New regulations may make SMSFs dearer but better run
A self-managed super fund expert says the upcoming removal of a rule that allows accountants to provide certain simple advice to (SMSF investors may make running a fund more costly.
But at the same time, this will require funds to seek formal financial advice, which could produce better investment outcomes for members in the long run.
John Wiseman is a financial planner and the principal of JWW Consulting. He notes there can be a number of reasons why people open a self-managed super fund, but most do it to reduce costs or because they believe they can produce a better investment return than a retail or industry fund.
“That's all changing. In most cases, I would question whether retail investors can do it better. When you look at the mix of assets in most SMSFs, very little money is in international shares or fixed interest. The majority of the money is either in Australian shares, property or cash. This shows these funds are not properly diversified,” says Wiseman.
The Australian Taxation Office’s (ATO’s) latest SMSF figures back this up. On average SMSFs hold 31.0% of their assets in listed shares, 14.4% of their assets in residential and non-residential property and 26.5% of their assets in cash1
“A small number of people run their funds by themselves well, but the lack of diversification shows the majority need financial advice,” he adds.
Until 30 June this year SMSFs investors can receive certain advice from their accountant around their SMSF, known as the accountants’ exemption. For instance, accountants can recommend a client start or wind up an SMSF2
This exemption ends on 1 July 2016. After this anyone who provides advice on an SMSF must be licensed under the Australian Financial Services (AFS) licensing regime.
The Australian Taxation Office’s figures show the cost of running an SMSF has remained static in recent years. Its latest figures3
show SMSFs have an average annual expense ratio of 1.1% of funds under management, equivalent to $12,200.
In 2013/2014 the average operating expense figure was 1.06%. The average operating expense ratio over the three years to 2012 was 0.65%4
In contrast, in 2014 super fund fees, including retail and industry funds, averaged 1.33%5
. So while fees are already rising for SMSF investors, they are still below the average fees Australian super fund members pay.
Wiseman says SMSF members who don't already use a financial adviser may pay more fees this year as they are required to seek advice from an adviser rather than from their accountant.
This will necessarily require additional paperwork, such as the production of statements of advice (SOAs) and records of advice (ROAs).
The message for SMSF members who use an adviser at the moment is to ask their accountant for a referral to a qualified financial planner. Another approach may be to ask other SMSF members about their experience with a financial adviser and seek a recommendation.
The Self-Managed Super Fund Association (SMSF) has a directory of qualified SMSF advisers on its web site. It is worth finding out whether there are advisers in your area who could provide advice on SMSFs.
Running an SMSF takes time, diligence and attention to detail. It can be extremely rewarding managing your own retirement savings as long as the fund has an appropriate investment strategy and asset allocation, and trustees take an active approach to running the structure.
Every SMSF member’s advice needs are unique, depending on the range of assets held in the fund, the time fund members have available to run their fund and their experience managing investments.
It is worth keeping a watching brief on the ongoing changes to rules and regulations covering the SMSF and super sector generally to ensure you are receiving the right advice when you need it and are relying on your own skills when that’s appropriate too.
1Australian Taxation Office, 2016, Self-managed super funds: a statistical overview 2014–15
2CPA Australia, 2015, Information guide: Accountants’ exemption reform
4Australian Taxation Office, 2015, Self-managed super funds: a statistical overview 2013–14
5SuperGuide, 2015, FEEding frenzy: how much does your super cost?