Walker Wayland - Perth Accountants

Jan 2022 7 Minutes

Peaks (and Pitfalls) of Investing in an SMSF

Article by Troy MacMillan | CFP SSA, B.Bus, DFP | Chief Executive | TWD

The very first problem I have with Self Managed Super Funds (SMSF) is the name. The majority of people tend to believe that they need to self-manage their own super. This then can lead to two disastrous outcomes:

1. Those who are then too worried to start an SMSF when they should.

SMSF’s suit those who want to be pro-active with their wealth within super. They enjoy the freedom and flexibility of being able to invest directly in shares, property, cash and bonds. Importantly the majority of these people typically engage professions such as Financial Advisers and Accountants to ensure that they are investing within their investment strategy, staying compliant and maximising their returns.

One of the biggest advantages of SMSF’s over retail and industry funds is their ability to invest in real property. If circumstances permit, you are also able to borrow within the fund to gain more leverage for such a purchase. Business owners in particular have the benefit of buying their business premises in their SMSF and then renting the premises back from the fund.

Then there is the significant cost savings for those with higher balances within their fund. The starting point for an SMSF generally is at around $250,000 as it is at that point that the fund can become cost-effective when compared to other super funds. As most fees in a SMSF are flat and not linked to the amount of money within your fund, there is no additional cost for having a larger balance. When you compare this to other super funds, their costs increase with the value of the fund which normally makes them more expensive. People enjoy the transparency of the fees within an SMSF and the certainty that there are no hidden fees and charges.

If you are the trustee of the account, you also have the comfort of knowing you have full control over your investments. In addition to the investment flexibility mentioned above, you can also take immediate advantage of any changes to super and tax regulations, which is particularly relevant at the moment!

An SMSF also allows for simplified succession planning, as opposed to the need for paperwork and proof of identity requirements that industry funds require.

Finally, an SMSF allows for a much closer working relationship between policyholders and professional advisers (Financial Planners, Accountants, Lawyers). You get to choose whose advice you want, rather than relying on those chosen by the fund, who may be very qualified but are not necessarily working with your particular needs in mind.

 

2. Those who start an SMSF when they shouldn’t.

Too many people start an SMSF for the wrong reasons. When it comes to cost, a lot of people see the fees that they are paying in their current super and get despondent. They typically feel that they are wasting their money by paying what they feel to be exorbitant costs with no value. Their solution is to start an SMSF so that they can reduce these costs and have control of their funds, but in many cases they actually pay more in fees than they were previously. There are the initial costs to consider like the establishment of a trust deed and corporate beneficiary (if required), then there are the ongoing costs such as the accounting fees for financials and returns of the fund combined with the auditing costs.

An example of this is where a client recently had $150,000 with their current super within an industry fund paying a total of 1.25% p/a = $1,875.

Before they saw us they moved to an SMSF where the costs involved were:

  1. Establishment of trust deed and corporate beneficiary - $2,200
  2. Accounting Costs - $1,500
  3. Audit - $400
  4. Total cost in the first year = $4,100

These costs did not take into account engaging any professional financial planning advice, as the client chose to manage the funds by themselves.

After a year, they realised that this was not a smart financial decision.

I mentioned in point one that a benefit of an SMSF is the ability to choose your advisers. Unfortunately, it also means you can chose to follow your own advice. A lot of people do not get professional advice, thinking that they can manage their super by themselves. In most cases this has proven to be the worst decision people can make as they are just not qualified to be looking after what is typically their biggest asset outside of the family home. Generally people do not diversify adequately enough within their fund. I have known people to invest in just one asset class like property and put their total portfolio at risk in a downward cycle. People become too emotional with their investment decisions or actually don’t make any decisions at all which can lead to a worse result. This has been highlighted in the past 12 months when the majority of SMSF funds have been sitting in term deposits and missing out on the best-performing market since the GFC.

People also need to be aware that managing an SMSF is a long-term proposition. You can’t just set and forget your investments, regular monitoring and strategy changes to suit the existing economic climate are required if you want to get the most out of your SMSF. There is also a high level of responsibility if you are the trustee, with compliance requirements in addition to the responsibility of making astute investments.

When it comes to financial advice within a SMSF, I find it beneficial to educate clients that this is broken down in three parts and in the following order:

  1. Strategy – What are your strategies to maximise the probability of reaching your goals? The fact that we’re talking super, then it’s a case of whether you are salary sacrificing, making addition non-concessional lump sum payments into super from available cash or the transferring of other assets like shares or property or are you starting a Transition to Retirement Pension?
  2. Structure – What structure will you choose to invest in? Are you going to invest in your name, your spouse’s name, a company, family trust or will you use super? If it’s super, you will have the confidence to know that it’s still the most tax effective investment vehicle in Australia, especially when you turn it to an account-based pension and in the process make the earnings and gains tax free.
  3. Investment – What will you invest in? By having an SMSF, you have the advantage of investing directly in the four main asset classes of shares, property, cash and bonds within your investment strategy. There are other assets allowed such as art and collectables, but they are not as common. It’s important to remember that super is not an investment, it is what you choose to invest in within your super that will either make you money or lose you money.

As a general guideline, SMSF’s can provide significant benefits for anyone who has $250,000+ in their super, likes the idea of having flexibility and control within their fund and the knowledge of a transparent cost structure.

It helps to have at least a moderate understanding of financial markets and investment strategies, but if you don’t then you should delegate the management and financial decision making to a team of professionals so that you can sleep easy!