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A STAKE IN THE GROUND
As the SMSF sector continues to grow, accurate and unbiased data will become more important, making Rice Warner’s 2020 cost analysis central to any discussion about the place and role of SMSFs. Jason Spits takes a look at the impact the research has had already and how it has reset the cost debate.
In a year punctuated by COVID-19 it can be easy to overlook the impact a report into the running costs of SMSFs could have on the superannuation sector, and for those advisers and accountants who deal with Australians interested in or currently running their own super fund.
Yet, in the face of numbers that at times seem to be arbitrarily chosen (see: Setting the Record Straight), the “Cost of Operating SMSFs 2020 Report”, produced by Rice Warner and commissioned by the SMSF Association (SMSFA) and SuperConcepts, puts an important stake in the ground as to the reality of what each SMSF costs to run annually.
What the report found was SMSFs with balances of $200,000 are competitive with industry and retail funds, even where the fund paid for full third-party administration services, and SMSFs with balances of $250,000 became cheaper than their public offer counterparts if trustees undertook some of the administration or used cheaper services when outsourcing.
Conversely, the report found SMSFs with a balance between $100,000 and $200,000 were still competitive with Australian Prudential Regulation Authority (APRA)-regulated funds, but needed to use cheap administration services or carry out much of that activity themselves. Further, SMSFs with balances below $100,000 were found not to be cost-effective unless they could grow to a larger balance within a reasonable time.
SMSFA deputy chief executive and policy and education director Peter Burgess points out these figures were generally assumed within the SMSF community, but the release of the 2020 report provided the independent verification the sector required.
“We were surprised at the $13,900 figure used by the Australian Securities and Investments Commission (ASIC) and understood that it came from ATO data and looked at average expenses, but we don’t believe those numbers were intended to be used as a benchmark,” Burgess says.
“That was the reason we felt the need to update the analysis on SMSF costs because while the numbers were not made up, they were not the best way to price the costs of running an SMSF.”
Interestingly, the latest figures are not entirely new as the 2020 report is an update on a 2013 report into the costs of operating an SMSF, prepared by Rice Warner for ASIC. The findings of this early report are generally consistent with the most recent analysis and a comparison between the two reports shows a reduction in costs over time for funds with balances above $200,000.
Rice Warner senior consultant and author of the 2020 report Alun Stevens says he was also surprised to see the high figures quoted by the Productivity Commission and ASIC given the findings of the 2013 report and that Rice Warner had been in communication with the Productivity Commission about its ‘draft’ $1 million figure.
“We had conversations with the commission because we used the same data and their numbers of $1 million, and then $500,000, were simplified, nonsense numbers and we told them so because they did not pick up the complexities of the SMSF sector,” Stevens reveals.
“So what we put on the table was not a great surprise to SMSF practitioners who may not have had the precision of our analysis, but probably had a gut feeling the public numbers were overstated.”
Creating a wider awareness of the cost of running an SMSF and moving this information from industry knowledge to public knowledge was a key outcome for the SMSFA, Burgess says, to not only benefit its practitioner membership, but also provide consumers with the information required to properly consider holding an SMSF.
“We have seen an increase in SMSF investors downloading cost-related information off the back of the research and we know consumers can have a better understanding of the costs related to running their own fund,” he says.
“There was a debate around costs and we are pleased ASIC is no longer using its fact sheet from 2019, and the Rice Warner analysis has shown the problems of using an average cost calculation, which doesn’t factor in the one-off expenses that occur with SMSFs.”
SuperConcepts SMSF technical and strategic solutions executive manager Phil La Greca says the impact of the analysis was not direct as the report did not choose to take a single-figure approach, but did allow for comparisons to be made in a more detailed manner.
“The report has moved the cost discussion away from a single number to a consideration of what the advice, administration and investment components are within an SMSF and the difficulty of comparing those with a MySuper product from an APRA-regulated provider,” La Greca notes.
“It has also shown that in many cases SMSFs are not as expensive as many people believed and has provided greater traction for accountants and advisers with clients, but also for the wider public because what the regulators say about an issue is usually believed.”
BDO director and SMSF specialist Mark Wilkinson also notes the positive impact the analysis is having in regards to the administration of SMSFs and that following on from the Productivity Commission and ASIC figures it provides a more grounded perspective.
“It is useful to have a third-party document that has looked at a range of fees and provides confidence with clients and for fund operators that their costs are correct, while also countering claims about the cost of an SMSF on their members,” Wilkinson says.
In reading the report, however, one figure stands out – and is referenced repeatedly – and that is the $200,000 balance at which SMSFs become costcompetitive with APRA-regulated funds.
According to Stevens, the reason behind the emphasis on this figure was not to create another benchmark, but to make some pertinent statements around what has been said about the costs of SMSFs and what was revealed by Rice Warner’s most recent analysis.
He adds SMSF trustees who find arrangements that are on par with the administration costs available to APRAregulated funds, and outlined in the report, can operate in the same cost bands as those funds.
“If a trustee outsources the work, it may not be cheaper, but the point of that figure was for us to state that a $500,000 balance was not the figure that should be quoted at all,” he says.
“It also allows advice practitioners to tell regulators that while a fund may be smaller than the benchmarks they have set, cost is not the only factor to consider and there are other issues at hand, and rebuffs any claims that if a fund has less than $1 million then advice to set up an SMSF is inappropriate,” he says, referencing ASIC Report 575 from mid-2018.
La Greca also regards the $200,000 balance figure as a talking point from which SMSF advisers and providers can address questions around the purpose of the fund and the trustees’ commitment to being involved in its operation.
“I would not want to see that figure used in any campaign to promote SMSFs because it lacks the nuance about the work involved in running an SMSF and instead any discussion should be around the cost of running a fund at any balance level,” he acknowledges.
“The ATO sector statistics show that more younger people are setting up SMSFs, so this will be an issue for more people in the future.”
Wilkinson highlights that while the Rice Warner analysis provides an external confirmation on the costs of running an SMSF, its focus on at what point do they become cost-competitive with APRAregulated funds also emphasises the legal obligations placed on trustees.
He says the $200,000 figure notes clearly some administration work is required by the trustees to ensure an SMSF is cost-competitive with an APRA fund, but these tasks include the duties required of trustees.
“By running an SMSF they have assumed responsibilities even if they don’t have a plan to grow and develop the fund, at which point they may be exposed to liabilities as well,” he says.
“So the $200,000 or $250,000 balance is not just about comparing costs, but also requires consideration of whether the trustees and members are capable of meeting their obligations under the SIS (Superannuation Industry (Supervision)) Act, and this analysis has confirmed the necessity of both activities.”
In considering the Rice Warner analysis, BT Financial Group SMSF strategy national manager Neil Sparks regards it as having come at a good time for the sector, which is leveraging technology in greater ways than ever to deal with the cost concerns and trustee obligations.
“The research examined more than 100,000 SMSFs and for the first time we got a comprehensive study looking at the cost of running an SMSF, and that’s been incredibly valuable,” Sparks says.
He feels the SMSF sector is at the point where mature technology and comprehensive cost research have both demonstrated the costs of running an SMSF have come down and are more affordable, but notes this has not changed the advice landscape.
“I think it’s come at a good time where we’ve had now many years of improvements in technology running SMSF administration on the cloud, and we are in a more mature phase where systems are really running well.”
“While technology has helped drive costs down, complexity hasn’t gone down. It’s gone up, so we need to be cognisant of those people that are unadvised and are out there dealing with the most complex system in superannuation and are fully responsible for the compliance,” he says.
“We need to get that message out there about the support that advisers, accountants and platforms can give to SMSF trustees and make sure they stay compliant and reap the benefits of the Australian superannuation system.”
Burgess sees the report contributing to that effort, that is, to show consumers the actual cost of running an SMSF, the need to take hands-on ownership and the benefit of seeking value-for-money services from third-party providers.
“Our members have been appreciative of this work and of the news that $13,900 is not representative of the numbers they are discussing with their clients,” he says.
“We wanted to make sure SMSF advisers and consumers have access to the most accurate information so they can choose the best superannuation vehicle for their needs and we expect to see reference to this research for years to come.
“That happened with the 2013 data, and the 2020 report provides more data than any other research in the market, so it will continue to be useful for the SMSF sector well into the future.”
SETTING THE RECORD STRAIGHT
The impact of the Rice Warner SMSF cost analysis cannot be overstated in setting a stake in the ground for any future discussion about SMSFs and their use by Australians.
However, the numbers used to describe the cost of running an SMSF prior to the release of that analysis have a chequered history, and have created concerns from the SMSF sector around their provenance and validity.
In its most recent review of the superannuation sector released in early 2019, the Productivity Commission also examined SMSF expenses and concluded, in a draft report, the most suitable balance for an SMSF to be cost-effective was $1 million. This figure was reduced to $500,000 in the final report following input from the sector, but SuperConcepts notes this figure did not differentiate between the balance of the fund and that of the members.
Additionally, Class, which had provided the commission with guidance around calculating SMSF costs, noted after the release of the final report that the government agency had combined expenses unique to SMSFs, such as insurance, interest, and capital works and depreciation, with operating fees in setting its benchmark.
More concerning for the SMSF sector was the publication of an ASIC SMSF Fact Sheet in October 2019 that stated the average cost of running an SMSF was $13,900 a year and required 100 hours of members’ time to manage.
This figure, promoted by the regulator, was widely picked up by media outlets, prompting the SMSF Association to question the methodology that arrived at that figure and claiming the actual running costs per member were around $5000.
The fact sheet also attracted attention in parliament where it was the subject of questioning at a hearing into the oversight of the regulator conducted by the Parliamentary Joint Committee for Corporations and Financial Services in July 2020 and a hearing of the House of Representatives Standing Committee on Economics in August 2020.
These appearances led ASIC chair James Shipton to admit the figures were inaccurate, but were not misleading, as they were drawn from ATO data and it was the best available information to hand at the time the sheet was created.
Shipton also committed ASIC to revising the figure, which it did in August 2020 without any fanfare, using a median figure of $3900 drawn from ATO data and a simple note added to the fact sheet media release stating it was now an historic document and information contained in it was no longer accurate.
