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Cost-competitiveness of SMSFs proven

SMSFs running costs

SMSFs with balances of $200,000 or more are as cost-effective as public offer funds, new research into running costs has shown.

The latest industry research into the running costs of SMSFs has found funds with balances above $200,000 are as cost-effective as public offer funds and in some circumstances are the cheapest retirement savings vehicle available to Australians.

The study from actuarial firm Rice Warner and commissioned by the SMSF Association and supported by SuperConcepts revealed SMSFs with balances of $200,000 or above are cost-competitive with Australian Prudential Regulation Authority (APRA)-regulated funds.

Further, the report showed SMSFs with balances of $500,000 and above are generally the cheapest superannuation fund option in the market.

“This research should finally lay to rest any arguments that SMSFs are not competitive on cost compared with the APRA-regulated superannuation sector, with the report graphically illustrating that the reductions in fees for SMSFs and retail funds and the increase in fees for industry funds since the initial report has changed the relative competitiveness of SMSFs in comparison with APRA-regulated funds,” SMSF Association chief executive John Maroney said.

“It is also clear that fees considerably lower than those on pricing schedules are being charged to some SMSFs, which means that they can be cost-competitive even at smaller sizes.

“This is welcome news for the SMSF sector as the cost of running SMSFs, especially those funds with balances below $500,000, has been used as a key factor as to whether an SMSF is viable or not. This report should bring that false analysis to an end.”

Conversely, the running costs research confirmed SMSFs with balances of below $100,000 could not compete on a cost basis with public offer funds. It added SMSFs are the most expensive retirement savings vehicle if the fund’s asset pool is less than $50,000.

According to Maroney, this result is unsurprising and strengthens the argument that SMSFs are not appropriate for all superannuants.

“However, it should be added that many SMSF trustees understand they are paying higher fees initially, knowing their cost structures as a percentage of their funds’ assets will fall as they grow to a competitive size. For this reason, the association remains adamant there should be no minimum balance, especially as the report’s analysis of these small SMSFs shows that the majority do grow steadily to more viable sizes,” he noted.

With regard to performance, the study found since 2005 SMSFs generated returns that were equivalent to their APRA-regulated counterparts.

“These results may not support the proposition that SMSFs are better investment managers than APRA-regulated funds, but they do indicate that members of SMSFs, in aggregate, are not disadvantaged when compared with APRA funds,” Maroney noted.

The research analysed information gathered from around 100,000 SMSFs and is an update of a similar exercise Rice Warner performed for the Australian Securities and Investments Commission (ASIC) in 2013.

“In the seven years since the previous report, average costs of APRA-regulated super funds have risen, whereas SMSF costs have fallen,” Rice Warner executive director Michael Rice said.

“It is cost-effective to open and maintain an SMSF account at much lower levels than declared by the Productivity Commission and ASIC. Separation of the results into those funds holding or not holding properties gives a more accurate picture of the cost structures.”

SuperConcepts chief investment officer Grant Christensen said the finding that SMSF costs are falling was significant in terms of the competitive asset threshold for these funds.

“While the issues with small-value funds will always exist, it has been encouraging that they grow quickly. Other positive signs are the age at which SMSFs are being established is now in the 35 to 44 age bracket and a significant proportion of small business owners deciding to forge their retirement destiny,” Christensen said.

The SMSF Association had previously welcomed the more granular cost analysis contained for the first time in the ATO’s “Self-managed super funds: A statistical overview 2017-18” report.

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