The DIY super fund attraction
ONE product has redrawn the picture of the superannuation landscape in the past five years.
In many ways the rise and rise of the humble self-managed or DIY super fund is testament to investors taking control of their superannuation affairs. There are now more than 410,000 SMSF’s with assets totaling more than $330 billion and that makes it the largest sector in Australia’s $1.2 trillion superannuation industry. And the numbers keep climbing with around 2500 new SMSFs being set up each month. (ATO, Self-managed superannuation funds - common mistakes and other compliance issues, September 2009).
This week more than 1000 financial advisers, accountants and fund service providers are gathering in Melbourne for the annual Self-managed Super Fund Professionals Association (SPAA) conference.
The growth in SMSF funds has been mirrored in the growth of SPAA which in a few short years has emerged from its origins as a specialist association dedicated to improving education and training for professionals working in the SMSF area to become a key representative body for both industry and investor issues.
It is interesting to look at what is behind the growth in SMSFs and ask the question should you consider following if that is the way people are heading?
Like any investment structure one size does not fit all. SMSFs are a great vehicle for some people but certainly no panacea for all.
The decision to set up your own super fund should not be taken lightly and certainly deserves more serious consideration than a discussion around the bar of your favorite golf club – anecdotally where many SMSF decisions are made according to providers of fund administration services.
Given the events of the past two years when financial markets crashed and then rebounded strongly it is not surprising that the roller coaster ride and fluctuating balance of individual super fund portfolios grabbed people’s attention.
Numerous surveys point to one overriding reason for setting up your own super fund – greater control. A perfectly natural human motivation and setting up your own fund certainly puts you in the driver’s seat. But being in control is potentially dangerous if you fall asleep at the wheel.
So who are the people setting up a DIY or SMSF fund and what are they investing in?
The Super System Review that was established by the Federal Government is underway. Chaired by Jeremy Cooper it is due to hand down its findings in June. In the course of its work it found a lack of comprehensive information on the SMSF sector so it pulled together a factual overview for its own purposes.
What the data to the end of June 2008 shows is out of the 770,000 plus members of DIY funds – and most funds have only two members –almost 70% of fund members are 50 or over.
What is the typical profile of these people?
Sole traders and small business owners not surprisingly are big users of SMSFs as their retirement savings vehicle and average annual taxable income for SMSF members is almost double that for other types of super fund members.
Correspondingly the member average balance is also much higher than the industry average at $456,000.
Another key difference with major industry or retail super funds is the asset allocation in SMSF portfolios. As at June 30, 2008 tax office data shows that two asset classes dominate SMSF portfolios – listed shares and cash/term deposits.
The SMSF sector had very low – less than 1% - invested in overseas investments whereas institutional super funds have substantial overseas investments – data from the Australian Prudential Regulatory Authority (APRA) shows it to be about 29%. In the last three years that has probably helped SMSF’s in performance terms given that the Australian markets have done better than overseas. There is no guarantee that will continue, though.
However, this points to the challenges facing SMSFs more generally – diversification and costs. Diversifying a portfolio is a key way to manage risk. While the problem is acute at the smaller end of the SMSF fund universe even funds that have assets in the $500,000 to $1 million size range have very concentrated portfolios. For example 55% of SMSFs have 70% of their investments in one asset class (Australian Government, Super System Review – A Statistical Summary of Self-Managed Super Funds).
Costs are the other factor to consider when deciding to set up your own fund. Size matters here. According to ATO data, funds between $100,000 and $200,000 had operating expenses of 2.85%. That is expensive compared to alternative retail and industry fund offers. Where SMSFs really have a cost advantage is when account balances are above $1 million because fees tend to reduce as a percentage of assets and funds above $1 million in assets reported average fees of 0.56% according to the tax office returns.
The advantages that SMSFs offer means the growth is likely to continue – subject to whatever changes the Cooper review into super may recommend – but it is a complex area and you need to think through the long-term impacts. Not everyone wants to be managing their pension drawdown calculations on their 80th birthday for example.
Seeking specialist advice and taking the time to understand things like trustee responsibilities before climbing aboard the SMSF bandwagon may be the best investment you make.
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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.