The regulation of Self-Managed Superannuation Funds (SMSFs) was transferred to the ATO in 1999 when there were less than 200,000 of these funds.  They have developed to become a significant proportion of the superannuation market and today there are more than 600,000 funds collectively holding about 28% of all superannuation assets.

Throughout this development they have attracted supporters, many of whom are suppliers to the market, and detractors, many of whom have seen assets flowing away from them to the SMSF sector. The relative costs of operating SMSFs versus the fees charged on balances by APRA regulated funds have been a major point of contention in this debate.  SMSFs have mainly fixed costs and APRA regulated funds have mainly variable costs, so this debate has evolved to be a debate about what size SMSFs should be before they can be considered to be in members’ best interests.

Rice Warner was commissioned by the Australian Securities and Investments Commission (ASIC) in 2013 to provide data, a framework and recommendations for resolving this debate.¹ Our research showed that there is no simple answer to the question of the appropriate size for SMSFs because there is a very wide range of costs incurred by SMSF Trustees depending on how much work they do themselves, how much they outsource to providers, and what it is that they outsource. Our report, therefore, provided ranges of account sizes where SMSFs could be competitive (i.e. of similar cost) with APRA regulated funds depending on the level of services outsourced to providers.

Our core finding was that SMSFs with balances from $250,000 could be competitive provided the Trustees undertook the majority of service functions themselves. Similarly, SMSFs with balances above $500,000 were competitive at all service levels and were the cheapest alternative if Trustees undertook the majority of service functions themselves.

In the years after our report, the Australian Taxation Office (ATO) produced more detailed statistics for SMSFs.   Using ATO data and ignoring our report for ASIC,  the Productivity Commission (PC), in its review of the superannuation market in 2018, determined that SMSFs with balances below $500,000 were not viable.² In fact, the PC initially used a figure of $1m but reduced it following industry criticism and a more detailed review of ATO data.

Using these inputs, ASIC released advice in October 2019³ that presented an average annual cost of running an SMSF of $13,900 and challenging the viability of SMSFs with less than $500,000 of assets.

This was unfortunate because the $13,900 average cost was misleading. It was based on tax deductions which included the cost of insurance which is not a cost of running an SMSF. It also averaged the expensive investment costs of complex assets of very large funds across small funds that did not have these types of assets or costs. Fortunately, the ATO statistics for the 2017-18 year presented a more granular breakdown of costs and these exposed the error in the ASIC assessment.⁴ ASIC has since withdrawn its misleading factsheet.

Nonetheless, it was apparent that the analysis and recommendations of our 2013 report needed updating and we were commissioned to do this by the SMSF Association which was sponsored by SuperConcepts.

Since 2013, fees and costs have changed across the superannuation market. In general, the costs of services to SMSFs have fallen whereas in the APRA regulated market, the fees of Industry Funds have risen while the fees of Retail Funds have fallen to align with those of Industry Funds. The result is that SMSFs are more competitive than they were in 2013, but still have a very wide range of potential costs so their suitability needs to be considered carefully.

Our revised recommendations are:

• SMSFs with less than $100,000 of assets are not competitive with APRA regulated funds. SMSFs of this size would only be appropriate if they were expected to grow fairly quickly.
• SMSFs with between $100,000 and $200,000 of assets can be competitive with APRA regulated funds provided the Trustees use the cheapest service providers and/or undertake a number of administration services themselves. By competitive, we do not imply that SMSFs are the cheapest but only that their costs are within the same range as the fees of APRA regulated funds.
• SMSFs with more than $200,000 of assets can be competitive with APRA regulated funds even where the Trustees outsource all administration functions, provided they use one of the cheaper suppliers.
• SMSFs with asset values of $500,000 and above are generally the cheapest alternative.

It is also clear from our analysis that SMSFs that do not invest in direct property or use complex investment structures like gearing are cheaper to administer, probably due to simpler accounting and auditing. Their investment costs are also lower. These differences are important.

The range of service offerings used by SMSFs and the wide range of their costs means that a simplistic focus on the size of their asset holdings is an inadequate and insufficient approach to assessing whether a particular Trustee has received appropriate advice. A more nuanced approach is definitely called for when seeking to determine whether an SMSF is in the best interests of members:

• The costs of investing in complex assets should not be held over those who do not invest in these assets.
• An SMSF with a modest balance invested in listed instruments by the Trustee directly is not in the same position as an SMSF with the same balance invested via an expensive portfolio management service.
• Even if starting small, will the SMSF grow within a reasonable time frame. If the intention is to move to an SMSF, for those able to make large contributions, there are tax advantages to moving with a smaller balance rather than waiting for a larger balance in a few years.
• An SMSF does not have to be the cheapest option to be competitive.
• The presence of insurance, its coverage and costs, is dependent on the personal circumstances of members irrespective of the size of the asset pool.

We trust that ASIC will take account of both the latest ATO statistics and our update of our 2013 report to them when reviewing its guidance regarding SMSFs.

Our full report can be found below.

¹ https://download.asic.gov.au/media/1336058/cp216-RiceWarner-cost-of-operating-smsfs.pdf

² https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment.pdf

³ https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-277mr-asic-urges-consumers-to-question-whether-smsfs-are-right-for-them/

⁴ https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/super-statistics/smsf/self-managed-super-funds–a-statistical-overview-2017-18/