Self Managed or Self Mangled SMSF?

Cryptocurrency SMSF nest egg

The allure of having complete control over your financial future is very compelling, and becomes even more so in turbulent market periods, like the one we have seen in 2020. So it is understandable that 2020’s volatile markets combined with the opaqueness of many large super funds could have left you wondering if you should be opening your own self managed super fund (SMSF).

It has been an interesting time for SMSF’s: the number of new accounts opened each year has been falling for the past decade. In 2018 new accounts equalled closed accounts. It’s clear the repealing of the ‘accountants exemption’ in July 2016 has been partly responsible for this. It stopped accountants without an appropriate advice license from recommending SMSFs to their clients. Post 2018, a marked decrease in closures has seen net new accounts increase again. 

There has been an explosion of online SMSF accountant alternatives recently. These can cheaply and quickly establish a fund – but without advice. So, it is easier than ever to setup a fund. 

For many, this might be an appropriate move in the long run, providing they have the time and skills to manage the structure and internal investments properly. However, many don’t. This year at Nucleus Wealth, we have had the most SMSF windups so far, with most opting to just roll across into our personal super side. A lack of time was the most often cited reason.

Can SMSFs be run with smaller balances?

In addition, there was some interesting research out last week regarding the ‘cost effectiveness’ of Self Managed Super Funds. With the disclaimer that Rice Warner was commissioned by the SMSF Association, so we treat it with a degree of skepticism. More on this here.

The report (summary info graphic here) goes to some length to combat the commonly held view that account balances need to be above $500,000 to be cost effective. The fixed administration and accounting costs mean that higher balances are usually needed to justify an SMSF.. To a degree Rice Warner are right, especially given the surge in low cost, online accountancy and audit providers that have flourished in the last 5 years. However, the devil is in the details. Both fees and management matter. Avoiding fees but failing the investment side can leave investors penny wise but pound foolish.  

Young and free

In the latest SMSF quarterly statistical report, an interesting stat to watch is the one relating to the age of new establishments, in which nearly 43% of new establishments in the June quarter were by people between 25 and 44 years old. 

Often this is the busiest time of an individual’s life, raising a family, buying/building/renovating a house, creating a career. Do all of these people also have enough time to be a fund manager?. Adding to this, nearly 50% of the new funders reported an annual income of between $0 and $80,000. 

The old adage, with great power comes great responsibility is apt. Inexperienced investors seeking big returns start with small, seemingly innocuous forays into investments and asset classes not normally the domain of long term positioning. Areas like microcap stocks, forex trading and cryptocurrency (direct firey responses here please) promise (and in truth rarely deliver) large potential returns that can. However, if unsuccessful or not managed carefully, these assets can set back retirement plans for years at the other end. A decade of mandatory saving can be undone in a heartbeat.

Low fees for freedom?

The cost of ‘running’ a fund does not always stop at the low prices offered by the online accountants. If anything, that is just the start, as it really just leaves you with a pile of cash in a bank account. You then need to decide what to do with it. Chances are that if someone has bothered to set one up, there are already a few ideas in mind. That’s great, but loading your life savings into a couple of tips from HotCopper or Reddit could be viewed as walking into a casino. 

Taking control personally is great as aside from some brokerage costs, your management costs are next to nil which sounds like a great deal right? But here’s a hot tip, you need to remember to put a value on your time. Even with an unquenchable interest in the investing world, you will probably find yourself spending more time on the management of your portfolio than you expected. Especially if things start to go wrong.

Is an SMSF that much cheaper?

In my experience, once you have added in the cost of your time, probably not. Our personal super accounts carry an additional trustee cost of 0.1% and an annual admin fee of $144 over the SMSF account types, meaning that unless the flexibility of an SMSF is worth paying extra for, your balance needs to be substantial (and your accounting cheap) to warrant the saving. 

Alternatives to doing it (all) on your own.

There are plenty of options out there for competent investment management if it either all starts to get too hard or you start to feel the pinch timewise as family and work begin to take over. 

A core and satellite approach is a common structure. It allocates a core to a diversified and liquid manager (or basket of ETF’s) for the nucleus of your portfolio and then satellite holdings to higher risk or more exotic assets is a good place to start. Particularly if you have some experience or insights into the satellite holdings.. If you succeed and realise terrific gains, well done, and use the opportunity to rebalance some back into your core holding and keep your retirement on track. If it does not work out so well, take solace in the fact that at least it was not the lot!

With little doubt the global pandemic, its ensuring effects on markets and perceived investment opportunities have pushed the thought of SMSF into the minds of many Australians in 2020. I just hope upon reflection in 20 years, the only impacts that remain are higher levels of cleanliness and an aversion to bat soup, and not blown up retirement plans for those who decided to self drive such an important component of Australian life. 

 

Tim Fuller is Head of Advice at Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Tim Fuller is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.