The cost of running an SMSF has dramatically fallen over the past few years. Two areas in particular where we’ve seen a significant drop in prices are fund administration services and auditing.
The reduction in the cost of fund administration has mainly been driven by technology, where the process has become less labour-intensive through the use of developments like the cloud.
The situation has progressed so far that some providers are offering this service free of charge, where once it would have cost around $3000 for a full administration function.
This trend is, in all likelihood, going to continue as we witness the economies of scale from organisations like AMP take effect.
The audit function has also seen a marked reduction in price, again pushed along in the main by more automated processes like data feeds, which reduce the amount of physical processing.
Some auditors are now offering to perform the function for as low as a couple of hundred dollars.
These developments are all positive for the sector as they open up the opportunity for more individuals to take control and run their own super funds.
But there is a catch. Trying to reduce the cost of running an SMSF is what every trustee strives for, as this helps maximise every dollar they choose to contribute to their retirement savings.
While a low-cost service is a means that can satisfy this end, trustees need to be mindful not to get caught in a race to the bottom that some service providers are all too willing to indulge in.
The key to avoiding this trap is to know the value a particular service has to you as a trustee.
To do this you must continually question what objective you’re trying to achieve.
Ironically, solely focusing on cost and not value can end up achieving the exact opposite, and place trustees in a situation where they experience the worst of all worlds.
A clear example is choosing a budget administration service or a low-cost audit where the compliance procedures are compromised because, like anything, to offer a service at the lowest price often means cutting back on some attention to detail.
This may in turn lead to breaches of the law and to an Australian Taxation Office (ATO) audit of the fund.
Under the regulator’s penalty regime this may end up costing trustees tens of thousands of dollars, which will not only negate the original cost saving but perhaps end up being more costly than if a slightly more expensive administration or audit service is used.
Moreover, on top of the additional expense of the ATO fines, the SMSF could be made non-complying and be shut down, leaving trustees in the unenviable situation of having lost not only money but also their SMSF – the worst of all worlds.
Value needs to be the objective, and trustees need to be mindful that this means not always choosing the lowest-cost option.