The latest research report on SMSFs

In my previous article titled SMSF Misconceptions, I reviewed ASIC’s Information Sheet INFO206 on what they believed was an appropriate starting balance and the average cost for an SMSF. I then compared those figures to that of the ATO’s quarterly statistical report.

This week the SMSF Association released their research on SMSFs conducted by Rice Warner, an Australian research consulting business, named “Cost of Operating SMSFs 2020”. In this article, I will run through two of its main points – costs and balances.

Costs

I’ve discussed in past Eureka Report articles SMSF costings, one which can be found here.

Rice Warner’s recently released research has shown that the average SMSF costs are not what ASIC has stated in INFO206 of $13,900, or what the ATO data has suggested in June 2020 as $5,989.

This research report didn’t give one standardised fee figure; instead, it conducted a deep dive, looking at fees in respect to whether the SMSF is in accumulation phase, pension phase, or both.

It then further segregated the annual fee figures based on the size of the SMSF and the type of investment strategy the SMSF was undertaking. Below is an abridged version of Table 4 from the research report.

• “Low” represents smaller funds with simple investments holdings
• “Mid” represents median fund fees
• “High” represents SMSFs with property and/or other complex investments and/or strategies

The variance in numbers published by ASIC and the ATO to this research report is material and significant.

Of note is that the above cost figures exclude financial planner fees, investment manager fees, insurance premiums, subscription fees, and investment expenses, whereas the ASIC figure of $13,900 was all-inclusive of such fees.

Outcome

SMSF trustees now have a solid basis on which to price check their current administration costs against, including where their SMSF sits administratively on the cost/size paradigm.

Furthermore, it’s another example that when it comes to the superannuation industry, and the superannuation of each and every Australian, there are so many vested interests wanting to manage and use superannuation money (for purposes other than the superannuants interest), that any media commentary on this subject, especially from government agencies, needs to be critically analysed against what the industry itself has to say, including research papers such as Rice Warner's.

SMSF balance

ASIC stated in INFO206 that a balance of at least $500,000 is required in order to produce returns after expenses and tax equivalent to an APRA regulated super fund. Rice Warner's centre piece in its research paper asserted that SMSFs with balances of:

• $200,000 or more are competitive against other superannuation products available to the public provided the trustees undertake all of the administration of the Fund,
• $250,000 or more become the cheapest alternative provided the trustees undertake some or all of the administration of the Fund, and
• With $500,000 and above, SMSF’s are generally the cheapest alternative, irrespective of if in accumulation phase, pension phase, or mixed, provided the trustees undertake some or all of the administration of the Fund.

Below is a table from the report that reviews SMSF fees against retail and industry funds. Of note are the green and light pink shadings, which represent when an SMSF is cheaper or within range of retail and industry funds respectably.

• 5^th percentile represents smaller funds with simple investments holdings
• 50^th percentile represents median fund fees
• 95^th percentile represents SMSFs with property and/or other complex investments and/or strategies

My takeaway from the above data table is when the investment mix is simple and straight forward, and the SMSF trustee is undertaking some or all the administration and investing decisions of an SMSF, the economies of scale for an SMSF can be found not only at lower establishment balances but lower balances in general. However, when complexity and/or delegation of administration and investment decisions of the SMSF to aligned professionals, the fees will increase accordingly.

Outcome

This data table is a great example of the keep it simple principle. The more financially literate a superannuant is, and their ability to undertake administration and investment decisions for their superannuation, the more cost effective an SMSF is compared to other superannuation products available in the market place.

With both of the above points, it will now become difficult for retail and industry super funds to push the narrative that they are the lowest cost option for every Australian.

These superannuation funds are simply shopfronts for fund managers trying to access more of the average Australians’ super money, and it's becoming apparent that it’s the fund managers and super funds that benefit more than the superannuation members.

This awakening can be seen with the increased interest of SMSFs by superannuants, and renewed focus within Parliament as they bring to a head amending the proposed increase to employer SGC from 1 July 2021 (read my review of that here) which will see further inflows into the industry.