Self-managed super funds, or SMSFs, are often viewed as one of the best ways to take control of investing for your retirement.
There can be opportunities to potentially generate a better return at a lower cost and invest in a wider range of assets than a retail or industry fund. Around 25,0001 new funds are established each year.
Arguments against SMSFs are often based on the complexity in meeting compliance obligations, the costs involved and a lack of investor skills to manage investments on your own. Early in 2017, CommBank’s SMSF team commissioned research to discover what support SMSF trustees required in running a fund.
The Four Cs - Complexity, Compliance, Costs, Capability
Running an SMSF is complex by definition - you are taking charge of your retirement future. The rules, structures and decisions are going to be more complex than handing over everything to an APRA regulated super fund and that’s one reason an SMSF is not for everyone. For those that thrive on that sort of challenge, running your own SMSF can be very rewarding.
In considering whether an SMSF is right for you, it is worth considering both your life stage and the common SMSF investor profiles. SMSFs cover a vast range of life stages and experience, from those starting out, to those well into the accumulation phase (post mortgage and children’s education) and those either entering or well into their retirement. Depending on your circumstances it is important to ask yourself: “Do you have the time and capacity to focus on the management of your fund?”
Your investor profile will influence the advice you need, how you administer your fund, the investments you make and the cost of running your fund.
What style of investor are you?
Our research identified four distinct styles:
- The Outsourcer - looking for the one-stop shop; do it for me
- The Coach Seeker - a growing segment looking for advice, featuring a younger demographic, including more women
- The Controller - they like doing it for themselves and seek information to support their decisions, often business owners and showing the highest income of all the segments
- The Self Directed - the traditional profile characterised as older, male and often either business owners or ex-business owners
Understanding the law and compliance requirements of running an SMSF can be a challenge, although getting good advice from qualified people can help. This challenge increases when there are major changes to the law, such as changes which occurred 1 July 20172.
This is particularly the case where changes can have unforeseen effects. For example, the introduction of the Transfer Balance Cap (TBC)3 had a consequential impact on estate planning, an already complex area, and associated tax changes introduced at the same time have impacted Transition to Retirement (TRIS)4 plans.
According to the Australian Tax Office (ATO)5, close to 2% of SMSFs were issued with auditor contravention reports (ACRs). The following four types of contraventions make up over 60% of all ACRs both by number and value of assets;
1. Loans or provision of financial assistance to members or their relatives
2. In-house assets
3. Separation of assets
4. General administrative contraventions
The top three cover areas that should be well-known to SMSF trustees and are often avoidable with appropriate advice.
The ATO’s oversight of the SMSF sector is increasing. It has indicated6 that its current compliance focus includes:
- Targeting people who set up SMSFs with the intention of using them to illegally gain early access to their superannuation benefits, as well as targeting promoters of these type of schemes.
- Targeting the non-lodgement of annual returns by SMSFs, which the ATO says can be a strong indicator that the retirement savings of the fund’s members may be at risk.
- A ‘top 100’ SMSF program investigating aggressive tax planning arrangements particularly within SMSFs with the highest asset balances. Areas of focus include the use of limited recourse borrowing arrangements, rapid and excessive asset growth rates and non-arm’s length arrangements.
- Increased reviews of the top SMSF auditors to ensure a large part of the SMSF sector is receiving adequate audits, as well as analysis and review of auditors considered to be ‘high risk’.
- Monitoring the use of reserves within SMSFs, particularly to identify whether reserves are being used to circumvent key 2017 superannuation reforms such as the transfer balance cap and total superannuation balance.
The ATO has also recently contacted some SMSF trustees about their SMSF investment strategy and considerations for investment diversification, stemming from concerns of high concentration of holdings in one asset or a single asset class.
Deciding what to invest in can be another challenge. Factors that influence an investor’s level of confidence and potential inertia when it comes to decision making include:
- Challenging market conditions, especially during protracted downturns in the market. When markets are under stress, investment decisions become more difficult
- An investor’s lack of experience or a previous bad experience with an investment
- Information overload - too much information from too many sources and few ways to gauge the reliability of the information
- Changes in government policy
The best defence against this uncertainty is to have a clearly defined, diversified, long-term investment strategy.
Having an effective investment strategy should help to guide you and your fund through uncertain times and it’s important to remember that superannuation is for the long-term. From start to end it can be potentially over 50 years.
A good investment strategy that keeps members disciplined and focused on the long-term is essential. Revisiting, and possibly revising, the purpose and circumstances of the fund and its members at least every 12 months can be a way of understanding if the initial goals and potential outcomes remain relevant and achievable.
Getting the right advice
‘Self-managed’ does not mean that trustees have to make all the decisions about the fund on their own.
Based on our research, we know that about 80% of SMSFs use at least one adviser and, of those that do use an adviser around 37% use more than one.
The key for an SMSF trustee is to find specialist advisers capable of meeting the specific needs relevant to your SMSF at the time you need it. Those advice needs will range from setting the investment strategy and building a diversified portfolio, to tax and compliance matters, as well as estate planning.
One of the most important times for advice is often at the point of movement from the accumulation to pension phase. This is when many investors who have been quite comfortable investing for growth during the accumulation phase need advice around how to generate sustainable income from a more defensive portfolio and maximising tax benefits, while ensuring they are not sacrificing all their growth opportunities.
Complicating this search for advice is the impact of the licensing regime on accountants.
From 1 July 2016, accountants wanting to provide financial advice to SMSF clients must be authorised by an Australian Financial Services Licensee (AFSL). This has led some accountants to form partnerships with licenced advisers and another emerging trend is for administration platforms that can manage both the funds’ investments and the administration and compliance requirements.
There is also a growing group of SMSF specialist advisers who understand and focus on the advice needs of SMSFs. Developments in assisted automated advice, not ‘robo-advice’ which implies no human involvement, are allowing advisers and their clients access to cost effective investment platforms to help boost the advice experience.
So, is an SMSF right for me?
There is no perfect profile of a successful SMSF investor, but the growth in the number of SMSFs each year and the growth in balances of SMSFs is some evidence that many investors have been successful in managing the hurdles.
Technology is enabling cost effective outsourcing of much of the compliance workload, although not trustee obligations. This could continue to reduce the costs of running and administering a fund and help provide access to more information, faster, and at lower cost.
Technology is also providing greater investing functionality at a lower cost - both for individuals and advisers.
Product innovation and development such as exchange traded funds (ETFs) and exchange traded bonds make it easier to source asset classes that previously were difficult or expensive to access, such as international shares, fixed interest, infrastructure and commodities. Automated assisted advice is expected to open up further opportunities in the future.
However, sometimes the self-directed option just doesn’t fit your lifestyle. For some it’s time constraints - working full time or running your own business can cause time pressure, making staying on top of requirements difficult.
For others, investing is an area they would rather monitor with minimal touch, leaving the day-to-day decisions to a trusted adviser. Deciding what is right for you can take time, but by researching your options, you are more likely to make an informed choice when you are ready.