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Self Managed Super Fund (SMSF) Article
Keeping Your Fund Costs to A Minimum
By Tony Negline.
This article may be out of date.
12th September 2007
The cheapest way to run your Self Managed Super Fund is to do as much as possible yourself.
This might include drafting the fund’s trust deed, preparing all minutes detailing the trustee’s decisions, drafting and implementing the fund’s investment objectives and strategies, keeping track of these investments including cash flows and other documentation, preparing the fund’s annual accounts, statutory return and member benefit statements and so on. This is not an extensive list of activities.
Some super fund requirements have to be done by people who have appropriate qualifications. For example, each year a super fund needs to be audited by a member of various accountancy bodies. Trust deeds should be drafted by a qualified lawyer.
It would seem that most SMSFs rely on their advisers to fully run the fund because the Australian Taxation Office has said that only 5% of small funds do not use a Registered Tax Agent to submit their tax return.
Most SMSF trustees have enough commonsense to recognize that they either don’t have sufficient knowledge or time to do all their fund’s activities adequately.
The cost of running a fund is always something the trustees should be looking to keep as low as possible.
An increasing number of SMSFs are using administration platforms to run their fund’s investments. These platforms are sometimes called Wrap Accounts or Master Funds. One purpose of these platforms is to have all of the fund’s investments in one place. The platform keeps track of these investments and provides reporting that enables the fund’s annual accounts to be prepared.
The cost of these platforms are nearly always based on the value of your investments. For example, it might be 1% per annum of the first $1 million placed into the platform. That is, the administration cost is $10,000 per year.
There are three administrative advantages with using an investment platform. Firstly the tracking of the super fund’s investments is done automatically and in one place. This means it is probably easier for the trustee and their advisers to monitor these investments. Secondly it is then relatively easy for the fund’s accountant to prepare the fund’s accounts because many accounting systems will import the transaction data at the touch of a button. Finally it should be quite simple for the fund’s auditor to check the fund’s financial records because all the reports are in one place.
What are the disadvantages on using an investment platform? Firstly the cost incurred might be seen as expensive when it is expressed in dollar terms. You also have to bear in mind that even after you have paid this fee you have to pay each investment manager. Secondly, wrap platforms can’t deal with all fund investments. Typically their specialty is a range of managed funds and listed investments. For example, if your super fund invests in residential property or collectibles then most investment platforms will not be able to keep track of it for you. (Some platforms help you keep track of these investments but rely totally on the data you enter.)
Some might be wondering why an SMSF would need an investment platform when the SMSF is already one. This is a very good point. In reality however SMSFs only have the structure that trustees put in place.
Additionally most investment manager costs are lower when provided indirectly via an investment platform than when provided via direct means. In some cases some fund managers offer additional discounts if the investment is done via a certain platform or financial planning group.
Most fund managers have wholesale investment structures that are available via an investment platform for a relatively low initial investment, such as $50,000. These same wholesale investments might also be available directly from the fund manager but only if you have at least $200,000 to invest.
A large number of accountants charge their clients more to prepare the fund’s accounts if an investment platform is not used. Without these consolidated reports, the accountant has to manually prepare the fund’s accounts. This requires more work and hence should cost more.
SMSF trustees could get the benefit and expertise of fund managers by using other investment structures such as Listed Invested Companies or Exchange Traded Funds. Both these types of funds are listed on the ASX and are generally cheaper than retail fund manager products.
An increasing number of SMSFs are using financial planners to provide advice in a range of areas, such as investment fund selection and implement death and disability insurance requirements. There are a variety of ways that planners use to charge their clients. Under law they have to disclose what the total cost of this advice is.
A SMSF with at least $1 million should have sufficient clout to demand efficient and cost effective advice. Most people seem to meekly agree to whatever fee a planner demands. Planners are not used to being asked to take a “hair cut” and the good planners often have sufficiently robust businesses to turn clients away who do not wish to pay standard fees and charges. As the SMSF market matures and trustees knowledge improves the pricing power will increasingly belong trustees.
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