Opinion piece written by John Maroney, CEO, SMSF Association
Eight out of 10 Self Managed Super Fund (SMSF) trustees believe the cost of running their own fund represents good value for money.
An SMSF Association survey found that trustees responsible for their own superannuation are often so engaged with their fund that they are acutely aware that even a modest saving in expenses can prove substantial to the bottom line of a super account over its lifetime.
The “member experience survey” aims to determine the real experience in managing an SMSF and is part of a bigger association project exploring the various qualitative and quantitative reasons where an SMSF might be the right fit.
SMSFs are typically seen as being cost-effective when balances are larger and gain scale due to their ability to have a fixed-fee structure. However, just how cost-effective are they compared with their Australian Prudential Regulation Authority (APRA) regulated cousins?
The big difference between the fees of an SMSF compared with APRA-regulated funds is that the operating expenses of SMSFs – accounting, audit and reporting – do not fundamentally change with the size of the fund. This differs from APRA-regulated funds that often have several “asset-based” expenses.
The Australian Taxation Office (ATO) has now published more granular data that break down fund expenses, so better comparisons can be made.
The ATO estimates the median “operating expense” of an SMSF at $3923. Given most funds have two members, this represents a cost of about $1961 per member.
The operating expense ratio for APRA-regulated funds is 0.4 per cent per annum. That compares to ATO statistics that show SMSFs have an operating fee ratio – before any optional investment fees are considered – of 0.5 per cent a year. Typically, these fees are for advice or investment management that cannot be avoided in APRA-regulated funds.
SMSF operating expenses typically include an approved auditor fee, management and admin expenses and the SMSF supervisory levy. As SMSFs become larger, these expenses become smaller as a percentage of the balance.
Conducting this kind of analysis on SMSF expense data in the past has been difficult because of the way the ATO reported SMSF expenses.
Previous analysis relied on the use of averages that ignored distortions caused by large SMSFs, or SMSFs that elected to use extensive admin, insurance and investment services.
Lowering fees for all super fund members is important.
Over the lifetime of a fund, high fees sap away members’ final returns. Structural reform in this year’s federal budget are designed to address this very issue.
A focus on ensuring new super participants can choose a fund that is performing well and cost-effectively is good for all industry sectors.
A more robust system means bigger balances, more competition and a healthier retirement.
Hopefully, with greater transparency and understanding of the net investment performance of their APRA-regulated funds, it will make it easier for individuals to compare the advantages and disadvantages of switching to an SMSF.
It should also make it easier for SMSF trustees to identify underperformance in their own fund.