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Too expensive, too complex: SMSF revolt builds

Emma Rapaport  |  18 Jul 2019Text size  Decrease  Increase  |  
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One in five trustees considered ditching their self-managed super fund in favour of an employer superannuation fund last year, saying the industry has become too expensive and complex, a new report shows.

In 2019, 20 per cent of SMSF trustees surveyed by Vanguard/Investment Trends said they were considering moving to a superannuation fund – 17 per cent to industry, 3 per cent to retail.

Only 4 per cent of trustees gave the same response just five years ago.

"Massive fees" paid to accountants, auditors, and solicitors, who in turn provided poor service and advice, was one of the key reasons given by the almost 5,000 SMSF members surveyed.

Trustees also reported concerns that managing their SMSF by themselves will become "more difficult as we age".

Poor investment advice was also a cause of pain, alongside a perception that industry funds perform just as well if not better than the SMSFs.

"There appears to be much more involvement from me now for not much gain," one survey respondent said.

Running an SMSF is time-consuming

It's been a turbulent year for Australia's 600,000-strong SMSF community. First, they faced an attack on their franking credits, then market volatility eroded their returns. Tales from the financial services royal commission of poor and inappropriate advice delivered to SMSFs couldn't have helped either. And now, the dramatic fall in interest rates is forcing them into riskier asset classes.

Trustees are reporting they spend eight hours a month running their SMSF. “Selecting/research specific investments” takes up the most time (3.3 hours), followed by “ongoing monitoring/reporting (2 hours)”, and “administration and paperwork” (1.7 hours). 

Fifteen per cent of respondents say managing their SMSF is more time consuming than they expected.

While trustees expressed concern, this has not turned into action, the report showed. Only 10,000 funds were wound up last year against 600,000 in total SMSFs established (or less than 2 per cent).

"20 per cent thought about it, but only 10,000 actually closed their fund," Michael Blomfield, chief executive of Investment Trends says.

SMSF industry slowing, but future growth prospects strong

Growth of the SMSF market has slowed over the past year to 4 per cent, with just over 20,000 SMSFs being set up in March 2019. This is down from 27,000 in March 2018 and 41,000 in March 2013.

However, Blomfield expects this number to rebound as certainty returns to the market following the Coalition's May electoral win.

Number of SMSFs established, Dec 2010 - Mar 2019

SMSFs established

Source: ATO Self-Managed Super Fund Quartlery Statistics Report, 2019 Vanguard / Investment Trends Self-Managed Super Fund Reports, July 2019

"The quickest things to stop things happening in the personal investment space – whether that's actually investing or establishing a fund or changing your asset allocation – is to create regulatory and rules-based uncertainty," Blomfield says.

He adds that there remains substantial and growing interest among super fund members to set up an SMSF in the future, citing greater control and better returns as the main attractions:

  • 11 per cent planning to set up an SMSF at some point in the future
  • 5 per cent planning to set up an SMSF in the next 12 months; and
  • 5 per cent in the process of setting up an SMSF

Newer trustees are younger, starting with less, and holding onto their super funds

Despite this, Vanguard/Investment Trends noted a shift in the demographics and behaviour of newer SMSF trustees.

Today, SMSFs are being established by younger people with lower balances. The median age at the time of establishment is 47, versus 52 almost ten years ago. Median starting balances are around $230,000 per trustee, down from $420,000 in 2010.

This analysis shows trustees are largely rejecting advice from industry experts, as well as the Productivity Commission, whose latest report shows SMSFs need between $500,000 and $1 million to start a fund.

Median age and balance at time of establishment for current SMSF Trustees versus demographics of super fund members who intend to set up an SMSF

Demographics smsf trustees

Source: 2019 Vanguard / Investment Trends Self-Managed Super Fund Reports, July 2019

Newer trustees are also tending to hold onto their employer superannuation fund when they establish an SMSF. Forty-four per cent of surveyed respondents who said they were considering opening an SMSF said they intended to hold on to the employer fund, compared to 29 per cent two years ago.

One industry fund, the 1.2 million member Hostplus, has opened its door to DIY super investors, offering SMSFs direct access to six of their pooled funds.

Blomfield attributed some of this to the trustee's desire to access life insurance via a fund – which is often viewed as easier and cheaper than seeking insurance outside of funds. However, he said other drivers are at work.

"The largest reason given is people think their fund's performing OK. They leave their employer fund as the 'core' of their retirement savings and start an SMSF where they do their 'satellite' investing – more international, specialise a bit more into infrastructure," he says.

"The other driver is they’re leaving it open just in case they want to go back, and they also want to be able to access investments they can't access … like infrastructure, small cap funds, and socially responsible investing."

is the editor of Morningstar.com.au

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