With the poor returns last year from most super funds, a number of people I talked to recently have shown interest in starting their own Self Managed Super Fund (SMSF), when they hear that I have one. Most of the questions I get are related to fund administration and cost e.g. how much does it cost to run it, what sort of fund balance do you need to start with, etc. While these are valid questions, they are not not the most important questions you should be asking when considering whether or not to start your own SMSF.
To me, the most important question you should ask is “Can I get better returns from my own SMSF compared to a top performing Industry Super Fund?” A lot of people (especially those who provide services for SMSFs) tend to focus on the fees charged by super funds. While fees and administration expenses do affect returns of any fund, high fees are not necessarily a bad thing if you can get higher returns. If a fund manager charges you a 2% fee but can generate a 12% return per year, you still get a net return after fees of 10% which is far better than a fund manager who charges a 0.5% fee but only can only generate a 5% return because your net return is only 4.5% vs 10%.
When you have a SMSF, you effectively become the fund manager of your own fund and trust me, it is a big responsibility and it can be pretty scary, especially if you have little prior investment experience. While it is easy to put down fund managers who have been losing money in the recent market downturn, I doubt many people can do better if they invested themselves under the same market conditions. My next question to potential SMSF trustees is “What is your investment strategy?” Before you start a SMSF, you must have a plan on how you will make money for your fund, that you believe can beat the top performing super funds.
If you have a full-time job and not much experience or interest in learning about investing, having a SMSF may not for you. Administration of the fund is only 10% or less of the work involved in running a SMSF and this work is typically outsourced to accountants and auditors for a fee. Most of the work you have to do in running your SMSF is finding and managing the investments that would make money for your fund. There are not many free resources to help you with investment strategies suitable for SMSF which is one of the primary reasons why I started a blog for SMSF Trustees to exchange investment ideas. You need to do the investing work yourself to save on fees or otherwise you will end up outsourcing this for a fee and the total cost for running your fund could be much higher than the fee you are currently paying through your super fund.
If you are not happy with the performance of your current fund and do not have the time or inclination to learn about investing, you could simply change to another better performing super fund. Superatings and Selecting Super are some of the resources I have found on the web that can help you compare the performance and fees of the available super funds. Some of the best funds are able to provide a net return, after tax and management fees of 7% p.a. when you look at their performance over 5 years and I think this return is better than starting a SMSF and holding most of your funds as cash in the bank earning 4% interest because you don’t have the time to invest it. Some may argue this is better than a -10% return, which is the average 1 year return for the best super funds but that is entirely your decision.
For me, I find investing facinating and love learning more about it. There are so many investment instruments and investment strategies available especially in the area of stock and derivatives. When my husband and I started our SMSF in Mar 2007, we wanted to be in control of our investments and we were prepared to devote the time and energy to learn the skills which we believe will help us out-perform our existing super funds. There is of course a cost in both time and money in acquiring financial education and investment skills but to me it is well worth it because these skills will help you all your life especially in your retirement when your primary source of income is from your investments. The best time to start learning is when you still have active income coming in from a job or business as you can afford to make the mistakes now when you don’t need to rely on your super for a living. Investing is a craft – it takes time and practice to become a master craftsman.