ASIC has launched a campaign warning self-managed super fund trustees of the high costs and risks associated with having an SMSF. There has been a huge response, most of it negative.
ASIC’s latest fact sheet estimates that the average cost of running an SMSF is $13,900 per year and takes over 100 hours a year to run.
ASIC Commissioner Danielle Press says: “ASIC believes that consumers are all too well aware of the potential benefits that might stem from using a SMSF, but are not equally alive to the considerable risks and responsibilities that come with the deal.”
Costs include set-up fees, an annual supervisory levy, costs for an annual financial statement, independent audit, administration costs, investment fees, wind-up fees and an annual actuarial certificate if required.
The annual 100 hours is spread across meeting and reporting obligations, preparing and implementing an investment strategy, keeping up to date with changes to superannuation laws and managing the SMSF’s administration and paperwork.
A Productivity Commission report on superannuation published in 2019 found that large SMSFs earn broadly similar net returns to APRA-regulated funds but smaller ones, with less than $500,000 in assets, perform significantly worse on average.
ASIC is emphasising the Productivity Commission’s findings and urges those with SMSF balances under $500,000 to ask their financial advisers why an SMSF is the best option for them.
ASIC has also drawn on Productivity Commission data to come up with its average cost figure.
Ron Lesh, the managing director of BGL Corporate Solutions, says ASIC has made a number of errors in its calculations, particularly its claim that it costs $13,900 a year to run and SMSF.
BGL is a software company specialising in ASIC compliance and SMSF administration solutions. It analysed 180,000 SMSF accounts being administered on its Simple Fund 360 platform and found that the cost of running a fund was much lower.
BGL says that for a fund with assets of less than $200,000, the average running cost last year was $1907. For a fund with $200,000 to $500,000 of assets, the average running cost was $2376.
For a fund with $1 million to $1.5 million of assets, the average running cost last year was $3299. And for a fund with $1.5 million to $3 million of assets, the average running cost was $3947.
David French, the managing director of Investment Collective, says the ASC figures are distorted by including the running costs of some very large funds.
“In my experience, costs specific to running an SMSF rarely exceed $1500 a year,” French says.
Tim Mackay, financial adviser at Quantun Financial, also says calculating the average cost of an SMSF is skewed because of the long tail of very large SMSFs.
ASIC has drawn on the work of the Productivity Commission, which reported on the efficiency and competitiveness of the superannuation industry in 2019. It says one-third of self-managed super fund members are in funds charging high fees and delivering relatively low returns
The Productivity Commission says large SMSFs earn broadly similar net returns to APRA-regulated funds but smaller ones, with less than $500,000 in assets, perform significantly worse on average.
“This is mainly due to the materially higher average costs they incur (relative to assets), due to being small,” the report says.
The Commission says that while some SMSFs expand quickly and perform better, others appear to start small and stay small. It classifies about 200,000 SMSFs, with 380,000 members, as “smaller SMSFs” that have been established for more than two years (according to the latest official data, there are 596,000 SMSFs with 1.1 million members).
“Some of these members may be benefiting from high returns or tax advantages but on average they are paying relatively high costs and facing low net returns,” the report says.
The Productivity Commission says fees are a key determinant of long-term outcomes in super. “Australians pay over $30 billion a year in fees on their super (excluding insurance premiums). An increase in fees of just 0.5 per cent can cost a typical full-time worker about 12 per cent of their balance by the time they reach retirement” it says.
It says fees have come down over the years but remain a drain on net returns. However, reported costs for SMSFs (relative to assets) have increased over recent years. Costs for SMSFs under $500,000 are “particularly high”, on average, and significantly more so than for APRA-regulated funds.
Graeme Colley, technical manager at SuperConcepts says there are also problems with data suggesting that small SMSFs underperform.
He says: “The Productivity Commission report says that SMSFs with balances of less than $500,000 produce lower average returns. It would have been useful if it had acknowledged that the average balance of an SMSF, usually with one or two embers is $1.2 million and that only 8 per cent of funds have balances below $500,000.”
Mackay says ASIC’s performance data comes with important caveats, which the regulator acknowledges. While the methodology used to estimate SMSF performance resembles the methodology used by APRA to measure the performance of the funds it regulates, the data is not the same.
It is an apples and oranges comparison.