty of people out there paying $5,000 for ordinary administration, but $3,000 should be enough to get you a rolled gold level of service (including some strategic advice).

The final point is that the best choice for you might also be a function of your stage of life. You might be quite comfortable with E-superfund when you’re in your thirties, with a relatively small fund investing mainly in listed shares. But as you get older and wealthier, switching your fund to a specialist administrator might be a better bet.

Whichever way you go, be sure to pick the option which gives you the service you need at the lowest possible cost and regularly review whether you might be better off elsewhere.

Disclosure: The authors use specialist administration services. Richard is a Chartered Accountant and Ben Smythe is a SMSF Specialist Advisor™ and Chartered Tax Adviser with Smythe Financial Management and previously worked for Heffron.