An increasing number of Australian investors are opting to establish their own self managed super fund, in a bid to take back control of their financial future and ensure they retire with a nest egg that will comfortably see them through the ‘golden years’.
DIY funds have risen in popularity at an exponential pace, as more self-funding retirees choose to forego the formality of a traditional managed structure in favour of deciding how, when and where their fund’s contributions are invested.
You only need to look at the ever-multiplying number of SMSF service providers and self-proclaimed ‘specialists’ to know that this is a growth industry and it represents big business.
The problem is, a large number of mum and dad investors have been persuaded toward the SMSF investment structure, just so these SMSF ‘experts’ can keep their hand in the profit jar, as it were.
The cost to establish and administer an SMSF is not to be sneezed at, and there are some rather intimidating penalties imposed for those who get it wrong.
Convincing your clients to pay you to establish an SMSF and then fork over an ongoing annual management fee can be a lucrative little money-spinner for self-serving financial advisers.
Of course I’m not suggesting that advisers shouldn’t charge for their services. But to convince a client to adopt a particular investment approach or purchase a particular product that will benefit you more than them, is just morally wrong.
Unfortunately it’s happening on with increasing frequency, because when times are good in property, everyone wants a piece of the profit pie.
And as interest rates continue to trend low, while values in certain housing sectors keep on keeping on, times couldn’t really be better than they are right now.
Not for everyone
Am I suggesting that all SMSFs and the people who spruik them are inherently evil and should be avoided at all costs? Of course not. But the fact is, this ain’t for everybody, and it certainly shouldn’t be approached as the latest fashion to throw on for your next dinner party…
‘Yes daahhhhllllink…we just bought the cutest little SMSF don’t you know?’
In an interview with Business Spectator’s Chris Kohler, The Australian reporter Andrew Main advises that a large number of us are exiting SMSFs and returning to pooled fund structures.
He says that according to Aussie Super director Andrew Baker, the amount of money transacting from SMSFs back to traditional managed funds is quite significant.
However, with the majority of closing SMSF balances in the vicinity of $70,000, it’s clear that those investors who are now jumping ship should never have gone down the SMSF path in the first place.
Main says that as cruel as it might sound, a $70,000 balance is simply not enough to justify paying the cost of keeping an SMSF alive and kicking, let alone expecting it to be profitable.
“The cost of running an SMSF is going down,” he says. “I mentioned $5,000 a year, which would be for a pretty complicated SMSF. It’s coming down all the time.
“But it’s clear that there’s been some unscrupulous accountants who have had the right to advise people on set up of SMSFs,” he says.
Main believes a lot of investors who are sold the SMSF strategy with this type of self-serving intent from their advisers then start to feel a sense of buyer’s remorse and decide they want out, before they’ve even really begun.
An engaging idea
Another reason industry analysts think some people might be stumbling into trouble when they choose to become trustee of their own SMSF is that they’re unaware of the level of user-participation required to make this structure viable.
“You get talked into this thing,” says Kohler, “Then the person leaves the room and all of a sudden you’re left with a high level of engagement and also these fees, that can be quite high.”
Main goes so far as to suggest that the engagement issue is the central problem that brings many SMSF trustees undone.
“If somebody has had a set and forget attitude to their super, which is what all the pooled funds are about – we’ll look after it for you – entirely understandable that’s where the bulk of the population are.
“If someone goes into an SMSF from a set and forget situation, they’re really running the risk of spending a lot of money and not doing very well,” says Main.
This is important dialogue, which highlights the necessity for better regulation of the SMSF services sector, as well as increasing education initiatives so that investors have a full appreciation of what they might be getting themselves into when it comes to different investment approaches and structures.
The bottom line is, if you have a low super balance and are not prepared to commit your own time and energy into your fund, maybe leave the management of your nest egg to another entity.
And always, always know whether what you’re committing to actually aligns with your financial strategy and objectives.