No matter how many statistics are published about how successful and how satisfied SMSF trustees are with their superannuation funds, scepticism and dread of this sector of the retirement savings industry just won’t go away.
The latest development has seen reports the Productivity Commission’s study into the superannuation system could result in the body looking at setting a minimum asset balance for SMSF establishments.
Whenever studies are performed on the Australian retirement savings industry, they are almost always based upon the criteria of cost and performance. This is because these are the easiest measures on which to compare different funds as they are elements common to all funds. But one has to ask, are they the most relevant? In relation to SMSFs, I think not.
Time and time again I have heard presentations based on research into SMSF trustees and their motivations and over the past decade the message has been unequivocally consistent – flexibility and control are the two factors driving people to decide to set up their own SMSF.
So if this is the repeated message, why can’t people in Canberra ever get it through their thick heads?
Unlike industry funds or retail funds, which can ostensibly be lumped into one category for comparison, SMSFs are less of a group and more a collective of individuals. This means setting broad-brush benchmarks for this sector is not really appropriate.
Costs incurred in running an SMSF can vary greatly from one fund to another. It could be I choose to outsource all of the administration of my fund, whereas my neighbour chooses to perform all of these tasks himself.
Naturally, that would mean the cost of running my fund would be significantly higher than his, but what conclusions about the whole SMSF sector can we draw from these facts?
Does it mean we can use the two funds and average out the costs and apply that number to the whole sector? And from this average number would it then be okay to set a ‘suitable’ cost ratio as a percentage and then use that to extrapolate an appropriate minimum establishment balance for everyone?
I would suggest the answer to all of these questions would be an emphatic no.
The process is just as unsound if you’re examining returns as well. If we take the retail and industry fund sectors, all of the investment options on offer are pretty much the same. As a member basically you get to choose between an aggressive, balanced or defensive investment option and it’s easy to compare performance as the underlying portfolios are similar, differing slightly in asset class representation.
But compare two SMSFs and the investments and returns can be as different as the North and South Poles. I may choose to invest in a portfolio of blue-chip shares, whereas another trustee, and someone has actually done this very successfully, might decide to invest in lace garments.
Again the return for both funds would be very different, but can a conclusion pertaining to the whole sector about returns be made from this? Once more I think the answer would be no.
These scenarios reflect one thing – the overriding characteristics of SMSFs are flexibility and control; the ability to control how the fund is structured and the flexibility to be able to change that at any given time.
A final argument against the imposition of a minimum establishment balance for SMSFs is the fact they are the only type of superannuation fund that can use limited recourse borrowing arrangements (LRBA) to acquire assets.
In effect it is a strategic option that allows an individual with a low to modest asset balance to boost the fund’s holding to a substantial level through the purchase of a large asset via an LRBA.
Should this option be ignored completely?
So a message to Capital Hill would be to stop the loathing of the SMSF sector and celebrate it as the success story it really is.