Self Managed Super – Savior or Scam?

For some the option of a Self Managed Super Fund (SMSF) is the ultimate expression of control over their finances.  They get to control how their capital is invested with relative freedom and save on costs at the same time.  For others this is simply the story they are sold.

Two recent experiences only served to reinforce earlier experiences of the misuse of SMSF’s, where the only apparent reasons for using a SMSF are for the benefit of people other than the fund members themselves.  Specifically, for the benefit of people advising and working on the setup, administration and operation of the SMSFs.

Praying on the Naive

The first was a gentleman aged over 65 (relevance of this explained soon) who had recently transferred all his super (approx. $400,000) from a well performing industry fund to a SMSF where his capital was invested in a cash account getting 1.75%.  His accountant administering the fund had told him he needed to get advice from someone for this money, which was why he contacted me.  It was clear the gentleman had no idea what to do with it.

At the same time he still had a $250,000 home loan and one dependent child, both of which were clearly concerning him. When it was explained that being over 65 he was eligible to access his super at any time, it was clear this was news to him, even though he was drawing a pension.  When it was explained that a risk free strategy achieving a net return of more than 4% and improving his cash flow would be to withdraw enough to repay the home loan this was again clearly news to him.  I suspect this had never been brought to his attention as then there would only be $150,000 in the fund and surely at this level it would be hard to justify on any level the fund’s existence.

How this person ended up in a SMSF is not clear, but what is clear is that he should never have ended up with a SMSF and that the only winners were the people around him being paid for the SMSFs existence.  The gentleman was naïve as to how the superannuation structure operates and the pros and cons of a SMSF and rather than help him via genuinely objective advice he had simply been enabled by those benefiting from his actions.

Counting the Layers of Costs

The second recent example relates to how money is invested in many SMSFs and the consequent costs.  In this case I came across a fund with approximately $1.5 million, which should clearly make the SMSF cost effective and worthwhile, but was it?

The simple answer is no, it wasn’t, and I’ll explain why.  It has to do with the type of investments used and how they were accessed.

On the first matter, the investments used were all very mainstream (i.e. ASX listed securities and readily accessible unlisted managed investments) and could easily be accessed directly or via a number of retail public offer funds or could be reasonably substituted via direct investment options under a number of industry super funds.

But these retail or industry funds would add a layer of administration costs a SMSF does not have I expect many will say.  And this is true, but it needs to be compared to the costs you are incurring in the SMSF, and this is where things went from OK to not so OK.

$1 million of the $1.5 million was invested via a retail administration platform at a cost of approximately $3,800 per annum.  This is in addition to the SMSF admin and accounting costs, which should typically be in the $2,000-$3,000 per annum range, for a total cost of $5,800-$6,800 per annum.  Importantly, these are simply admin costs.  We aren’t even looking at the costs associated with investing the money, via advice fees and investment management fees.

The SMSF member could have had the same, or equivalent, investment exposure via a retail or industry fund for significantly less cost, with APRA regulatory supervision/protection and without any trustee responsibilities or admin functions to perform.  At the minimum, they could have used a much lower cost SMSF option, such as an online administered fund that provided the same access to investments at a fraction of the cost.

Who Benefits?

The bottom line is that in this case, again, the only people benefiting from the arrangement were those involved in assisting to operate the SMSF.  There was clearly no benefit to the client, the member of the fund.  The person for which the fund’s existence is supposed to benefit.

SMSFs have become an industry in themselves.  There are a legion of SMSF advisers, be they accountants, lawyers or financial planners.  There is also an army involved in SMSF administration.  The vast majority do a good job, but as the saying goes “you don’t ask a barber if you need a haircut”, so be careful who you ask about your need for a SMSF.

What can we learn from this?

SMSFs are a great option for those with a strong desire for control over the investment of their money, sufficient super benefits to make the option cost effective and the knowledge and preparedness to take on the responsibilities as trustee.  This is not everyone.  Far from it.

What should also be taken from the earlier examples, and many others, is that when someone starts pitching a SMSF you need to turn your BS filter on.  There is a saying in the insurance world that is just as applicable to the SMSF world, “Sell the sizzle, not the sausage”.  When you start being sold the sizzle of control benefits, or estate planning benefits, or cost benefits you’re being distracted from the sausage that is simply the superannuation structure, with those benefits available in a number of formats.

Work out what you are looking for from your super fund first, then go looking for the right solution for you.  It could be an industry fund, retail fund, online administered limited SMSF or a full blown less restrictive SMSF.  Whatever you do, don’t start with a solution.  Start with the problem you are trying to solve.  Maybe there isn’t even a problem to solve.

The “I can do better” fallacy

Not touched on earlier is the possibility, probably likelihood, many SMSFs are established due to experiences of perceived poor investment performance in the existing/prior super fund and the belief “I can do better myself”.  In the vast majority (99.9%) of cases this is a serious case of what behavioral psychologists call overconfidence.  Again, turn your BS filter on, only this time point it at yourself.

If you are disappointed at the recent performance experience the starting point is finding out the cause of the poor performance.  9 times out of 10 it will stem from the asset class composition (i.e. Australian shares, listed property, fixed interest, etc.) of your portfolio and for 95% of us we have control over this, so that makes it at least partly our fault.  Note, choosing not to exercise control does not let you off the hook. For the other 1 in 10 the manager may have stuffed up or maybe their positioning wasn’t benefited by market movements.   How can you tell the difference?  Very often you can’t.

Bottom line, find out why first.  Then you can consider rationally whether you actually have a problem to solve.  If you aren’t prepared to put in the effort to find out why and understand all your options, then have I got the SMSF for you!!!

Disclaimer

This advice is of a general nature only and may not be relevant to your particular circumstances.  The circumstances of each person are different and you should seek advice from a financial planner who can consider if any strategies or products mentioned are right for you.