Productivity Commission has concerns about sub $1 million SMSFs

The Productivity Commission has concerns about SMSFs with less than $1 million, blaming higher costs for poor net returns.

In its draft report about the efficiency and competitiveness of the superannuation system the Productivity Commission raises concerns about the returns and costs of smaller SMSFs.

One of the draft findings of the Commission is that SMSFs have generally tracked the long-term investment performance of APRA-regulated funds. But it also find that “many” SMSFs with balances under $1 million have “materially lower returns on average”.

The Commission also find that reported costs for SMSFs with over $1 million are “broadly comparable” to APRA-regulated funds.

“By contrast, costs for low-balance SMSFs are particularly high, and significantly more so than APRA-regulated funds. These high costs are the primary cause of the poor net returns experienced by small SMSFs on average,” says the draft report.

“More than one million members have chosen to self-manage their super in an SMSF. Large SMSFs are broadly competitive with institutional funds in terms of net returns. However, smaller ones (with less than $1 million in assets) perform significantly worse than institutional funds, mainly due to the materially higher average costs they incur due to being small.”

Another draft finding of the report was that the quality of financial advice provided to super fund members – including SMSF members – “is questionable”.

“Knowledge of the guidance and supports available to pre-retirees is generally lacking. In future, as members retire with higher balances and the diversity of options available expands, the need for tailored advice will grow.”

The Productivity Commission finds that Limited Recourse Borrowing Arrangements are, presently, “unlikely to pose a material systemic risk”, due to the “small number of SMSFs” with such borrowings. Though the Commission does say that active monitoring is “clearly warranted” so that borrowings by SMSFs don’t pose a systemic risk in the future.

On the other hand the Commission did say that SMSFs were “adding competitive tension” to the superannuation sector.

The SMSF Association said the draft report was a “timely reminder” that SMSF trustees should pay close attention to the expenses of their fund.

“With the Commission finding that lower balance SMSFs have higher costs than their counterparts, it is important that trustees understand and manage their SMSF in the most cost-effective manner while maintaining the quality of the administration and advice they seek,” said SMSF Association CEO John Maroney.

The Productivity Commission said the difference in returns between SMSFs with less than $50,000 and ones with more than $2 million was higher than 10% per annum. Maroney said it was important to remember that many lower balance SMSFs have just been set up – and so will quickly grow in size – or are in the process of winding up.

“In particular, for SMSF trustees starting off with a lower balance, it is essential that they have a plan to achieve greater scale and cost-effectiveness as quickly as possible,” he said.

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