The pros and cons of SMSFs

Their numbers topped 500,000 a while ago, and their members have recently passed through the 1 million mark.

Self-managed super funds seem to be the most popular thing since former Prime Minister Bob Hawke declared a de facto public holiday when Australia II won the America’s Cup.

Many who sign up for them do not truly understand their power. And many who have had them for years are similarly unaware of exactly how strong the colt they’re riding is.

They are not just an investment vehicle that allows you to pick your own shares. If that’s your reason, there are far simpler, cost-effective options available.

But are they all they’re cracked up to be? Are they right for you? If you’ve been considering that question (or you’ve opened one and are now wondering why you did), then today I’m either going to vindicate your decision, save you from going down a garden path ... or make you rethink a recent decision to open one.

There are plenty of good reasons for opening a SMSF. But there are also some bad ones.

First are four reasons you should consider opening one.

1. You have enough money to justify it

The number that seems to float around without being challenged is that if you’ve got $200,000, you’ve got enough money to justify opening a SMSF.

The figure is, in my opinion, rubbish. Having $200,000 to tip in as starting capital to a SMSF doesn’t justify anything.

Far more importantly, do you know what you’re doing with investments? If you don’t, and you’re going to have to hire someone to make the investment decisions for you, you’re going to need more than that. I’d suggest $500,000, if a reasonably full-service investment adviser, charging a flat fee, is going to be required to assist you with that.

If you do know what you’re doing and are prepared to make the tough investment decisions (or meet some of the other criteria below), then $200,000 is probably enough. But don’t get talked into it just because you’ve got a couple of hundred grand sitting in super (or jointly, in super funds, if you’re looking to do this with a partner).

2. Particular investment opportunities

SMSF trustees are able to choose their own investments. So long as the investment is an allowable investment for a SMSF, then the trustee can invest in it. However (see below), this is not just picking stocks.

If you have good reason for investing in some assets that APRA funds do not provide options for, then a SMSF could be for you.

In particular, if you want to buy direct property (residential or commercial), then you’ll need a SMSF. If you want to do it through gearing, ditto. But see this column (The super property end game) if you’re considering geared property.

There are many other investment opportunities (such as smaller, unlisted companies) that aren’t available through APRA funds that an SMSF can provide the only option for investment through your super.

3. You have the time

If you are the trustee, whether or not you outsource some responsibilities for accounting and investment, you’re in charge. You need to manage the investments, manage the contract help and manage the oversight.

If you have the time to monitor the trust, in its entirety, then a SMSF might be for you.

4. Estate planning objectives

Because big APRA funds are having to write trust deeds that will cater to the masses, they can’t/don’t allow for some of the estate planning powers that are available in super.

Witness the number of funds who still do not allow binding nominations for their members, or reversionary pension options. SMSFs are able to make complex end-of-life financial arrangements that APRA funds will (probably) never allow the flexibility to do.

Other benefits include the ability to make anti-detriment payments (see Super benefits after death) and more flexibility with paying death benefits.

And here are four reasons not to start a SMSF.

1. Your adviser or accountant told you to

Nope. This is a dumb reason. If the reasons above (though that list is not exhaustive) don’t exist for you personally, then this reason doesn’t cut it.

I’ve seen many set up for these reasons. Accountants sometimes do it because of the ongoing accounting work that it will generate (not much different to the much despised commissions, really). And advisers recommend it because they can see trail income going on for a long time.

They need to justify it on legitimate grounds. And if they can’t, seek a second opinion before committing.

2. You want to pick your stocks

If your main reason for wanting to start an SMSF is so that you can choose your own stocks and managed funds, then let me save you some headaches.

There are better options around, if that’s all you’re after. You don’t need a SMSF.

With today’s modern platforms and wraps, you can buy almost any listed investments and almost any managed funds. And you can do so without incurring the costs (time and money) associated with a SMSF.

And with competition in the market increasing on a weekly basis, there are plenty of funds whose relatively low fees cap out at a point, beyond which no further fees are paid, which can make it a very appealing alternative to a full-blown SMSF.

3. You’re sick of paying fees

You think you won’t pay fees when you set up a SMSF? Fees for accounting, audit, share broking, fund manager, platform, as well as ATO supervisory levy fees, all exist for SMSFs. Most are inescapable.

And if you’re not happy with your existing super fund/platform and the fees they are charging for the performance received, then you might just be better to change providers after doing some research, possibly to a wrap provider who will give you the investment control you desire.

And ... management fees for super funds and super platforms are usually charged on a percentage basis. If you’ve only got a relatively small amount in super, then you’re being charged an equally small amount to cover all of the decisions, paperwork and aggregation that they provide, if you choose to use them.

4. You’re not interested in investing

Sure, you can hire someone to make those decisions for you, but that costs money. And if you’ve got enough money in your SMSF, you can still hire people AND save money overall.

But you’ve still got to manage them. And if you don’t really know much about investing and what makes investment markets tick, then an SMSF isn’t for you.

Lest the above be misunderstood, I’m a card-carrying SMSF nut. I love them. But I see too many people set them up for the wrong reasons. If you’re considering setting one up, the above should justify your decision.

If you’re not sure, or are wavering on a decision, hold off and consider it a bit longer. Once set up, they can be difficult to close down.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• The SMSF Professionals’ Association of Australia (SPAA) has welcomed Finance Minister Senator Mathias Cormann’s statement that the Coalition will proceed with the amendments to the Future of Financial Advice (FoFA) reforms. SPAA’s chief executive, Andrea Slattery, said SPAA had always supported the removal of the best interest duty because it was too broad in its application, would create uncertainty and would involve a high compliance burden for financial advisers.
• SMSFs outperformed funds regulated by the Australian Prudential Regulation Authority, according to a NAB report. The analysis indicates that, between 2005 and 2012, SMSFs generated an average return of 7.7% compared to 4.5% on average from the rest of the superannuation industry.