There is a variety of considerations that may influence the decision as to when a SMSF approach is appropriate for any individual. Reasons for electing a SMF include:
desire for complete control;
a preference for investment in certain assets or asset classes which are not readily available through other types of funds; and
a belief that fund managers do not add value to your asset portfolio and hence a superior investment return can be achieved in the self-managed fund.
The ATO is the responsible authority for the prudential supervision of self-managed superannuation funds. The ATO (2012) reported the inward rollovers to SMSFs from period June 2006 – June 2012, which highlights a significant switch to SMSFs during the global financial crisis (“GFC’). See Table 1 over the page.
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Table 1: Rollovers to Self-Managed Superannuation Funds
There is still a significant swing towards the establishment of SMSFs in Australia. Table 1 reveals the number of rollovers out of existing funds to SMSFs in Australia. During the decade to June 2012, the SMSFs had turned out to be the single largest sector in the ASI. The primary driver of growth within the self-managed sector has been the high value of assets per member that have been rolled over from other superannuation entities to SMSFs since ‘choice of fund’ was introduced in July 2005. There was a sharp rise in the year 2008 for the establishment of SMSFs.
The changing landscape of the structure of the superannuation industry is best illustrated by the period between June 2004 and June 2012, in Table 2 below.
Table 2: The number of superannuation entities in Australia from 2004 – 2012
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Table 2 shows the number of corporate funds declined from 1,405 in June 2004 to 122 in June 2012 compared to industry funds and SMSFs which have grown in size. Industry funds have become significant financial entities in Australia with expanded financial services and in the next decade to 2024, several large industry funds may compete directly with the major four banks in Australia.
The differences between industry and retails funds in Australia are provided in Table 3 below2.
2. The Australian Financial Planning Handbook 2013 provides a similar comparison for SMSFs, public
Table 3: A comparison between industry funds and retail funds3
Points of Comparison Industry Fund Retail Fund
Cost of fund The cost of the fund is the same whether the
person obtains advice or invests without advice or assistance.
The cost of the fund is the same whether the person obtains advice or invests without advice or assistance.
Disclosure of fees
From 1 July 2005, all ASFs must disclose costs
Can have hidden fees – eg. investment management costs are deducted before the net earnings rate of the fund is declared.
Full disclosure of fees both at superannuation fund and underlying investment levels.
Life insurance Set levels of insurance cover.
Many offer a low fixed sum insured. Some permit increases to the sum insured at a cost to the member.
Widest variation of premiums depending on age, occupation, sex and whether smoke.
Broader offerings.
Can offer a high level of automatic cover. Retail corporate funds provide 2-3 times higher level of cover without evidence of health.
Investment choice within fund
Investment choice can make a difference to the outcome
Larger range of investment options Direct shares cannot be purchased
A range of investment options Direct investment
Unique investments
Administration Service standard for all transactions. Service standards for most transactions.
Interactive voice response
Provide up to date account balance. Provide up to date account balance and unit price.
Frequency of member statements
Only provide annual statements. Many funds provide 6 monthly record of contributions but does not include investment earnings.
Majority provide annual statements. Some provide 6 monthly transaction and account balance including investment earnings.
Timing of member statements
Send out within 3 months of end of period. Send out within 2 months of end of period.
Ongoing monitoring of portfolio
No fund promotion of ongoing monitoring as one of its services
Clients receiving ongoing monitoring service receive benefits such as:
- contact with their adviser throughout the year - periodic reviews to ensure financial plan stays current and relevant to economic climate and changing lifestyle
-monitoring and active management of investments
Retirement options Limited to the options available within the fund. Limited by options available on Approved Product List.
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Evidence on the performance of these two types of superannuation funds, was provided for the first time by Coleman, Esho and Wong (2003). Using APRA annual data from 1996 to 2002, the evidence suggested that there were significant
differences in outcomes across the different type of funds. For example:
Returns were highest for corporate funds and lowest for retail funds.
Retail and industry funds had the lowest returns and volatility and the highest expenses.
Many funds, particularly retail funds, have failed to outperform the return available from a risk free investment in Treasury notes.
There was evidence of a negative return between returns and expenses suggesting that fund members receive little advantage from investing in superannuation funds with high expenses.
Retail funds exhibit potential problems with low returns and high fees.