Written by Hudson Adviser Michal Park
A recent email from a Hudson member prompted my article this week. This particular member is in the midst of establishing an SMSF in which to purchase a commercial property that his business will rent.
To reinforce the Productivity Commission’s report about the efficiency and competitiveness of superannuation, ASIC sent this Hudson member a fact sheet titled “SMSF’s: are they for you?” as a newly registered SMSF trustee. With 599,678 SMSF’s in Australia holding nearly $748 billion in assets as at 30 June 2019, it’s worth a fact sheet.
In a nutshell, the fact sheet is designed to highlight the downside to SMSF’s, identifying eight “red flags”, the first being those with low fund balances. ASIC research suggests that SMSF’s with balances below $500,000 produce lower returns on average (after expenses and tax) when compared to industry and retail super funds. In the past, the rule of thumb was that one required a balance of between $200,000 and $300,000 to make an SMSF feasible, but now it looks like the magic number is closer to $500,000.
All eight red flags, as identified in REP 575, are as follows:
- The client has a low superannuation balance and would have a limited ability to make future contributions
- The client wants a simply superannuation solution
- The client wants to delegate all of the running of the SMSF to a paid advice-provider
- The client wants to delegate all of the investment decision making to someone else
- The client does not have a lot of time to devote to managing their financial affairs
- The client has little experience making investment decisions
- The client, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (because undischarged bankrupts and persons convicted of an offence involving dishonesty are prohibited from acting as a trustee)
- The client has a low level of financial literacy
Below is a chart directly from the ASIC fact sheet, illustrating the poor returns from SMSF’s with balances under $500,000:
I’ve compared these figures above the below Chant West table which shows the annual financial year performance of the median growth fund over the financial years:
So the question I ask myself is this: even with balances in excess of $500,000, is the significant time, costs, risk and obligations associated with establishing and running a SMSF really worth it? The returns are not all that different to a “garden variety” complying super fund, as illustrated above.
So, unless you are like my Hudson member with a specific purpose to establish an SMSF, or you want more control over your investment strategy (requiring skill, care and diligence), perhaps a SMSF is not right for you.
The complete fact sheet can be found here: