Self-managed super: Yes or no?

Of Australia’s $2 trillion invested in superannuation, it’s estimated somewhere between a quarter and a third of that money is in self-managed superannuation funds.

Ross Greenwood speaks to Stephen Anthony, Chief Economist at Industry Super, and SMSF Association CEO John Maroney, who debate the pros and cons of having a SMSF

Introduction: Self-managed super: Yes or no?

Ross Greenwood: Great to have your company here on Money News right around Australia. Well of Australia’s two trillion dollars, 2,000 billion dollars that we have in superannuation, it’s sometimes estimated that somewhere between a quarter and a third of that money these days is in self-managed superannuation funds. There’s no doubt that accountants and others have been highly successful in convincing many people that a self-managed superannuation fund is the way to go. The question is, is it the best way to go for your superannuation?

Now, for years, it’s always been presumed that you need to have a reasonable amount of money in a superannuation fund to make certain that the administration of that fund basically is low enough in percentage terms to compete with the other ways you could have gone. It could have been an industry fund or it could have been, say, a bank-run scheme or a company-run scheme, whatever you like. The fact of the matter is, what was that amount of money you needed in there?

Some suggest it might have been $200,000. There’s another aspect of this as well and that is, how good are you at running that self-managed superannuation fund? Do you actually have the diligence to spend the time to look at the investments, to monitor it, to make certain you’re getting performance out of it? Do you just get a bit lazy and not do the active management you probably should to try to get the returns?

Some analysis that’s now been done by Industry Super, now bear in mind they have a vested interest. They’d like people to close their self-managed super funds and put the money into industry funds. What it actually shows is that unless you have more than $2 million in your super fund it’s highly likely that you are under-performing. That you would have been better off doing other things with your fund rather than try to do it yourself.

Indeed, this not only comes down to cost, but it also comes down to the diligent of the people running that self-managed super fund. We’re going to have both sides of this argument right now. First up, of course, we’re going to go to the self-managed super fund. Stephen Anthony’s the Chief Economist at Industry Super. Then we’ll go to John Maroney, who is the Chief Executive of the Self-Managed Superannuation Funds Association, who’ll be with us very shortly. Let’s start though with Stephen Anthony in the studio with me. Many thanks for your time Stephen.

Interview with Stephen Anthony, Chief Economist, Industry Funds and John Maroney, CEO SMSF Association

Stephen Anthony: Good having me, Ross.

Ross Greenwood: When you come down to the bottom line as to who does better or less well-off as a result of this, why did you pick that $2 million number? Why is that the key number in your mind?

Stephen Anthony: It’s the key number because that’s the point at which self-managed super funds become a really valuable tool for potential retirees. Above that, that form is competitive with and can outperform an APRA regulated super fund, so a large super fund.

Ross Greenwood: You’re not saying just industry funds? You’re saying the ones run by banks and others as well? You’re including all of those in it and not just your own industry funds?

Stephen Anthony: That’s right. Listen, we are being completely objective here. We just want to point out that this vehicle is very good for high wealth individuals, but it’s very poor for everybody else. Given that half the $720 billion in small funds is in the hands of people who are earning sub-scale returns, it would be a major microeconomic reform for this country to see more of that shifted into APRA regulated funds.

Ross Greenwood: In other words, you think a lot of people who have self-managed superannuation funds should not have those funds, that they would be better off if they put that money back into APRA regulated funds.

Stephen Anthony: Absolutely. The evidence on that is clear-cut. The returns below two million in fund size, are 2.5% at least below the APRA regulated average. That being the case, it would be much better for those funds to be outside of self-managed super. Much better for the country, and much better for the potential retirees that they can grow their wealth for their retirement.

Ross Greenwood: You know that there’s a very big wedge. There’s been a concerted effort for people to create self-managed superannuation funds. Accountants have been a part of this, lawyers have been a part of this. There’s been an industry created around self-managed super funds. Do you believe this comes down to the cost of running that self-managed super fund, or is it actually the skill of the individual running it themselves?

Stephen Anthony: It’s the advice that those individuals receive. There’s so many spruikers out there, and are anecdotally pushing people into all sorts of different property arrangements and into debt. This can be mums and dads taking money out of the APRA regulated sector and putting it into something that is completely undiversified.

Ross Greenwood: Hang on. You’re basically saying that a lot of people who might have been convinced to take their superannuation to have borrowed and therefore gone and bought a property or whatever it might be, have in some cases at least, done themselves in the eye. Have meant that their superannuation funds have been diminished or gone backwards as a result?

Stephen Anthony: Absolutely, Ross, or just been uncompetitive. That lack of diversification that many of these funds have, and that tendency to not focus on retirement but to focus on other objectives, it might be buying a business asset or some investment property. It’s that lack of clarity, that lack of purpose that is missing here.

Ross Greenwood: You’re actually basing this on tax office information. The statistical overview that was for the 2015 and 2016 year. What you’re saying is if people have balances below $200,000 in their self-managed super fund, that the average returns drop into the negative. That’s pretty much what you’re saying there, isn’t it?

Stephen Anthony: Absolutely. That’s clear-cut. Beyond that, slightly bigger, the returns are just what we’d call mediocre. Percentage points lower than an APRA regulated fund.

Ross Greenwood: Therefore, the question is who is running the fund, what skills and diligence do they have, and whether the people are actually monitoring this? Whether they actually know that their self-managed super fund might not be performing up to par.

Stephen Anthony: We would suggest that perhaps this whole sector be brought under the guidance of APRA so that it can be run on a comparable basis to the large funds. There has to be some higher level oversight here to fix this up. The sub-scale element of this is $360 billion. This is not insignificant. Getting this right is a major microeconomic reform for this country.

Ross Greenwood: There you go. Tell you what, good to have you on the program. There’s Stephen Anthony, Chief Economist at Industry Super, that’s done the number crunching here to show that he believes that a lot of people with self-managed super funds are doing themselves in the eye. Let’s now go to the Chief Executive of the Association that looks after self-managed superannuation funds. John Maroney’s on the line now. Many thanks for your time, John.

John Maroney: My pleasure, Ross. Thank you.

Ross Greenwood: You’ve just heard from Stephen Anthony, saying a lot of people who have self-managed superannuation funds probably should not have them. Do you believe he’s right?

John Maroney: No, I don’t believe that. There’s quite a bit of misrepresentation of the statistics that have been put into their report and I’m happy to comment on those. Perhaps–

Ross Greenwood: Take me through this, the balances. This comes from the tax office itself, managed super funds, a statistical overview 2015-2016, shows that people with balances below 200,000, the average returns drop into the negative. Would you believe that that would be correct for people with super funds with less than $200,000 in them?

John Maroney: No, I don’t believe that’s the correct analysis because what they’re doing is comparing apples and oranges. In the ATO figures from the tax office, there’s a mixture of set up cost, advice cost, insurance cost, which are factored into those figures which aren’t factored into the APRA figures. It’s not a consistent comparison. You need to start with, are people satisfied with what they’re getting? The number of self-managed super funds has doubled over the past 10 years from 300,000 to 600,000.

They are not for everybody, but I firmly believe that people that have gone into them have chosen to be in there. The latest satisfaction rating from Roy Morgan said over 70% of people in self-managed super funds are satisfied with their fund, the expenses and the performance compared to all other funds are less than 60%. To have that high satisfaction rate, I think actually shows that people have chosen this and the vast majority of them are quite happy to be there.

Ross Greenwood: They may be happy to be there, the question is whether they know that their performance is less than what they otherwise might have achieved. I’ll give you one good for example. You mentioned some of the fees and costs, well of course in the APRA regulated numbers that were put out, insurance costs were actually added in there as well. There’s other aspects of this also, and that is that clearly, it’s a situation where a person must come out with the best outcome financially. That’s what they’re seeking here. The question is whether people have got the right skills to manage their own self-managed superannuation fund. Not necessarily whether they’re satisfied, but whether they have the skills to provide the right financial returns for themselves, or indeed as we’ve just heard from Stephen Anthony. You and I both know this is true John, that there are spruikers out there basically selling property related schemes for self-managed superannuation funds that to your eye and mine are probably inappropriate for them.

John Maroney: We’re very concerned about the property spruikers. In fact, I issued a press release last week saying that we urge ASIC to continue the crackdown on any unlicensed and unethical marketing behavior from unscrupulous property spruikers. That we’re fully behind if there’s any misconduct happening in the area of a property side. They should be cleaned up. The report refers to the amounts of property activity from self-managed super funds. The total amount of residential property where there’s loans involved is less than .2% percent of the housing market. There’s no chance of that really having a significant impact of the overall property market–

Ross Greenwood: It’s not the property market per se, as much John, is how much of the self-managed superannuation funds have got money in that residential property market. It’s not necessarily that’s. It’s whether they bought a property investment, in the residential property market inside their own super firm. Because, let’s say, for example, it might be only .02% or .2% of the residential property market. If it happens to be 50% or 60% of my self-managed super fund that’s where the risk is, surely.

JohnMaroney: One of our key roles is educating the trustees of self-managed super funds and their advisors. We would strongly advocate increased diversification. We support that message. One thing that needs to be noted, is a lot of funds that would be set up under 200,000, which has been a benchmark provided by the regulators in previous years. They rapidly moved to well over 200,000–

Ross Greenwood: Do you think that’s the right number, John? $200,000 is being the line in the sand as to whether a person should consider a self-managed superannuation fund or not?

John Maroney: We don’t advocate a particular number because it depends on the skills and diligence of the person. How much they want to do them themselves. The cost of administration or whether other activities have been coming down quite significantly. Since that was a figure that was in an ASIC report and I can refer you to report if you like. That wasn’t a figure from us. That was a figure that was produced for and used by ASIC in terms of saying, “This is an indicator.” If you look at the text of the statistics they say, “Of the funds that started in 2012, half them were under that 200,000 mark.”

Of those same funds, only 20% remained under that by 2016. A lot of people start their funds. It might be with one or two properties and shares, et cetera. The experience over the last four or five years has been that they rapidly grow that, because they are more engaged. The level of voluntary contributions is much higher. There’s a strong incentive for people to build the retirements savings. We believe all Australians have a right to a secure retirement, and to give them the choice of fund. Which, we know that some other players don’t like having choice in competition. We are strong supporters of a choice in competition.

Ross Greenwood: I’ll tell you what, John Maroney, the chief executive of the self-managed superannuation fund association. You have got both sides of the argument. $200,000 always has been, if you like, the benchmark for when people should consider it. Then it comes down to your skills and your abilities. Whether ultimately you have the time and the diligence to make that self-managed superannuation fund work. John Maroney, and also to Stephen Anthony, in the studio with me. We appreciate both of your times tonight.


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