Is a self-managed super fund right for all clients?

By Alan Hegerty, CEO, AMG Super

The ever-increasing focus on the client’s best interest raises an important question: Is a self-managed super fund (SMSF) the right option for the client?

According to the Australian Tax Office (ATO), nearly 600,000 SMSFs in Australia held $822 billion in assets as at June 2021. Which accounts for approximately 25% of the $3.3 trillion superannuation industry.

SMSFs are clearly popular because they offer greater control and investment flexibility than the traditional retail super platform or wrap offerings. However, this flexibility comes with additional responsibilities and challenges, including:

  • maintaining trustee obligation
  • complying with regulations
  • increasing the time spent managing the fund, and
  • potential increase in costs.

SMSF trustee obligations

As an SMSF trustee, the client is ultimately responsible for running the SMSF and they must understand their duties, responsibilities, and obligations.  If they fail to perform their responsibilities under the law, they may incur penalties or prosecution.

Some of the rules an SMSF trustee needs to follow include:

  • Act honestly in all matters concerning the fund.
  • Exercise skill and diligence in managing the fund.
  • Act in the best interest of all members at all times.
  • Keep the money and assets of the fund separate from other money and assets.
  • Retain control over the fund.
  • Develop and implement an investment strategy.
  • Consider if the fund should hold insurance coverage for its members.
  • Do not access or allow others to access funds early.

Do the benefits outweigh the costs?

The establishment of an SMSF can be complicated and time-consuming. It is critical to establish the SMSF correctly to ensure the client remains eligible for the tax concessions under super legislation.  The complexity is evident when reviewing the 15 steps and documents in the ATO SMSF establishment checklist.

After establishing the SMSF, the trustee is responsible for the ongoing compliance and administrative tasks, such as:

  • annual tax return
  • end-of-year financial statements
  • annual fund audit
  • lodgement of transfer balance account and other reports
  • conducting an annual review of the investment strategy.

Given all the obligations, advisers need to consider whether the benefits outweigh the time, costs, and risks (including financial penalties and prosecution) involved in establishing and managing an SMSF.

The time burden involving the establishment of the SMSF and the end of financial year compliance becomes a challenge for many clients who are time-poor and looking to simplify their financial affairs.

Is there a viable alternative?

Traditionally, advisers would recommend an SMSF when a client has a super balance of $300k+ or wants the flexibility of an individual share trading account and Holder Identification Number (HIN), which was not traditionally available in a custodial retail super platform.

However, technology is increasing flexibility for superannuation platforms.  At AMG Super, we have built a non-custodial retail super platform where each member has an individual share trading account and HIN, which is CHESS sponsored by their broker.

Coupled with an individual Cash Management Account (CMA) for each client, the AMG Super platform allows the adviser to manage their clients’ retail super portfolio live on the market through the same share trading account they would use for an SMSF.

In addition to the individual HIN and CMA for each client, AMG Super also offers a range of individually held term deposits and instant access to 300+ unlisted managed funds.

An adviser should consider whether an SMSF is the best options for the client, given there are platform super products like AMG on the market where:

  • there are no trustee compliance obligations
  • they offer a similar level of control and investment flexibility
  • they are far less time consuming for the client.

Our research shows that many advisers no longer use ‘high account balance’ as the primary reason for creating an SMSF.  Instead, advisers are adopting a decision-making framework that considers question such as:

  1. Does the client show an understanding of their trustee obligations and the ability to maintain them?
  2. Does the client want to access alternative investments not available on a platform product, such as AMG Super?

Do the benefits of an SMSF outweigh the challenges to close it?

Another consideration advisers face more frequently is what to do when the trustee becomes unwilling/unable to run the fund due to death, or the parties want to go their separate ways?

The ATO indicated the median age for all SMSF members was 60 as at the end of June 2021. As the super industry matures and our population ages, we will continue seeing an increased number of SMSFs that will face this challenge.

This article is general information and does not consider the circumstances of any investor or constitute advice. No fund or product mentioned in this article constitutes an offer or inducement to enter into any investment activity. Material published in SIAA Newsroom is copyright and may not be reproduced without permission. Any requests for reproduction will be referred to the contributor for permission.