Why a self-managed super fund might not be a good idea - unless you have $1 million

Photo by Cameron Spencer/Getty Images
  • A self-managed super fund performs better the larger it becomes.
  • This is mainly due to the high costs of running a fund, inclusion administration expenses.
  • The difference between returns from the smallest SMSFs, with less than $50,000, and the largest, with over $2 million, is more than 10 percentage points a year.

Starting a self-managed super fund (SMSF) with less than $1 million might be a shortcut to returns even lower than a standard off-the-shelf fund, according to analysis by the Productivity Commission.

SMSFs, essentially a fund set up in your own name with direct control over investments, have been growing in popularity. In the last decade, SMSF funds have grown from 315,000 to about 594,000 with 1.1 million accounts controlling a combined $699 billion.

However, the Productivity Commission’s investigation into Australia’s superannuation system shows that smaller SMFSs, those with less than $1 million, perform significantly worse than institutional funds.

This is mainly due to the higher average costs, compared to assets, smaller funds incur due because of their size.

The study by the Productivity Commission identified high fees, low returns and expensive insurance as key problems for superannuation, reducing assets held by members by billions of dollars every year.

The commission found the difference between returns from the smallest SMSFs, with less than $50,000, and the largest, with over $2 million, are more than 10 percentage points a year.

High costs, relative to the size of assets, are the main cause of the poor net returns by small SMSFs. This chart shows the relationship between fund size and returns:

Source: Productivity Commission

“Fees matter because they detract from net returns,” the commission noted.

“The primary issue for members is whether relatively higher fees generate a higher net return or provide other services they value.”

For the average SMSF member, the annual cost of running the fund rose to around $7,300 in 2016 from $5,100 in 2013.

“While costs decline as SMSFs get larger, the differential persists for SMSFs with balances less than $1 million (on average).”

“This would imply that the majority of SMSF members are likely incurring costs higher than those incurred (in fees) for members of an average APRA-regulated fund — though their net returns appear to be broadly similar.”

Administration and operating costs are significantly higher that investment costs.

Here’s how costs rise as a percentage of assets for smaller funds:

Source: Productivity Commission

The commission detected a drop in the number of small SMSFs being established, perhaps reflecting greater knowledge of the high costs.

“This may have countered the benefits of operating an SMSF, such as control over investment decisions,” it found.

“However, it could also be driven by an improved awareness of underlying costs, and/or the quality of financial advice.”

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