You can always tell when a Government inquiry is occurring because ‘mud-slinging’ becomes the national pastime for many pockets of the financial services industry. Self-managed super funds (SMSFs) become a key target for many at these times given its continued growth, with rhetoric about minimum balances again for SMSFs, the ATO’s ability to regulate the sector and more… I am in favour a healthy debate of the use of leverage within superannuation, but hold a firm view for it to be retained (which I share my thoughts further shortly)
Over the past few weeks we have just about seen it all through the media about SMSFs – take the front page of the Australian Financial Review that runs a ludicrous article on the notion that SMSFs don’t pay tax, focusing on how they benefit from franking credits? Um, unless I’m missing something the tax framework that governs SMSFs exists broadly across all sectors of the superannuation industry. I didn’t see any mud thrown at charitable institutions who also take significant advantage of franking credits given their tax arrangements?
The FSI interim report posed the following questions:
- To what extent should the Inquiry be concerned about the high operating expenses of many SMSFs?
- Should there be any limitations on the establishment of SMSFs?
In this first post on the FSI and SMSFs, let’s take a look at the debate about cost-effectiveness and imposing barriers to entry:
The debate about fees and minimum balances
I always find this an interesting one. I recently participated in a panel discussion with several industry fund executives on the super industry in 2020. Unsurprisingly, the debate turned to minimum balances in SMSFs, with comments made that outflows occurred to SMSFs on many occasions with lower balances that what would be a cost comparative basis. In my response, I posed the following question to the facilitator:
So, John (not real name) do you mind if I ask what suit you’re wearing? Hugo Boss, Armani perhaps? (…silence) Why don’t you buy a $99 suit from Man-to-man? It does the same thing – it comes with a jacket, pants, pockets, pin stripes, etc? (…more silence) You see, you could wear a cheaper suit but it is your preference not to. Cost isn’t a driver in this purchase decision, you are prepared to pay a premium for this choice. You acknowledge that if you focused your clothing decisions on cost, then clearly the Hugo Boss suit is not an appropriate suit for you.
The message here is that I was attempting to convey to 50+ industry fund executives was that many people continue to be attracted to SMSFs for reasons beyond fees. Sure, having an understanding of costs are important, but this isn’t in many instances the driver for shifting to an SMSF structure. Greater investment choice, the ability to manage tax outcomes, and estate planning are just some examples why people move to SMSFs. These thought processes are also happening at an earlier age, with a greater number of SMSF new entrants in their late 30’s and early 40’s.
Some of the supposed guidance around fees appears misguided at best. For example the research on fees commissioned by ASIC (prepared by Rice Warner) on costs as part of CP216, Advice on SMSF has been heavily challenged across the SMSF sector (including SPAA). It is more evident that the SMSF sector is becoming more competitive, which is having a significant role in the debate around costs.
Having undertaken my own research through the Future of SMSF Report into pricing of services provided by professionals within the SMSF sector, we have identified:
- An average fund establishment fee of $844 (with medians by fee revenue ranging between $625 and $875; and
- An average cost for administration and compliance services of $2,371 (with medians by fee revenue ranging from ($1,750 to $2,750)
At a median asset size of $518,000 (ATO SMSF statistical overview 2012), this fee represents a fee of less than 0.5%, significantly lower than any APRA regulated fund.
Interestingly, fee pressures have become very real for many practices, with median fee growth over the past two years being just 2.5%, with many businesses seeing no change in fees due to the highly competitive space for administration and compliance services.
Limitations on establishment
The notion of providing a framework to govern minimum entry points for SMSF is clearly misguided. I was interested to read the SPAA submission which raised a range of practical issues on this matter including:
- How would regulatory controls and policing of minimum balances be achieved?
- How regulation would deal with balances that fell under any minimum entry point? This may be via investment performance, roll-overs, pensions, lump sums, etc?
- If delays occur in transferring funds from a roll-over institution and the fund receives SGC contributions, does the fund satisfy the minimum balance requirement?
- Government reduction of contribution caps has limited the ability to establish larger superannuation balances and members should not be disadvantaged or prevented from establishing an SMSF because of an inability to establish higher balances.
The question that should be asked is that if barriers to entry are to be imposed around minimum balances based on a cost argument, then what framework would be introduced to ensure that individuals with larger balances within APRA funds would shift to an SMSF as it would be a more suitable option? I’d like to see that…
The focus must continue on the quality of advice and having adequate information available for individuals to make an informed decision about SMSFs.
It will be interesting to follow the views of the FSI panel on this one, given the views of the Cooper Review panel that showed a ‘well functioning’ sector.
I’d love to hear your views in these questions raised by the FSI interim report?