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IFSA has released a report examining the drivers behind the establishment
of self-managed superannuation fund (SMSFs). The report is available on the IFSA
website.
The research, conducted by Investment Trends, surveyed 1,189 SMSF members
in two detailed quantitative surveys in late 2004 and 2005. IFSA CEO, Mr
Richard Gilbert, said that despite a decline of over 30% in the SMSF
establishment rate from its peak in 2002-03, SMSFs remain a popular
retirement savings option.
Reasons for establishing SMSFs
Mr Gilbert said that 55% of investors cited ‘control’ over their
superannuation as a reason for establishing an SMSF, followed by poor
investment performance (36%) from existing superannuation funds often
drawing attention to fund fees and charges (20%). Smaller funds (with less
than $100,000) were more likely to say that they had established their fund
based on ‘advice from a friend’, Mr Gilbert said.
The report revealed that the average starting balance for SMSFs
established in the last two years was $300,000, but 28% have balances under
$100,000. Meanwhile, 28% of SMSF members were over 55, with 15% already
retired. Those still working were, on average, eight years from retirement.
Role of SMSF advisers
The report suggests that accountants are the dominant source of SMSF
advice with 79% of respondents receiving advice from either an accountant or
financial planner (while 11% used both planners and accountants). However,
the role of accountants as the ‘instigators’ of establishing an SMSF has
declined since 2002, largely as a result of the AFS licensing restrictions
on accountants making such recommendations.
IFSA also noted that SMSFs using the services of a financial adviser or
bank-based adviser had higher fund balances and a higher incidence of life
insurance through the fund.
SMSF costs
IFSA noted that the costs associated with running an SMSF vary greatly
depending on the size of the SMSF, the range and types of advisers used, and
the types of assets held. The research estimated that the average annual
total amount spent on running an SMSF was $3,500 p.a. This figure includes
the cost of accountancy, investment and financial planning advice (where
used) and an assumed 2% management expense ratio (MER) on managed fund
investments. However, it excludes transaction costs. According to IFSA, this
average cost reflects the fact that only a subset of SMSFs seek investment
advice relating to their fund. Those using a financial planner or accountant
for investment or additional taxation advice often have higher average SMSF
costs (an average of $5,900 p.a.). Those only using an accountant to assist
with their SMSF spend on average $3,200 p.a.
Furthermore, IFSA consider that SMSF costs tend to increase only slightly
as fund size rises, so that the average cost of the SMSF structure in
percentage terms declines as assets increase.
IFSA also identified several instances where SMSFs with less than
$100,000 had annual fees above $5,000 p.a. or initial establishment costs
above $6,000.
Investment allocations
Shares and property were identified as the dominant asset classes for
SMSFs, with 89% holding shares (with an average share portfolio of $180,000
or 33% of assets) and 60% holding property (with 31% residential, commercial
or listed property trusts). Managed funds were also an important asset class
held by 58% of SMSFs (representing an average balance of $120,000 or 15% of
assets), while 78% indicated that they were open to investing in managed
funds when considering future asset allocations.
Source: IFSA
media release, 22 February 2006
This article appeared in Thomson’s Superannuation
& Financial Service Bulletin (24 March 2006). Superannuation
& Financial Service Bulletin is a comprehensive and informative
superannuation news service. Special coverage is given to newly introduced
legislation with contributions from business-focused experts.
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