With the increased scrutiny of self-managed super funds (SMSF) from the regulator, the soon-to-be-introduced penalty regime for trustees and the increasing diligence of SMSF auditors, the time must arise where members of SMSFs question whether the continued retention of their SMSF is worth all the trouble.
Even where professional advisers (primarily accountants and financial planners) are engaged to assist the trustees in compliance, accounting and investment-related functions, trustees still need to devote time to the running of their fund.
After all, trustees are responsible for the operation of the fund, and simply appointing professional advisers is no defence for trustees if, and when, something goes wrong.
It is arguable that many SMSFs have been established for perfectly legitimate reasons and that trustees are "doing the right thing".
However, it is an equally credible argument that many SMSFs have been established for the wrong reasons.
Whether an SMSF has been recommended by a professional adviser looking to generate another source of income for their practice, or to enable trustees to access benefits early, or to make ill-considered or inappropriate investment decisions, the reality is that there will be a fair number of SMSFs that just shouldn't be.
But, in the interests of a balanced debate and in the emerging world of a best interest duty of advisers to their clients, let's consider the arguments for and against an SMSF.
The reasons often cited for establishing a SMSF include control, cost savings, and investment flexibility. We will consider each in turn.
Control
Except in some very limited circumstances, every member of an SMSF must be a trustee (or director of a corporate trustee) and each trustee must be a member.
The responsibility for running a SMSF in a compliant manner then falls squarely on the shoulders of the trustees.
In many respects trustees have absolute control over the management of the superannuation savings of their members – limited, however, by the constraints of the governing rules of their fund.
But the question must be asked: is the control that trustees assume worth the added burden of the responsibilities they assume?
Members of Australian Prudential Regulation Authority (APRA)-regulated funds have control over many aspects of their superannuation interests, to the extent that they are generally free to move their benefits between funds, often have a wide choice of investments, can choose benefit payment options that best suit their own circumstances, and implement estate planning solutions suited to their personal situation.
Cost savings
When the Australian Securities and Investments Commission (ASIC) released consultation paper CP 216 in September 2013, they included the results of work done by consulting actuaries Rice Warner that looked at the costs of running a SMSF.
Whilst there has been some debate around the conclusions drawn by Rice Warner, the results cannot be dismissed out of hand.
The conclusions reached suggested that an SMSF with a balance of between $200,000 and $500,000 may be cost effective when compared to an APRA-regulated fund – provided the trustees were prepared to do some of the work themselves, and that real cost effectiveness probably only starts to emerge when a SMSF has member balances in excess of $500,000.
Of course, the actual costs of running a SMSF are often difficult to determine due to the diverse range of expenses incurred.
Unfortunately the costs of actually running an SMSF are not bundled up into one annual charge or management expense ratio, thereby making it difficult to directly compare the actual costs of running an SMSF with an APRA-regulated fund.
In recent times, we have seen a downward pressure on costs, particularly as retail funds seek to compete with the industry fund sector. Some retail funds are even capping their maximum fees at competitive levels.
Some may argue that a low cost fund will not provide the flexibility their members require, but in many cases this may be a perception rather than reality.
An APRA-regulated fund offering all the "bells and whistles" may be more expensive, but if a member's needs are modest in terms of the fund features and investment menu, a simpler fund with a lower cost structure may be in the member's best interest.
Just because a member has a high account balance does not, in itself, suggest that an SMSF will be the best option from a cost perspective.
Cost is only one aspect of the rationale behind establishing an SMSF, and a thorough analysis of the features and benefits required by a member should be considered – and suitable fund options costed – before rushing down the SMSF route.
Investment flexibility
Trustees of SMSFs certainly have the capacity to invest in a broader range of assets and asset classes than may be available to members using an APRA-regulated superannuation offering.
However, how many trustees are looking to invest outside the types of asset classes readily available to members of APRA-regulated funds?
The statistics published in the Australian Taxation Office's SMSF statistics as at 30 June 2013 reveal that just over 71 per cent of all SMSF assets are invested in asset classes that are readily available through many retail superannuation funds.
These include listed shares, cash and term deposits, managed investments and listed trusts.
There are many other asset classes that SMSFs may invest in.
However, with the exception of direct property and unlisted trusts which account for 15.4 per cent and 8.9 per cent of SMSF assets respectively, the total exposure to other assets is less than 5 per cent of the total assets of SMSFs.
It could also be argued that many unlisted unit trusts can also be accessed through retail superannuation funds.
Given the extensive array of investment options available through selected APRA-regulated funds, many SMSF members may not need to use an SMSF to access their preferred investment options.
Conclusion
The debate around SMSFs versus other superannuation offerings is sure to continue well into the future.
However, in a world where the best interests of clients should be paramount, maybe it is time for professional advisers to consider the full menu of superannuation options rather than simply pull another SMSF off the shelf.
It is agreed that an SMSF will be the appropriate retirement savings structure for many, particularly for those seeking to invest in asset classes not readily available through an APRA fund. However the SMSF should not be regarded as a "one size fits all" solution.
Disclosure: The author of this article has an SMSF, and is a SPAA-accredited SMSF adviser.
Peter Kelly is the manager of technical advice at Centrepoint Alliance.
