Determining a minimum fund size to achieve cost-effectiveness rests with the fund balance, the number of fund members and the investment strategy, according to research conducted by the Centre for International Finance and Regulation (CIFR).
The “Size, cost and asset allocation of Australian self-managed superannuation funds” paper, hosted by University of New South Wales (UNSW) Business School, used Australian Taxation Office (ATO) fund-level data rather than aggregate data for the first time.
The paper found there was no right minimum fund size to ensure the costs of running a fund would be less than the fees charged by a retail or industry fund and that the gearing within SMSFs was so high that further regulation was required.
Co-author of the paper UNSW Business School professor of economics and head of the school of risk and actuarial studies Hazel Bateman said the study also found SMSFs became more expensive to run as the level of cash diminished and the level of growth assets increased.
Bateman said the SMSF needed to be quite large before the fees were lower than in the regulated sector, however, the assets inside the fund were also a factor in determining at what point it was cheaper to manage your own requirement savings.
Also part of the CIFR research team, Deakin University senior lecturer Adrian Raftery said the estimates and concerns around the cost and minimum size of SMSFs varied to suit the needs of interested parties.
“If you ask the regulators of super funds or the competitors to SMSFs, such as the industry funds, as to what the minimum balance of an SMSF should be to make it cost-effective, they will suggest a high figure,” Raftery said.
“Chartered accountants and other practitioners who can see an opportunity for fee income will suggest a low figure.”
In addition, he said regardless of which perception was held, generally one figure was used as an estimate as though it was one-size-fits-all.
ASIC published a figure suggesting $150,000 as a minimum, while the ATO suggested $200,000 might be needed.
“We came up with five figures depending on how much money there is, the number of fund members and the investment strategy,” Raftery said.
“If you have two fund members both with $1 million and one has the money in cash and the other has it in a mix of residential property, shares and artwork, then the cost of running the fund is not going to be the same as a one-person fund with all their money in cash or all their money in shares.”
The research analysis provided, for the first time, a model where running expenses could be estimated and evidence-based recommendations could be made about an SMSF’s cost-effectiveness.
