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 30,000 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 (https://www.commbank.com.au/personal/superannuation/smsf/smsfreport.html) 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 occurred 1 July 2017 (1).
This is particularly the case where changes can have unforeseen effects. For example, the introduction of the Transfer Balance Cap (TBC) (2) had a consequential impact on estate planning, an already complex area, and Transition to Retirement (TRIS) (3) plans.
According to the ATO (4) , for the year ended 30 June 2016, 2% of SMSFs were issued with auditor contravention reports (ACRs). The following four types of contraventions make up nearly 70% of all ACRs both by number and value of assets;
1. Loans to members / providing financial assistance to related parties
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 has said that its oversight of the SMSF sector is increasing. It has a watch-list of tax schemes and arrangements, several of which it believes are clear attempts to circumvent or lessen the impact of the new superannuation rules, including the transfer balance cap.
The watch list includes a focus on funds that have:
- The appearance of being set up for the wrong reason e.g. to improperly access super balances
- Outstanding lodgements and / or are not audited
- Unrectified regulatory contraventions
- Low cost audits that do not meet required standards
- Seemingly non-commercial transactions
In addition to these key areas, the ATO is turning its focus on contrived arrangements involving SMSF investment in property development ventures or business ventures. It believes these could have the potential to trigger the arm’s length and sole purpose test provisions. Also in focus is ensuring compliance with the new collectables rules (5) that came into effect on 1 July 2016.
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 (https://www.commbank.com.au/guidance/retirement/smsf-investing-strategies-201708.html).
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 up to 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 licencing regime on accountants (https://www.commbank.com.au/guidance/retirement/can-your-accountant-provide-smsf-advice-from-1-july-2016-201607.html).
From 1 July 2016, accountants wanting to provide 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.