Figuring out fees: how to assess whether the fees you pay are worth the cost
Aside from keeping an eye on investment product fees, another way to manage SMSF costs is to take advantage of tax concessions available in the system.
Investment product fees
The fees attached to investment products make a big difference to the returns a self-managed super fund (SMSF) enjoys.
The relationship between fees and returns is complex. Some products, for example actively managed funds, tend to charge a higher fee because the potential for returns is greater than other products, for instance index funds.
But that is not always the case. So it always pays to keep a close watch on fees to ensure the performance the investment generates warrants the costs attached to it.
Smaller SMSFs have to be particularly watchful of fees as the cost ratio – fees the fund accrues in relation to returns – tends to be higher than other funds.
So building scale, that is, increasing the funds under management, is important as the fund is able to accommodate higher fees as the value of the fund rises.
Simple investment strategies that don’t cost a lot are sometimes more suitable for smaller funds, at least in their early years.
As the fund’s assets grow it will be able to take on higher costs. The idea is to establish an investment strategy that suits the fund’s size and members’ investment goals.
Liam Shorte is a financial planner and director of Verante Financial Planning. He says when trustees review an investment it’s important to asses how it will help fund members meet their retirement objectives.
“If your target is a steady income to pay pensions then assess how the investment might help achieve this. Conversely, younger members should consider whether investments with high turnover triggering capital gains are really suitable in the accumulation phase,” he adds.
Shorte says liquidity – the relative ability to buy and sell an asset easily – is something investors should also consider.
“Many investments sound attractive but they might have liquidity issues in terms of restrictions withdrawing money. In the case of small cap stocks, there may be very low daily volumes traded on the stock exchange so it may not be easy to get out of them quickly,” he advises.
Shorte says one of the best ways to build a portfolio while managing costs is to use a core diversified index fund alongside a similar fund with active exposure to achieve a diversified investment portfolio.
SMSF investors can then build on that with a blend of sector ETFs, managed funds, direct shares and term deposits, which are all reasonably cost-effective.
“It is important to only pay for active management where the manager has shown the ability to outperform long term. Some managers offer some downside protection and some investors might find that is worth paying a little extra for this over the long term,” Shorte adds.
One of the ways SMSFs can build scale and reduce their cost ratio is to bring together a number of people's super into one investment pool. This allows them to benefit from economies of scale in terms of brokerage costs and means only one set of member fees are payable.
“Trustees can also access lower admin costs by looking for flat rate administration providers, so members don’t pay more as the fund’s balance grows,” Shorte adds.
Aside from keeping an eye on investment fees, another way to manage SMSF costs is to take advantage of tax concessions available in the system.
Salary sacrificing, using the co-contribution and spouse contributions benefits, as well as super splitting are some of the actions SMSF members can consider to manage costs and drive returns.
“Making contributions earlier in the tax year to get funds working faster and taking pension payments later in the year to maximise investment returns are other ways to make the most of the provisions in the super system,” Shorte adds.
“Stop leakage in costs by making sure you are using a low cost broker, not buying in small parcels and accessing a platform that suits your needs,” he says.
It’s also important to manage insurance premiums over the longer term by considering level premiums at the outset and reviewing sums insured as you reduce debt.
Says Shorte: “Question your service providers annually to see if they can reduce costs as better technology helps them reduce their expenses as well.”