Don't paint yourself into a corner with DIY
The rush into self-managed superannuation funds (SMSFs) continues to gain pace. The sector already makes up about a third of retirement savings with about one million members.
Each week about 700 SMSFs are established. Most people are probably running their own funds for the right reasons. But where it goes from here is the question.
It is no longer just accountants setting up self-managed superannuation funds for their small business clients and for the better-off professionals they advise.
The concern is really where self-managed superannuation funds are recommended by financial planners and accountants to those in more modest circumstances.
The Australian Securities and Investments Commission released a report in April on the quality of self-managed superannuation fund advice. The regulator targeted the advice being given by accountants and financial planners to those trustees of self-managed super funds, or potential trustees, with balances of $150,000 or less.
The regulator found 28 per cent of the advice was "poor".
Among the many potential problems of recommending SMSFs to those with lowsuperannuation account balances, costs would have to be one of the biggest concerns.
Industry Super Australia, the former Industry Super Network, and the Australian Institute of Superannuation Trustees produced a recent report that looked at Australian Taxation Office data on more than 70,000 SMSFs to get an accurate cost idea.
In 2010, one in five SMSFs had assets of less than $100,000. Funds between $50,000 and $100,000 in size had average costs of 3.7 per cent. The smallest funds, those with assets of up to $50,000, had costs, on average, of more than 7 per cent.
Industry funds have an obvious vested interest in highlighting the deficiencies of SMSFs but, nevertheless, the costs of smaller SMSFs compare unfavourably with large not-for-profit funds, which have costs of less than 1 per cent.
Many of those talking up the advantages of SMSFs say the minimum needed is somewhere between $200,000 and $500,000.
But Dr Sacha Vidler, the chief economist of Industry Super Australia, says the Tax Office data shows that SMSFs need to have assets of about $2 million before they have costs, on average, of about 1 per cent.
In 2010, about 10 per cent of SMSFs reported to the Tax Office that they had assets of at least $2 million. Does that mean trustees of smaller funds place great store in their ability to pick investments that are going to outperform markets and more than justify the high costs? Maybe so.
But the research shows that two-thirds of SMSFs have a very low level of diversification, with most assets in one class.
There are other potential disadvantages with SMSFs apart from high costs, such as being outside of the compensation scheme in the event of theft and fraud.
Large funds also have the advantage in life insurance. The insurer behind the fund usually accepts applications for life insurance cover automatically. As an individual buying life insurance, the insurer may need a medical examination and may not be accepted.