Comparing SMSFs with industry and retail superannuation funds

Industry experts believe proposed legislation and a new licensing regime will give way to like-for-like cost comparisons between SMSFs, industry and retail superannuation funds. Damon Taylor reports.

As the industry’s fastest growing sector, self-managed superannuation has become sufficiently mainstream that most everyone knows its points of attraction.

Control and flexibility continue to head the list, and yet recent data released by the Australian Taxation Office has revealed that costs, or more particularly reduced costs, may provide trustees with an equally attractive advantage. 

But while reduced operating expenses may be a point of differentiation for self-managed super funds (SMSFs), Peter Hogan, principal of Plaza Financial, believes most trustees consider it an ancillary benefit rather than a specific goal.

“To be honest, I’ve found that cost isn’t a big driver when it comes to SMSF setup,” he said. “If someone wants a self-managed superannuation fund, they almost accept that it may cost them more, at least initially.  

“In the end, they know what they’re being charged in terms of an audit fee; my own clients know that I charge them a flat fee for financial advice, and then they know what their brokerage fees are,” said Hogan.

“Those costs are fixed, so anything beyond that really depends on what they’re doing with their investment and strategy and, more importantly, how they’re doing it.”

As to how self-managed super fund costs figured against the fees involved in a retail master trust or industry super fund, Sharyn Long, managing partner for Sharyn Long Chartered Accountants, said that although cost was important, like-for-like comparisons didn’t often take place.

“In my experience, a lot of people actually make a decision that they want a self-managed super fund for control, for flexibility, for the usual reasons,” she said.

“They therefore want to know what the costs are going to be, and they want to make sure that they’re reasonable, but I don’t think they do as much of a comparison as you might think.

“That will change though,” Long was quick to add.

“Under the accountants’ exemption now, accountants who don’t hold a Financial Services Licence are obviously not permitted to advise clients on the different superannuation options available to them.

“But under the new proposed licensing regime and under FOFA [the Future of Financial Advice reforms], I think they’re going to have to consider those options and make them clear to clients.”

Long said that while the self-managed superannuation sector was still waiting for detail around the accountants’ proposed limited licensing regime, comparisons across all sectors of the superannuation industry were inevitable.

“You won’t be able to say to your client ‘yes, set up a self-managed super fund’,” she said.

“You’re going to have to say ‘look, have you considered all of the options?’ And, in doing so, that cost comparison will take place.

“It’s a comparison that will become real and more relevant as time goes on and as this new licensing regime comes into play.”

Offering the numbers behind the SMSF cost equation, Andrea Slattery, chief executive officer for the Self-Managed Super Fund Professionals' Association, said that recent research backed up the anecdotal evidence provided by Hogan and Long.

“Our research is actually confirming that costs are going down the list in terms of points of attraction, significantly down the list,” she said.

“So things like performance and risk, interest in certain investments, they’re all starting to take sway.

“But we helped the Cooper Review pull together the ATO data so that they could make an analysis of the cost incurred within an average SMSF,” Slattery continued.

“And at that time, the analysis showed that the average cost for an SMSF was 0.67 per cent. 

“At the same time, the average cost for a retail fund was 2.1 per cent and the average cost for an industry fund was at 1.1 per cent.”

Interestingly, Slattery said that in its  latest review, which admittedly was 18 months in arrears, the ATO had confirmed that those costs had further reduced over a 12-month period to 0.65 per cent.

“So comparing apples to apples, the APRA (Australian Prudential Regulation Authority) data, which looks at the best-performing 20 per cent of funds 12 months ago, their figures have gone from 1.1 per cent for industry funds to 1.5 per cent and from 2.1 per cent for retail funds to 2.8 per cent,” she said.

“So in general, the costs and fees for retail and industry funds are blowing out a little bit as those sectors try to add more bells and whistles.

“But in the SMSF sector, they're reducing,” Slattery added.

“Indeed, the thing about an SMSF is that it’s particular to the individual or to the members of the fund, not just in terms of the choices that those members make but also in terms of the costs that are incurred.

“The valid argument here is that control and flexibility drives how you run your fund; it drives what decisions you make, what advice you use, how expensive your fund is and, ultimately, the performance it enjoys.”

But moving beyond the question of SMSF cost, it is this sector’s advice space which sets the tone for how a new fund is to be run. And yet with the upcoming removal of the accountants’ licensing exemption and the prospect of a limited licensing regime in its place, the SMSF advice space is set to change once again.

However, for Hogan, SMSF advice has made a deliberate evolution in recent years, and one which has only served to benefit trustees.

“Five years ago, you’d do a survey of trustees and probably 90 per cent of them would say that the first point of contact to set up the fund was their accountant,” he said.

“But I think there’s been a realisation that financial planners needed to get more involved in the whole process because of the limitations in what accountants have been able to do under corporations law for the last X number of years.

“So with the accountants' carve-out, they can recommend a self-managed super fund but they can’t do super switching advice, they can’t do insurance advice, they can’t recommend consolidation, they can’t draft the investment strategy or the asset allocation for the fund,” Hogan outlined.

“So, by necessity, a client who has needed assistance in those areas has needed to go and see someone who is licensed.

“So even if an accountant has made the recommendation to set up the fund, I think the financial adviser is now far more involved at a much earlier stage than perhaps they would have been in the past, if at all.”

Outlining a similar history, Slattery said that while self-managed super funds had been in existence for 45 years, their initial appeal had been as tax structures.

“So you had accountants doing the tax work and lawyers doing the deed work,” she said.

“It was another structure with which to save, but what's actually happened is that the financial adviser, someone who really looks at the future, has entered the equation where the accountant really looks at the past.

“So their worlds have merged and a lot of accountants have become financial advisers and a lot of financial planners have undertaken tax degrees and so forth,” Slattery continued.

“It’s evolved because people have realised that they can add value for their clients with strategic advice and, to have the capacity to do that, you either do it yourself or you have a network to do it.

“So when you're looking at the interplay of accountants and financial advisers, they’re now well connected within what has become a quite specialised profession.”

Yet the question that remains is whether self-managed superannuation may have a game changer on its hands with the limited licensing regime that has been proposed for accountants.

Will accountants be better placed to give SMSF advice and, more importantly, will SMSF trustees be better positioned as a consequence?

The key issue, according to Long, is realising what hasn’t worked under the current regime.

“We have this accountants’ exemption but I think a lot of people haven’t understood what they can and can’t do, what it allows them to do,” she said.

“So I think there’s been a lot of overstepping of that boundary and a lot of blurred areas in terms of what advice has been given.

“Now, my understanding of the recommendations that have come out of FOFA is that if you want to give investment or product advice, you’re going to have to have a full licence,” Long continued.

“If you want to give generic structural advice like you currently do under the accountants’ exemption, then you’ll have a restricted licence but you’ll need to consider all of the various segments of the industry and not just self-managed super.”

And as to whether accountants would be better placed as a consequence, Long indicated that the jury was still out.

“My understanding of the licensing regime is that the limited licence will be relatively easy to obtain and not cost-prohibitive,” she said.

“Whereas currently, the full licence requires audit and compliance plans and realistically, if the accountant isn’t in that mainstream space of providing investment advice, then they probably wouldn’t want to go down that track.

“But I think the whole industry agrees that the accountants’ exemption hasn’t worked and that we need a better system than that,” Long added. “So, from that point of view, it will be better than what we have currently.

“And I’m reasonably comfortable that it will function reasonably well and that it won’t be cost-prohibitive or overly difficult to obtain.”

Identifying similar gaps in the accountants’ licensing exemption, Slattery said that there was currently a very real barrier to accountants being able to provide advice on setting up an SMSF.

“But under the proposed licensing requirements, they will be able to do that,” she said.

“That means that there's more likely to be high level tax advice as well as structured financial advice, which is a real value add, that can be provided to the market and to consumers going forward.

“Of course, the risk of the licensing regime is that it will be too costly and that it won't actually allow an appropriately competent piece of advice to be given to clients,” Slattery continued.

“What we're seeing and hearing from the proposals are that those concerns should be alleviated, but those are the things we have to avoid.

“What we’re looking for is a level playing field.”

For Slattery, the equation is simple.

“If you want to provide tax advice, you have to have a tax agent status,” she said. “If you want to provide financial advice and investment advice, then you need to have your licence for that as well.

“And strategic, value-add, structural advice should be treated exactly the same,” Slattery continued.

“This new structure should provide an opportunity for genuinely, professional, competent advice to be given so that the client benefits.

“But, like I said, until the measure comes in, our concern is that there might be barriers and restrictions to that happening through costs or through some other form of barrier to entry.”

Indeed, Slattery’s concern is one shared by accounting industry bodies, CPA Australia and the Institute of Chartered Accountants in Australia. The argument is that an overly onerous licensing framework could mean the exit of countless sole practitioners.

Yet for Hogan, some level of rationalisation is inevitable.

“In fact, the financial planning profession has been saying exactly the same sorts of things every time new legislation or regulatory requirements are introduced,” he said.

“And it happens. People get to a point in their business lives where they’ve only got three or four years left and then they’re being asked to do three or four years of study so that they can understand what they’ve already been doing for many years just that bit better.

“It becomes a tricky proposition,” Hogan added.

“Equally, this registration program for auditors, it falls into the same boat, but I suppose that there is a counter-argument.

“It does, after all, give the people who are willing to do the work, those who take on the new regime with a view to servicing their clients in a way that the law requires, a significant advantage; it’s going to be a win for their clients and a win for those people’s businesses going forward.”

For her part, Long said that though Australia’s accounting bodies clearly had serious concerns about imposing additional rules and regulations, the number of exits would still be dictated by the desire of accountants to remain working with and advising SMSF clients.

“If a practitioner has a genuine interest in servicing his or her clients’ well-being, and their retirement savings as a part of that overall strategy, then I doubt that a licensing regime will be of any real concern,” she said.

“On the other hand, if you’re not really practising in the area, not really spending a lot of time on it, then the prospect of paying more and doing more just to be compliant becomes far less attractive.

“If that’s the case, the judgment may well be that you’re not really in that space and therefore won’t do that work anymore.”

Reiterating his position, Hogan said that he could understand accountants’ concerns about any increased regulatory burden.

“The last thing they want is to be dragged into a compulsory regulatory regime where they’re not at the moment,” he said.

“And I can understand that because anyone who takes up financial planning, for example, they all have that rude shock when they take it up because it is an onerous responsibility to take on.

“But once you acclimatise to the regime and so on, then it’s pretty much business as usual,” Hogan added.

“And while we may well lose some people who currently give SMSF advice, there will be plenty of others lining up to take up that work and build their business with an SMSF specialisation.”

So while the advice piece within self-managed superannuation may remain a work in progress, Slattery said that there was much about which the sector could be proud.

“Look, one of the facts about the self-managed superannuation is that it is the only sector that meets every government objective,” she said.

“It’s the only sector that is 100 per cent engaged, it has 100 per cent access to choice, it is the best performing, it has the lowest fees and it meets adequacy, sustainability and longevity matters as well.”

And for Hogan, those victories are what made getting the advice piece right so vital.

“You can license people and you can pass legislation requiring people to do things until you’re blue in the face, but unless there’s a willingness for them to do it and to put in the hours and the work to prove their competency, it just isn’t going to happen,” he said.

“So I suppose it’s got to be a self-regulation of the industry in the end. Its participants have to be willing to submit themselves to some sort of licensing regime and its ongoing educational requirements, and then they also have to accept that that’s still only the minimum requirement.

“But we are talking about people who are professionals here and so they have to accept that those minimum standards, that level of education and qualification, is what will elevate them to that professional standard and status.”

The bottom line, according to Slattery, is that self-managed superannuation was a value-add for anyone providing advice in the area.

“It’s an area where people are looking to manage and control their own futures,” she said.

“Now, not everyone needs to do that, but there are a significant number of Australians who can and do.

“But it is vitally important not to lose sight of the fact that this is a good, well-managed, well-functioning sector,” Slattery added. “It is a sector that gets on with business.”

“But, most importantly, it is a sector that needs legislation changes that will allow it to get on with business.”