How much do you really need to establish an SMSF? This is the perennial question and the Australian Securities and Investments Commission (ASIC) has released guidelines for financial planners and licensed accountants, INFO 206, saying: “In many cases, a recommendation for a retail client to set up an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests. The costs of establishing and operating an SMSF with a balance of $200,000 or below are unlikely to be competitive, compared to a fund regulated by the Australian Prudential Regulation Authority.”
This was based on advice from Rice Warner and follows its submission to the Financial System Inquiry in 2013 that the average cost of having a superannuation account in Australia (again not an SMSF) is 1.12 per cent. So for an SMSF with $200,000 there is an assumption the administration and other running fees are above $2200 a year and this was argued by the super industry to ASIC when seeking submissions on INFO 206.
I appeared on behalf of consumers, and also SMSF members, in front of the ASIC team in charge of INFO 206.
There were a few of us in the room and some of us had read the Rice Warner report, and one of the other consumer advocates, a practising actuary, took the report to task.
Now I am not an actuary and did not want to challenge Rice Warner, but I asked how the firm could be so prescriptive when there are administration services out there that offer compliance and tax for SMSFs for $500 and in some cases much less when the trustees of the fund are doing a lot of the investment accounting work.
Unfortunately, the firm did not appear to be listening to what I was asking because I said that, based on the Rice Warner figures, with $50,000 in a retail or industry super fund environment paying on average $500 in fees, an individual may have lower costs in an SMSF. Plus if the trustees did their own work, and got an independent audit, the fees would be even lower and then the start-up amount for an SMSF could be much smaller.
It seemed their minds were made up because the directive was made for licensees and not people wanting to set up their own fund, who are exempt from licensing. They had held the meeting already with the professional bodies, so the decision was really not a consumer issue. I figured they just wanted to make sure accountants did not steer people into funds with smaller super balances and charge them high accounting fees.
In the opinion of the Australian SMSF Members Association, the amount needed to establish an SMSF depends on your age and how long you are going to be in the fund. If you are a young couple aged 30 or thereabouts, happily married and have combined super in a retail fund of $100,000, then that is a great start for a portfolio of shares or as a deposit on a residential property.
The benefit of setting up an SMSF in this situation is that you would be using money passively sitting in a retail or industry fund to acquire a long-term investment portfolio, including high-quality investments such as blue-chip shares, exchange-traded funds or property in an SMSF. Now you may never need to sell those assets as they are for your family’s retirement purposes. And if it is property, the good thing is it is yours. You can’t live in it, but your tenants rent and contributions you make will go into paying that off quick smart. Of course, the large funds don’t want that strategy to go too far and wide because they don’t offer that investment option. But if it is your fund, well you can choose your investments and rightly so.