High cost, low balance SMSFs are in ‘transition’ period: report finds

High relative operating costs experienced by SMSFs with small balances is indicative of a transition period, and not an ongoing situation, according to the June 2016 Class SMSF Benchmark Report.

“Recent industry commentary has suggested that self managed super funds with smaller balances are not cost effective, citing that based on ATO data, funds with balances of $50,000 or less have lost 15 per cent over 7 years to June 2014,” said the report.

According to the ATO’s Self-managed superannuation funds: A statistical overview 2013-2014, the most recent report available, the average operating expense ratio in 2013/14 for SMSFs in the $1 – $50,000 range was 12.05%.

The Class SMSF Benchmark Report, based on a statistical analysis of the more than 100,000 SMSFs using Class Super, finds that these low-balance funds are largely either newly formed and growing or winding-up. Additionally these funds can have “significant” set-up and advice expenses.

Class calculates that the average time an SMSF is in the sub-$50,000 range is 2.06 years.

“Class’ findings verify and quantify what many in the industry suspected i.e. that the dynamics of funds with balances of less than $50k are similar to that of an airport transit lounge, with constant arrivals and departures,” says the report.

“Given the high turnover in this bracket, it is incorrect to assume that funds with low balances are sitting around for many years paying ongoing high fees.”

Class Ltd CEO, Keven Bungard, said: “Our inaugural SMSF Benchmark Report, published last quarter, was extremely well received across the industry. Looking at the dynamics of smaller balance funds for the June Report has been an informative exercise, with insightful findings that bring clarity to recent industry discussions around the cost effectiveness of smaller balance funds over time.”

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