Costs of operating SMSFs - Different strokes for different folks

The “Costs of operating SMSFs 2020” report prepared by Rice Warner and released by the SMSF Association today was a breath of fresh air.

The SMSFA has done SMSF trustees and professionals a great service by commissioning this report and Rice Warner has delivered comprehensive, carefully considered analysis that tells a story many of us know well. SMSFs are actually cheaper than you think but you can’t reduce their administration costs to a single universally appropriate number unless you’re happy for that number to often be wildly wrong. 

It’s disappointing that ASIC has historically led the charge on misleading consumers here. Let’s hope it’s happened because they haven’t had the analysis provided in this report and therefore haven’t been able to do anything else

Before diving into the detail, it’s worth highlighting the key conclusions. Under plenty of scenarios considered by the report, SMSFs of more than $500,000 were cheaper than APRA regulated funds and they became competitive relative to APRA funds at around $200,000.

Importantly though, the precise comparison depends on the choices made by trustee.

And actually this is one of the brilliant things about SMSFs. People make choices about their superannuation and those choices can change and evolve over time. 

The way I manage my SMSF today is very different to the way I did it 20 years ago. I’m not an investment expert so I have an adviser (let’s be honest, that hasn’t changed). I’m time poor whereas I wasn’t in the past – so now I use a full-service administrator (coincidentally – the best in the business, Heffron). 

I started out with a few very simple investments. Now that I’m staring old age in the face and have accumulated more money, my SMSF has different investments. They are still pretty mainstream and many are available on retail fund platforms but others are not. My needs have changed and my fund has evolved with me.

It’s a little like buying a car. Ignoring car choices driven by status or super luxury, we don’t see it as a universally important thing that we buy the cheapest car on the market. Instead, our choice is driven by need (small or family?), skills (manual or automatic), risk appetite (reliability/brand) and preferences (hybrid? Leather seats?). Overall, we want the best value for money for what we want.

Similarly, the choices we make about SMSFs which in turn drive costs of administration are about the need (number of members, pensions or lump sums), skills (where is advice needed?), risk appetite (reliability/brand) and preferences (property? Compliance only or full-service administration?). Overall, we want to maximise our retirement savings by getting the right balance between costs and benefits we believe will enhance returns and strategies which determine our overall outcomes.

The report also highlighted that on the whole, administration prices have come down. That’s not surprising – the technology changes that have been made in recent years to support SMSF administration are enormous. In fact this is a point often missed in rhetoric highlighting the benefits of scale for APRA regulated funds. The SMSFs themselves don’t have scale (they are smaller than APRA regulated funds) and even the administration service providers often don’t have scale (nearly 50% of the funds in the country are looked after by firms that have fewer than 100 to service). But the providers of key infrastructure and investment platforms do have scale.

Administration providers who leverage that scale – and believe me most of us do – are able to bring its benefits all the way to our sub $500,000 funds. Consumers who are prepared to make choices that perfectly fit the model of a smart provider leveraging all the help they can get from this scale within the industry itself can receive basic SMSF administration at a fraction of the costs we saw 10 years ago. 

For example, we now offer lower fees for funds that use specific investment platforms, bank accounts, don’t have property and collectables and adhere to requirements such as digital signing – because these days, all of those things make our own costs lower.

No wonder administration fees have come down.

(Although I did like the slight dig when it comes to costs. Rice Warner commented that the only fees not reducing were the statutory ones. Perhaps ASIC and the ATO need a bit more scale?) 

There are many things to talk about when it comes to where this report will lead us but there are two I’m curious about.

Firstly, ASIC has historically raised cost as a critical consideration for advisers in ruling out SMSFs. And they are quite right to do so. But if SMSFs are actually cheaper than APRA regulated funds above $500,000 in most cases, will we now see a slightly different focus?  Should an equivalent amount of scrutiny be applied to ensuring SMSFs are proactively raised and considered when a client’s balance exceeds this threshold? And should APRA fund trustees initiate this conversation too?

Remember that trustees hold a unique place that is quite inconsistent with being a commercial organisation - they are charged with ignoring their own interests and focussing only on the best interests of their members. Either cost is a critical consideration or it's not.

I expect the argument against this will be that “all members” interests are best served if those with large balances stay in the APRA regulated fund to subsidise costs for all the other members. That certainly highlights a major dilemma that large funds must face every day – which members’ interests are being prioritised? Certainly, that’s much easier in an SMSF.

Secondly, there is a grey zone between $200,000 and $500,000 where the costs are broadly comparable. What is the “right” answer here? The traditional wisdom is that an APRA regulated fund is generally most appropriate when it’s line ball. But in fact, I think that treats all members as a homogenous group. There will be some for whom moving to an SMSF as soon as it’s “not too much more expensive” than an APRA regulated fund will be completely appropriate – particularly those who are contributing as much as possible and growing quickly. For others, having an SMSF might be a decision they only come to when the cost argument is just too compelling to ignore. Either way, I hope the regulator is supportive of the fact that it’s different strokes for different folks.

The Report’s 50 odd pages are a ripping yarn. The very fact that it needs to be 50 pages long to cover the diverse range of types of costs and approaches to SMSF administration highlights exactly how much power, choice and control SMSF members have in choosing exactly how they want to manage their retirement savings.

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