Should there be a minimum balance requirement to establish an SMSF?
Matthew Jones

No. An SMSF can be a very effective vehicle for people in certain situations. There can be good, valid reasons for establishing a fund for certain individuals – regardless of size. The question of whether or not to establish a fund comes down to a lot more than just what it will cost to run.

Administration costs are currently declining rapidly. It cost my clients less than $1,000 to have their funds administered and audited last year. But of greater importance is considering whether or not a trustee is knowledgeable enough to understand the implications of creating an SMSF.

Matthew Kidd

There shouldn’t be a set minimum. A majority of our clients have a property in super which they have geared into. If a client has about $150,000 at settlement – jointly with a partner or as an individual – then we will recommend an SMSF if the investment strategy includes a property, due to the leverage that is available.

If the strategy doesn’t involve gearing into a property, then the old rule of thumb of $200,000 is about right. It all comes down to what the annual costs will be to keep the fund running versus what they are currently paying to be in a retail fund.

But you could have someone with $500,000 in there and an SMSF might not be suitable for them, so that’s the initial determining factor. Don’t jump to the numbers straight away.

If you have determined an SMSF is suitable for a client, then it comes down to the investment strategy. If they’re only really interested in having direct equities and that’s it, well then you’ve got to question whether an SMSF is applicable.

But it will become applicable just by sheer numbers. If someone’s got $300,000 or $400,000, at some stage they’re going to end up paying more in fees in a retail fund than they will in their own fund.

David Busoli

The argument against small-balance SMSFs has always centred on diversification and cost. Though diversification is more difficult to achieve, a lack of diversification is not unacceptable if it is in accordance with the fund’s investment strategy.

Cost is becoming less of a consideration with increasing competition, but I would find it difficult to justify an overall cost of more than 1.5 per cent of the fund balance.

If [you’ve] got a fund costing around $3,000, that is 1.5 per cent of $200,000. And that really comes down to our understanding that $200,000 is pretty much the [minimum] number for an SMSF.

$200,000 to $220,000 is often a number that is mentioned by people from the Australian Taxation Office (ATO) as being reasonable, and I think that’s fair enough.

But that’s not to say [the account balance] could [not] be less than that – especially with costs going down. It’s possible to get a fund done for half of that [ie, 1.5 per cent] too.

It is possible that another reason [for setting up an SMSF] may prevail, however – such as a particularly attractive investment opportunity either unavailable in the retail environment or without gearing. Another could be estate planning in conjunction with life insurance.

Richard Livingston

No. There have been plenty of people able to get good results from a relatively small SMSF with a simple portfolio. With the rise of online administration providers this will probably get easier.

There are some issues with investors with small balances setting up SMSFs and leveraging into, for instance, residential property. This leaves them with a high-risk SMSF with no diversification. But if this is the concern, a prohibition on borrowing in SMSFs would be a better solution.

Having minimum investment sizes for many of the good managed funds is problematic enough. The last thing Australian investors need is more minimums.

Are too many unsophisticated investors entering the sector?
Matthew Jones

We find that a lot of people have created an SMSF because they wanted to do it themselves, but they don’t understand the compliance requirements that trustees are faced with.

Secondly, they all think they know what good investments are – but they soon realise it’s not as easy as going out and buying CBA.

The problem with the industry I see is that people think they can do it on their own, but they’re not qualified.

What I’m afraid is that the regulator – that is, the ATO – is going to turn around and see this as a growing problem and therefore impose more regulations to try and control it.

But for the people who do have the compliance and investment knowledge – and are getting great benefits out of SMSFs – that will reduce the benefit for them.

Matthew Kidd

What’s an unsophisticated investor? If that’s saying there’s people jumping into SMSFs who really shouldn’t be – in other words they don’t understand the responsibilities of being a trustee and they don’t understand the SIS Act – then the answer’s probably ‘yes’.

And that’s because you have an industry that’s going to focus on SMSFs as a way to grow their businesses.

You probably have unscrupulous advisers involved in large organisations that have an objective to get as much money into SMSFs as possible. Suddenly, the minimum account balances come down as well.

If ‘unsophisticated’ means ‘lacking financial literacy’, then the answer’s ‘yes’ again. But a little bit of information can be dangerous.

We’ve now entered an age – especially post-global financial crisis (GFC) – when people look at their super balances and say, ‘hang on – I’m being smashed here’ and then they do a little bit of research and they think ‘self-managed super is for me.’

The GFC has probably pushed a lot of people who normally wouldn’t consider SMSFs into SMSFs. And some of those people possibly should not be in there.

David Busoli

I think it’s fair to say that with half a million funds out there there’s a lot of people who have less than optimal knowledge of the SIS Act or knowledge of investment.

I don’t really think that the sector as such has suffered because of that, because I think that’s already largely the case.
There’s already access to a lot of professional advice in terms of SIS compliance and investments that people can – and do – avail themselves of.

A lot of people in funds currently would be regarded as unsophisticated under that definition. But even so, the ATO has pointed out that the SMSF sector seems to be running quite well.

Richard Livingston

I’m not sure I agree that unsophisticated investors setting up SMSFs is necessarily a bad thing.

So long as you have the time, commitment to educate yourself, trustworthy advice and a balance which isn’t going to be eaten away by costs, then I don’t think there’s anything wrong with an ‘unsophisticated’ person setting up an SMSF.

I also don’t see that an unsophisticated person staying in industry/retail super and ending up with poor performance and/or high costs is a superior outcome to setting up an SMSF and having a go yourself.

Having said that, there is probably a concern that too many people – whether unsophisticated or sophisticated – have rushed into SMSFs without thinking it through properly.

Would an influx of unsophisticated investors hurt the SMSF industry?
Matthew Jones

I do think there are too many unsophisticated investors, and if this trend continues, the regulator will try and do something about it.

And it’s just unknown – what will they do? They’ll just change the rules of the game.

Part of me thinks that every superannuation fund should have an adviser working with it in some capacity.

We have SMSFs and they’re making their own decisions – we’re not advising them. But we get to see the investment decisions trustees make.

Part of me gets scared when I see what clients bring to me and their experience and what they’ve done with their fund.

They’re telling me that they have to achieve returns of 40 per cent a year to retire and stuff like that – it’s just crazy. Then I sit down with them and explain to them that it’s not going to happen.

I’d like to see a minimum level of education for trustees. And the vast majority of people should be using an adviser in some capacity – either for compliance or investments, and preferably both.

Most of the time it’s the accountants who set up these funds – but accountants aren’t investment specialists. Who’s giving the trustee advice on investments? If it’s been set up by a financial adviser then generally there’s a better knowledge of investments going into it.

Matthew Kidd

If you’ve got every Tom, Dick and Harry on a corner of the street saying they’re an SMSF specialist and they’re advising clients who shouldn’t be in SMSFs to go into SMSFs, then we have a major problem.

You’ve also got large organisations such as AMP buying other companies, and suddenly they are SMSF specialists and they’re advertising on buses and TV.

That’s a bit scary, because they’ve now invested heavily into the sector, and now every AMP adviser is going to be either an SMSF specialist or referring to one who’s in house.

In general, when large companies start investing in a sector they need a return on that investment – and quality can go out the window.

When it comes to quality versus return on investments, return on investment wins every time. There’s a chance for corners to be cut – or the wrong people to be giving advice.

SMSFs are now in a bit of a wave … and it’s got to be managed. And that’s where our powers that be need to step in to make sure it’s managed properly.

David Busoli

I don’t think AMP’s advertising is driving more people than [is appropriate] into an SMSF. The advertising is alongside a whole stack of information that educates people.

It’s driving a whole heap of people towards getting education, and as a consequence they’re making a considered decision as to whether or not they should be in [an SMSF].

It’s also driving the people who are unsuitable to the position that they shouldn’t have one.

At our seminars, I tell people straight away: Some of you are going to leave here tonight thinking this is the best thing since sliced bread, and others are going to say, ‘it’s not for me’. And either way that’s a good result.

Richard Livingston

I don’t really get this concern at all. Nothing that an ‘unsophisticated’ person does affects the performance of anyone else’s SMSF.

I think the main concern is that the government implements a bunch of poorly thought out ‘reforms’ in response to this idea that too many unsophisticated investors is a problem.

If they did, they’d probably end up negatively impacting the new investor who is diligently going about investing his or her $100,000 super balance with the aid of an adviser or online research house, whilst leaving the supposedly ‘sophisticated’ person to invest their SMSF recklessly.

We need to be focusing on what people are doing, not how much they’ve got to invest or whether a bureaucrat thinks they’re unsophisticated.