4 red flags that would stop me setting up an SMSF

Avoid SMSFs if you feel pressured by sales tactics, spot opaque structures, hear illegal early access promises or overestimate your investment prowess.

It seems the government’s efforts to make it easier to change super funds have worked – and more people are switching than ever before. Some are moving to self-managed super funds, which apparently wasn’t part of the plan and is causing great concern within the industry fund arena.

While an SMSF isn’t for everyone, it seems more and more people are deciding that an SMSF is right for them.

I’m a fan, of course. But I did wonder, despite being a big fan today, what would make me pause and decide not to set up an SMSF for a younger me?

There are definitely a few things.

Firstly, if one were being sold to me – hard. If anyone were pushing me hard towards an SMSF I’d be concerned.

There’s no doubt that a number of business models rely on unsuspecting super fund members setting up an SMSF, bringing all their super into it and using the money to buy a particular investment or trust a particular product.

Sometimes these are downright illegal, and sometimes they’re perfectly legal but far riskier than anyone is letting on.

Some of the big red flags are things like an unsolicited approach, an emphasis on urgency, celebrity endorsements, lots of financial buzz words that don’t mean much or opaque ownership.

And some of these people are very persistent. They have to be – setting up an SMSF and getting your existing super rolled into it can take months. So someone determined to relieve you of some of your retirement savings needs to be patient – their success depends on it, it’s not a sign that they’re really invested in your success.

Secondly – and maybe this is a related point – I’d be put off if I were being encouraged to invest in something I really didn’t understand, or if I couldn’t really tell who was being paid or how much I was really paying.

While SMSFs can invest in a whole lot of things, in reality most hold the same types of assets as all other super funds. The weird and wacky things are usually the domain of the seasoned investor rather than the SMSF rookie.

Certainly, my younger self would be well advised to steer clear of those “opportunities”, particularly if there were stellar returns “absolutely guaranteed”.

A third warning sign would be if I were being told an SMSF would help me do something I am pretty sure is impossible – most commonly, access my super early. That’s just a lie.

All super funds have the same rules about access and for most of us, the earliest time we can touch a single cent of our super is our 60th birthday. In a nutshell, if your current super fund can’t give you your money, an SMSF won’t be able to either.

The trouble is, an SMSF puts control over the bank account for your super into your hands. So if someone convinces you they have an exciting strategy that lets you move some of your super across to your personal account with a few clicks and swipes any earlier than 60, I suspect they’re lying.

They have probably helped themselves to a hefty commission for their “strategy” already. They will be long gone by the time the ATO catches up with you. And the ATO will definitely catch up with you.

I’d always check the total fees I’d be paying for an SMSF (accounting, audit, financial advice, the annual levy to the government) and divide this by the total amount likely to be in my fund. That way, these fees can be expressed as a “percentage of assets”.

It’s the way the fees for lots of other super funds are charged so it’s generally the best way to compare SMSF costs to other super funds.

Often, SMSF costs are fixed dollar amounts (for example accounting fees) so they feel cheaper (compared to other super funds) if you have a larger balance.

At the start of the SMSF journey, an SMSF will often be more expensive than an alternative fund. So working that out is not necessarily a clear “no” to starting the SMSF. But what will be important is understanding the difference so you know what you’re really paying for all the strategic benefits you expect in the future.

Many people start SMSFs because they want to take control of their own destiny and manage their own investments. It’s tempting to imagine that we’ll all instantly be able to outperform the professionals every time. But perhaps that’s a fourth warning sign – an element of self-delusion. I’d say “know your limitations”.

Many people start out with somewhat boring investments in their SMSF – perhaps even a couple of simple diversified ETFs. They change things over time as they grow in knowledge and confidence.

In fact, the ease with which SMSFs evolve to suit the changing needs of their members is one of the biggest benefits of SMSFs and why plenty of people start one earlier than might seem sensible.

It’s highly unlikely the “best” super fund or “best investment platform” or “best adviser” today will also be the best in 20, 40 or 50 years’ time and yet that’s the timeframe for super.

So most people who stay in the public super fund system have to change funds several times during their lives. At best, switching super funds eats into retirement savings (costs and taxes incurred as part of the switch).

At worst, switching can mean leaving behind valuable tax and other benefits. An SMSF is unique in that everything about it can change without ever moving super funds.

Perhaps that’s why more and more people are switching to an SMSF – they never want to switch again.

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