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Self Managed Super Fund (SMSF) Article
Why do people set up Self Managed Super Funds?

By Tony Negline.

This article may be out of date.

7th April 2004

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The number of Self-Managed Super Funds has been growing at a phenomenal rate.  Between June 1995 and June 2003:

As can be seen from the table below, SMSFs are growing faster and stronger than any other super fund category.

So what is the cause of the popularity?  The key motivations seem to be a mixture of the following:

The issue appears to boil down to a desire to control one’s destiny without any outside influences and also a desire to use super to own property (particularly business property) or some other asset such as artwork.

Most of the people setting up these funds are either running their own businesses or are wealthier retirees.

According to Robert Brown, Chartered Accountant and long time super specialist, the popularity of SMSFs is not surprising.  “Fund managers are often seen as big impersonal organisations that can’t be trusted,” he said.  “This is a harsh judgement but a natural one for many to make because almost everyday we are bombarded with negative messages about retail super funds either from news stories or competitor advertising”.

Consequently retail funds, despite their large expenditures on image building and advertising can’t kill off SMSFs.  As normal market movements affect fund manager performance figures, their reputations seem to take a huge battering.  Each time this occurs a new wave of disgruntled investors crosses over to SMSFs.  Many of these new converts never go back to retail super funds.  Over time they bring along their friends and relatives.

It is somewhat ironic that some people leave retail funds because they are disillusioned with fund manager performance and want to do it themselves but then leave much of their SMSF monies in cash.

For many years a key driver in running a SMSF was the perceived cost savings compared to using a retail fund.  If a SMSFs total assets are very small then the SMSF will cost considerably more than a retail fund.  However because of the increasing costs of regulatory supervision – such as preparation of annual accounts, statutory returns and audit - the cost savings for all SMSFs compared to retail funds have largely disappeared.

A flaw in this cost comparison is that many investors often do not place an equivalent monetary value on their own time acting as trustee.

Estate Planning considerations and especially the flexibility available within SMSFs is often an attraction in using these funds.  This can be especially important for someone who has a number of children from two or more relationships or someone with young children.  Sam Wall, Head of Zurich’s Technical Services thinks the advantages of SMSFs compared to retail super funds is sometimes oversold.

Some years ago the Insurance and Superannuation Commission estimated that by 2010, SMSFs would be the largest super fund category.  If the current growth rate continues then it looks as though SMSFs will become the largest super fund category long before 2010.

 

Assets

$b

% increase

No. of members

(‘000)

% increase

No. of funds

% increase

Av Account Balance

($’000s)

Corporate

58,945

       26

1,107

      -16

1,759

     -58

      53

Industry

59,014

     430

7,691

       57

104

     -32

        8

Public Sector

110,945

       94

3,001

         1

73

     -25

      37

Retail

185,679

     262

13,066

     122

231

     -57

      14

RSAs

3,837

 

 

 

 

 

 

DIY Funds

117,855

     525

511

     352

275,523

    174

    231

Life Office

16,076

      -62

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

548,515

     141

25,376

       66

277,690

    163

      22

Adapted from APRA Superannuation Trends, September Quarter 2003

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