Summary: There are definitely some very good reasons for investing via an SMSF. At the same time they do require extra work, responsibility and potentially additional cost. It's important to understand why it is that you might want to initiate an SMSF, can you achieve the same result by better utilising the managed fund environment? If not then an SMSF may be the right way for you to go.

Body: Whenever investment markets experience periods of turmoil there tends to be a spike of interest in setting up self managed super funds (SMSF). Understandable though this may be, there is work and cost involved in setting up and running an SMSF and it may also disrupt existing investments. It is not something that you would want to jump into only to close down 6 months or even 1 or 2 years down the track. I'd like to take a look at some of the features of an SMSF which may help you to decide if they are the right option for your situation.

Ultimate Control

An SMSF allows up to four members/trustees (each member is also has to be a trustee and vice versa) to have ultimate control over many aspects of their superannuation. Within the confines of the regulations, they can tailor many elements such as the as pension structures, insurances and the investment strategy. Most of these options will generally be available through a managed fund or master trust structure however there may be greater flexibility within an SMSF.

The drawback of having control is that you also have responsibility. There are regulations to be adhered to in running an SMSF and there may be serious penalties for not complying with those regulations. You can usually pay someone to assist you with just about every element however ultimate responsibility lies with the trustees. You therefore need to be comfortable that there will be some extra administrative burden and of course the more responsibility you take on the more you may be able to save in fees.

Fees

The fees attached to an SMSF differ from managed fund fees in that there is usually a higher flat dollar component for an SMSF. An accountant or SMSF service may charge $1,000 or more to set up the fund plus an annual fee usually starting around $1,000 (and as much as $5,000 to $10,000 or more per year depending on the size and complexity of the fund). They may also have an additional percentage based fee associated with the investment management within the fund. In contrast a managed fund usually has nominal flat dollar fees with the bulk of the fees calculated as a percentage of the funds under management. These can also vary significantly depending on the fund but would normally be between 1% and 2.5%.

It is generally recommended that you need a minimum starting balance of between $150,000 and $250,000 before starting an SMSF. At this level an average annual $2,500 administration fee represents only 1% to 1.7% of the fund value. On a $1,000,000 balance it is a very low .25%. On a $50,000 balance it would equal a percentage fee of 5%, too much considering the likely long term investment returns.

Depending on the complexity and cost of the fund, an SMSF can be very expensive but it can also be one of the cheapest options available.

Investment Choice

Providing that they also are in line with the regulations (specifically the sole purpose test) SMSFs can choose from a wide range of investment options including direct investments or pooled unit trusts. For example they could hold cash in the bank, artwork, a direct property, some direct Australian shares and maybe units in a international share managed fund. This is generally in contrast to managed funds which are restricted to listed or structured investments generally available through a unit trust. Most obviously they are unable to invest in direct assets such as art or property.

Managing your own investments

The option of having complete control over their investments is a very appealing one, particularly considering the recent performance of traditional super funds. Whatever the investment strategy, some choose to manage their own investments due to a well founded belief in their own ability, they may enjoy making their own investment decisions or they may wish to learn and improve their skills over time. For most people it is probably a mix of all three.

Either way, it's very important to be aware that despite the apparent poor efforts of investment managers over the past 18 months, their job isn't easy. There are simple way to replicate market returns (via an index fund for example) but that still leaves the decision of which markets to be exposed to (shares, fixed interest, cash, property, Australia, overseas etc). It is easy to say that an investment would have been better in cash over the past 18 months but the same generally can't be said about most periods of 5 years plus. There are a lot of new SMSFs that have been established and moved directly into cash in response to recent markets returns but many of these could be still sitting in cash 5 years from now, potentially missing out on a rebound in investment markets.

There are certainly ways that individuals can help to improve their investment returns, they may skills or knowledge for example. Regardless of what anyone tells you, there were also a lot of savvy investors and market commentators that thought that share markets were headed for a big fall about two years ago. Of course that sort of insight doesn't need an SMSF to be beneficial; it can be used to select appropriate investment options in the managed fund space. Many investors would be shocked to know for example that the vast majority of balanced funds would not have been able to reduce the exposure to growth assets 2 years ago if they knew what was coming.

There are definitely some very good reasons for investing via an SMSF. At the same time they do require extra work, responsibility and potentially additional cost. It's important to understand why it is that you might want to initiate an SMSF, can you achieve the same result by better utilising the managed fund environment? If not then an SMSF may be the right way for you to go.

Resource: Daniel Hicks is Senior Financial Adviser with superannuation advisers Superworks Financial.

Contact Details:

Daniel Hicks
Senior Financial Adviser
Superworks Financial Pty Ltd

Level 1, 89 High Street, Kew 3101

VIC, Australia
www.superworks.com.au