Many SMSF members are paying exorbitantly high fees and they don’t even know it. So if you run your own SMSF, taking 2 minutes to read this blog could save you a lot of money.
I was reviewing a new client’s SMSF recently that held approximately $700,000 of investment. It was managed by a high profile SMSF firm that also provided investment advice. Unfortunately, most of the recommended managed fund investments held by the SMSF were ones that were marketed and operated by the SMSF firm – so my clients certainly weren’t receiving independent advice. In summary, the clients were paying very high fees for biased advice (i.e. to be sold the firm’s own products).
They were paying approximately $7,000 p.a. to the SMSF firm for investment advice and compliance services (i.e. admin, financial statements, audit, etc.) which is quite high for a fund of this size and complexity. In fact, ASIC research suggests the total cost should be between $2,000 and $7,000 p.a. (with the mid-range being $4,000 p.a.).
In addition to this, each managed fund charged an investment management fee which added up to over $9,300 p.a. or 1.31% p.a. ASIC research suggests investment management fees should range from 0.35% and 1.20% p.a. (with the mid-range being 0.80% p.a.). The benefit of investing in low-cost index funds (our approach) is that the average investment management fees tend to be close to 0.25% p.a.
In total, this client’s SMSF fees were over $16,000 p.a. or 2.3% p.a.
Reduce fees by 60% and save $10,000 p.a.
By comparison, if ProSolution looked after this Fund and invested in low-cost index funds (which, according to an immense amount of research, has a higher probability of achieving superior longer term returns), provided independent financial advice and compliance services, the total cost of these service would be under $6,000 p.a.
That results in a saving for these clients of over $10,000 p.a. for an arguably superior service (because we are independent – we don’t run any managed investments or take investment commissions or any financial benefits). The compounding impact of those savings over a 15 year period amount to over $250,000 because more money is left in the Fund each year to reinvest – which amounts to 20% more super in 15 years’ time!
Broad category of fees
There are three broad categories of fees that a SMSF might pay:
- Admin and compliance fees – these usually include administrative fees, fees for preparation of financial statements and tax returns, audit of the fund, ASIC fees and so on.
- Advice fees – this could include a commission or trailing income. My advice is always agree a fixed fee, not a percentage.
- Investment fees – these are often referred to as MERs, ICRs, management fees, expensive recovery fees, performance fees, contributions fee, etc. – there are literally hundreds of names and different types of fees. Refer to the managed fund’s Product Disclosure Statement to ascertain these.
I’m not suggesting that anyone with a SMSF should be singularly focused on fees. It is very true that; fees are what you pay, value is what you receive. So, you must weigh up both value and fees.
With that I mind I have three cautions for you
- There are some very slick businesses operating in the SMSF space that are making a lot of money. You have to be careful and make sure you fully understand how much you are paying, how it compares to the market and the value you are receiving. The lowest cost provider isn’t always the best, but neither is the highest cost one.
- The quantum of fees you are paying is not always obvious. There many different names for the same fees, some fees are subtracted from investment returns so you don’t see them and you have to know what to look for and the questions to ask. If in doubt, ask your provider to add them up for you or get independent advice/second opinion.
- Please, if you are going to pay a fee for financial advice, make sure the advisor is independent and does not have conflicts of interest (i.e. aligned to or owned by a product provider or has a financial benefit in selling certain investments to you).
- A SMSF might not be the right solution for you. There are other options that still provide you with essentially the same control and flexibility that are significantly lower-cost and simpler to manage. An accountant however is unlikely to know about these options because they are not financial advisors.
I hope this short blog serves as a warning to anyone with a SMSF to make sure they know what they are paying. If you need any help, you are welcome to reach out to us.
