SMSFs are not for everyone. There I said it. I’m constantly amazed at the number individuals I have spoken to that have a SMSF with a basic investment strategy, with poor diversification in the ultra flexible SMSF structure. Usually the move to SMSF was about saving fees or the notion of “taking control” of their retirement funds, and the investment strategy was an after thought. Problem is, paying less in fees does not necessarily make you wealthier. Disagree? Let me give you a simple, albeit, make believe example.
- A portfolio with $500,000 in a retail/industry super fund generates a 12 month return of $50,000. Administration and investment management fees of $6,000 are charged leaving an after-fee return of $44,000. The portfolio is now worth $544,000.
- The same portfolio of $500,000 is now in a SMSF with the investments managed by the trustee(s). They invest in Australian shares and term deposits and generate a return of $43,000. The fund pays $2,500 in fees (accounting, tax return, audit) leaving an after-fee return of $40,500. The portfolio is now worth $540,500.
Which portfolio would you prefer?
Now I know this is an example I’ve come up with, but what you need to realise is that it’s not far from the truth for the 2014/15 financial year returns. All it takes is a little bit of extra allocation to Australian shares instead of Global shares and there’s your return differential.
I’m all for super as a retirement savings and income structure. There’s nothing out there like it. I’m all for SMSF when the driver is a robust investment strategy and everything follows on from that. What I don’t like is SMSF recommended out of self-interest. Sold on the notion of fee savings and investment control when it’s actually your after-fee, final return that matters most.
Fee savings make it easier to improve the final return, but it doesn’t automatically lead to a better bottom line.
I should also mention that the first portfolio did not require hundreds of hours of your time for investment research and the responsibility of being a trustee and running your own fund and all the compliance burden that goes with it. I’ve never known of anyone who wakes up one day saying “I’d like to take on more paperwork in my life”. Compliance and red tape adds no meaningful value to you.
As a CERTIFIED FINANCIAL PLANNER® I implore you to do your homework before making the big decision to establish and run your own SMSF. Know your options, know what’s out there, make a fully informed decision. Technology has come a long way and super funds have capitalised on it. There are other cost effective options out there that may fit in with your desired investment strategy. Maybe it’s time to upgrade your existing super product? The bottom line is, do your research and consider your options. When in doubt, seek advice from a qualified and experienced financial planner.
By Ray Ong
General Advice Warning
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
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Contact us on 08 9381 6811 for a complimentary consultation. Ray is a CERTIFIED FINANCIAL PLANNER® and LIFE RISK SPECIALIST® and has a Bachelor’s of Commerce in Financial Planning (with distinction). He is a member of The Financial Planning Association of Australia. We are based in Perth, Western Australia and specialise in retirement planning, wealth accumulation and wealth protection (life and disability insurance).