There is always a lot of discussion about how much money you need to start a Self Managed Super Fund (SMSF). The decision all too often seems to centre around the one-dimensional aspect of fees. The answer, though, is not so straight forward. Starting an SMSF to save fees is akin to starting a restaurant because you don’t like the cost of takeaway. Although fees should never be overlooked, there is a lot more to running a Self-Managed Super Fund than saving fees.
There is more to running an SMSF than the fees
Legally and practically, there is no minimum amount you need to start an SMSF. In theory you could start one with as little as one dollar. There is also no magical trigger amount you need that defines when an SMSF is suddenly the optimal super fund to have. It ultimately depends on what you wish to invest in. There are simply some investments that are not available in public offer funds. If you wish to invest in these types of assets in your super fund (e.g. residential property, gold bullion, diamonds etc.) you will need to setup and run your own SMSF.
If you have a SMSF and you are investing only in managed funds, direct shares and/or term deposits, you may be doubling up in fees and costs. There are many public offer funds that will offer such investments with low administration fees. In other words, if you only need what a public offer fund can provide, fees start to become a determinant. But there is no point saving on fees if you are not either an experienced investor that understands asset allocation, has a disciplined investment strategy and are equipped to manage your portfolio through all market conditions, or you have an advisor that is all of those things.
Having an SMSF and not diversifying your investments is dangerous. Being overweight in one sector can cost you dearly if that sector underperforms. At various times this has happened with shares, bonds, property and even with term deposits. Protecting your wealth for retirement requires an understanding of portfolio construction, asset allocation and investment selection.
I have often heard people wanting to start an SMSF because they cynically exclaim that they “can lose money just as efficiently as a public offer fund!”. But in fact they are wrong. They can potentially do much worse than a public offer fund! Why? The public offer funds default investments have mandated diversification which have cushioned the market falls of 2008 and have rebounded in value since. Many SMSFs crystallised the equity market losses of 2008 and moved to cash, then missed the equity market upswing of 2012.
The key to successful investing is discipline and appropriate allocation of risk assets to match your risk appetite. If you don’t understand investing (and risk adjusted returns) or do not seek advisors to assist you, you probably should not have an SMSF, no matter how much money you have in super. With an SMSF you are ultimately personally responsible for its performance. If there is a failure along the way, there are no external trustees to turn to for recompense (you are the trustee!).
Whilst ASIC regulate the investment markets, they are not in the business of defining for investors what is a good or bad investment. All ASIC can do is tell you whether an investment scheme is legal. Managing your own money is not for the faint-hearted. Avoid those who tell you that self-managed super is simple, straight forward or easy. On average we talk more people out of starting SMSFs than we do putting them into it, because often there is a simpler alternative, that meets all of the investor’s objectives. Self-managed super is a great tool in the right hands for the right reasons. There is plenty of evidence on our website which explains the situations in which it can be used to great effect. Make sure you understand what is involved and seek advice before setting one up.
David Baruffi is a financial advisor at Blueprint Wealth
Blueprint Planning Pty Ltd (ABN 78 097 264 554) trading as Blueprint Wealth and David Baruffi are Authorised Representatives of AMP Financial Planning Pty Limited
Disclaimer: This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.