Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Going beyond the cost debate in SMSFs

Olivia Long  |  31 Oct 2013Text size  Decrease  Increase  |  
Email to Friend

Olivia Long is the chief executive of Xpress Super.

 

There is increasing debate in the industry around what minimum balance should be required in order to make a self-managed superannuation fund (SMSF) effective.

In short, there is no minimum balance required for an SMSF to be an effective retirement savings vehicle. I know that's not the view of the Australian Prudential Regulation Authority-regulated funds, but I think it's fair to say they are hardly objective when it comes to this issue.

They argue that $500,000 should be the starting point. They also argue that potential trustees should be the font of all knowledge when it comes to investment and the regulatory environment. The concept of setting in stone qualifications for people wanting set up an SMSF has even been mooted.

As you would expect, I couldn't disagree more. My starting point is that cost is the wrong way to approach this issue. But even if you accept that the cost of running an SMSF should be the guiding principle, then the argument that advocates a $500,000 minimum simply can't be sustained.

Let's have a look at some numbers produced by actuarial firm Rice Warner. Taking a $100,000 balance, they estimated the average cost of running an industry fund, retail fund and SMSF at $936, $1608 and $1594, respectively. So, an SMSF is competitive already with a retail fund.

Increase the balance to $250,000 and the industry fund costs $2136, its retail counterpart is $4540, while an SMSF is $1750 - 18 per cent cheaper than the industry fund and a whopping 61 per cent cheaper than its retail equivalent.

At $500,000, the statistics are even more damning for the APRA funds, with the industry fund costing $4136, retail at $8940 and SMSF at just $1999.

On these numbers, the figure of $500,000 is simply nonsensical - if you wanted a cut-off point based on cost, then clearly it should be $250,000 compared with an industry fund and just $100,000 for a retail fund. Some "expert" just thought of a number and doubled it!

But to my way of thinking, focussing on the cost of running a fund - important as it is - misses two critical elements to the debate. First, it often means there is a lack of analysis on the rate of return, surely a critical consideration for a long-term retirement savings vehicle.

After all, if a fund's rate of return is not important, why do our industry and retail counterparts trumpet their good years and give a good imitation of a Trappist monk in the bad years?

On the basis of return, SMSFs are competitive with the industry and retail funds. Over the past decade, retail funds have delivered, on average, 3.4 per cent. I am quite certain many SMSF trustees have outperformed that average return.

Second, it tells those people - often younger people - that they don't have the skill set or knowledge to take control of their own retirement savings. Surely in today's society we should be encouraging people who want to take responsibility for their retirement to do so.

Provided these people do their homework and have a full understanding of what's involved in running an SMSF, then there is no reason to set an arbitrary limit to warn them off.

But don't just take my word for it. In 2010, the Cooper Review, which took the last definitive look at our superannuation system, reached the same conclusion.

Click here to learn more from Olivia Long about minimum balances and SMSFs.

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend