Why are fewer people setting up SMSFs?
Why are fewer people setting up SMSFs?
The rate of people starting new self-managed super funds has fallen to a 10-year low, according to recent research – whether you already have one or are considering starting one, it’s important to consider why.
The SMSF boom arguably began in 2010, when the establishment rate hit 9.3%. There are now nearly about 600,000 SMSFs in Australia, representing over a million people and $700 billion in funds. Some of the most popular reasons for starting SMSFs were control over one’s investments, the ability to hold more wealth in “unusual” assets like art and a general post-GFC distrust towards handing the reins over to large financial institutions.
But this is now changing, albeit slowly. While some of this can be explained by demographic shifts – the early SMSF adopters were pre-retirees, an increasing amount of whom are now moving into the pension phase – there are other factors at play.
The issue with smaller balances
Based on the findings of the Productivity Commission, larger SMSFs – that is, those with more than $1 million in assets – have generally performed well against institutional super funds. However, those with less than $1 million have often performed significantly worse, which the PC attributed to the “materially higher average costs they incur due to being small.”
The PC highlighted that the performance difference between the smallest SMSFs (with less than $50,000) and the largest (with more than $2 million) exceeds 10 percentage points each year.
Therefore, it could be suggested that one of the deciding factors as to whether you should set up an SMSF is the value of the assets you’ll be able to invest in it.
Now, it’s worth noting that the peak body for SMSF trustees, the SMSF Association, rejected these findings on the basis that the data underpinning them is “fundamentally flawed.” The SMSFA said that the PC’s estimates with respect to smaller funds was derived on data from the ATO, and that the ATO’s statistics are “questionable, especially in regards to costs and returns.”
On top of this, investment return comparisons with institutional funds were said to be distorted by the fact that a greater proportion of SMSF members have entered the retirement phase.
Aside from the costs involved in taking control of your investments and retirement income, recent Vanguard and Investment Trends research suggests that many SMSF members and their trustees are struggling to stay apace with the regulatory changes that will inevitably and tangibly affect their nest eggs.
The Productivity Commission mentioned above, along with the ongoing Royal Commission – not to mention any changes to the Age Pension made in each Budget – are putting pressure on self-directed savers to maintain a clear understanding of each new piece of legislation.
As Vanguard’s head of corporate affairs, Robin Bowerman, explained: “In 2018, with the backdrop of the Royal Commission and the Productivity Commission’s review, the only real certainty is uncertainty for SMSFs and their advisers, with the prospect of further regulatory change seemingly inevitable. As Vanguard always cautions, the need to stay informed while maintaining a longer term perspective has never been more important for investors.”
“The debate about the viability of smaller balance SMSF is likely to be ongoing,” he continued, “because the decision is so dependent on individual circumstances. What is critical is that those considering setting up self-managed funds should get professional advice to make sure a SMSF is the right structure for their long-term financial needs.”
Advice is key
That’s the rub there: one other key takeaway from the research is that those SMSFs currently working with an adviser have reported the highest satisfaction in three years, citing the benefits of advisers being able to explain investment ideas, and also regular contact.
What this suggests is that if you are running an SMSF, or are thinking about setting one up, one of your best bets is to find an adviser who can help you along the way.
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