This article has been a few months in waiting as there were more pressing issues to cover, however, we thought it worth retouching on the issue raised by ASIC and numerous industry super funds throughout 2019. The issue was initially raised when ASIC published a fact sheet on the Self Managed Super Fund sector, asking readers to consider are they for you?
Of course, on its own this can only be a positive for the financial advice and superannuation sector, ensuring all investors really consider if they are willing and capable to control the investment of their own life savings. This is of course a unique structure compared to most parts of the developed world. The concern, however, came from reporting that the average cost to operate an SMSF is $13,900 per year! Not only this, they also suggested that trustees spend at least 100 hours per year running their fund. The ultimate conclusion, being that funds under
$500,000 were unlikely to be cost effective, makes some sense for us, however, our experience is that the hurdle is substantially lower at closer to $250,000 following the introduction of a number of new service providers in the sector.
In light of these fact sheets and input from a number of SMSF specialists, we thought it worth putting forward our thoughts on the matter. Specifically, we are focusing on the fee question, as this seems to be driving the discussion. When it comes to SMSF’s its important to note that there are many possible fees, but the majority of these are optional, depending on the investment strategy adopted. To summarise, they are as follows:
- Accounting and Administration Fee: This is the only fee that must be paid by an SMSF each year, it represents the cost of meeting the funds taxation reporting and audit requirements. In our experience, the average cost of an SMSF tax return and audit is just $2,200 yet many accountants continue to charge amounts as high as $7,000 for what is today a commoditised The lowest fees for returns are around $1,650.
- SMSF Supervisory Levy: This represents the ‘registration’ fee paid to the ATO each year which has increased from $191 a few years ago to $259 today and is now automatically deducted from your tax
- Platform Fees: These are the first of many optional fees and represent the cost of employing groups like Hub 24, BT Wrap, MLC or Netwealth to undertake all the paperwork for your investments on your behalf. The average cost of this fee is around 0.25% of the assets held in the SMSF. It means you are not required to complete any paperwork and will receive consolidated tax reporting each year.
- Management Fees: These fees are charged by professional fund managers, exchange traded funds (ETF’s) and listed investment companies. They are not an out of pocket expense, but rather deducted from your earnings within the structure. Importantly, they are optional and depend on your individual selection of
- Adviser Fees: Again, these fees relate to receiving professional advice to guide the investment of your portfolio and assist with meeting your reporting and other responsibilities. These are completely optional, SMSF’s allow you to make all the decisions yourself, or to make none and outsource this Financial advice fees are not included in the cost structure of industry funds.
Without becoming part of the industry vs. SMSF war it’s important to ensure every option is compared on a equal footing. The structure of most large industry funds is highly opaque meaning it is difficult to understand the many layers of fees you may be charged. Consider for instance that most funds charge an administration fee of 0.60% but does this include payments made to their own associated investment entities? Most funds allocate returns based on a ‘crediting rate’ equal to a day’s worth of estimated earnings, but the calculation of this rate is not transparent, does it include all relevant costs? Returns have no doubt been strong for both options, however, we believe investors will increasingly value the need for transparency.