Do you really want to set up an SMSF?
Monday, August 17, 2015/
Almost 18,000 individual investors will set up some 9500 self-managed super funds in the first quarter of 2015-16 – if figures for the same period last year are repeated.
The first few months of a new financial year are among the peak times for members of large super funds to switch to self-managed super.
Over the next few months, the total number of SMSFs is likely to swell to more than 560,000 and their membership numbers will continue to climb well past one million.
Certainly, many of the new SMSF members are in a position to make the most of their fledgling funds. These may include those who want to invest in direct property (such as their own business premises) through super, undertake flexible estate planning, and pool their super savings with other family members to buy otherwise unaffordable assets.
However, Chris Malkin, one of Australia’s most-experienced superannuation auditors, told SmartCompany he comes across SMSFs “all of the time” where the members would be clearly be better off in a big super fund.
Malkin, senior consultant auditor with Baumgartner Superannuation, says the weaknesses with these SMSFs include seemingly inadequate assets to ever become financially feasible, poor investment diversification and trustees who are clearly out of their depth.
He finds some SMSF trustees who have little investment knowledge together with a poor understanding of their legal obligations. (Under superannuation law, all SMSF members must be either an individual trustee of their fund or trustee directors if the fund has a corporate trustee.)
“A lot of people are in self-managed funds that shouldn’t be,” Malkin says.
“I wonder where they are getting their advice from or whether they are getting advice. But as an auditor, I can’t make a comment to the trustees about the appropriateness of their asset allocations.”
Malkin is perplexed about why some SMSF trustees have bothered to set up their own funds.
“If all you are going to do in your SMSF is replicate the portfolio of an APRA-regulated fund, there is no point in having an SMSF,” he says.
Despite his words of caution to new and would-be SMSF trustees, Malkin is a big supporter of self-managed super when appropriate. He has had considerable success with his own SMSF “because I am passionate about it.”
His SMSF portfolio includes two direct commercial properties and quality shares. And, significantly, the diversification of his SMSF portfolio takes into account his non-super investment portfolio.
Before establishing a SMSF, critical questions you should consider include:
ONE. Am I dissatisfied with the performance of the big super funds?
Keep in mind that the returns of the big super funds with broadly-diversified portfolios have been strong over recent years in particular and this reflects the returns of investment markets and the composition of their portfolios.
Specialist researcher SuperRatings calculates that the median big super fund with a balanced portfolio returned 9.7% over the 12 months to June 30. The median fund produced an annual return of 12.3% over three years, 9.2% over five years, 5.9% over seven years and 6.5% over 10 years. (The returns over seven and 10 years were affected by the GFC).
Significantly, the balanced portfolios of the big super funds are widely diversified, spreading the risks and opportunities.
TWO. Do I really want to make investments that are unavailable in a big fund?
In an attempt to counter the popularity of SMSFs, more big industry super funds are offering members so-called “direct” investment options. These enable members to invest in their own choice of individual listed shares as well as in a range of exchange traded funds (ETFs) and term deposits – in addition to the funds’ standard investment options.
These “direct” investment options no doubt satisfy the wishes of many members of the big funds to gain more control over their super investments. However, an SMSF is necessary for those want to invest their super in direct property or other no-so-usual assets.
THREE. Do I want to hold my business premises in super?
This is a key question for small-medium business owners. Many SME owners hold their business premises in their SMSFs for tax-effectiveness, asset-protection, succession planning (for family enterprises) and security of tenure.
Business real estate is one of the limited types of assets that SMSFs are allowed to acquire from related parties including members.
Also business real estate is one of the few types of assets that SMSFs can lease to related parties, including the members’ businesses, without a limit on its value under the superannuation in-house asset rules.
FOUR. Do I really want to spend my time operating an SMSF?
Operating your own SMSF is typically quite time-consuming even when using a professional SMSF administration service (as most self-managed funds do) and even if paying a good financial planner to help guide the fund’s asset allocation and investments.
By contrast, a large super fund looks after all of the administration and the day-to-day investment decisions – working within your chosen asset allocation or investment choice.
NEXT: SmartCompany will publish a detailed report next month on the advantages and disadvantages of self-managed super. This article will cover such issues as investment choice, investment and administrative flexibility, cost effectiveness, tax planning, estate planning and asset protection.