An Easy Guide to Self Managed Super Funds (SMSFs)

Self managed super funds (SMSFs) have gained increasing popularity in recent years. Here’s a quick guide to see what it’s all about.

A self managed super fund (SMSF) is a trust. It is a legal arrangement similar to a family trust and is regulated by the Australian Taxation Office (ATO). See ATO’s summary and comparison of SMSF to other super funds.

Regulations stipulates that “the sole purpose of a self managed super fund is to provide retirement benefits for its members (beneficiaries) or their dependants”.

Because it is “self managed”, all responsibilities and investment strategies falls on your shoulders.

Regulation by the ATO also means the SMSF will need to comply with superannuation and tax laws etc, rendering it quiet technical and time consuming.

According to the ATO, self managed super fund makes up 29% of all superannuation assets.

Self managed super funds directly invested 82% of their assets in the below:

  • 26% cash and term deposits
  • 31% Australian listed shares
  • 11% non-residential real property
  • 9% unlisted trusts
  • 5% other managed investments

The above numbers indicate significant issues such as home bias, diversification and concentration risk. Cash and term deposit is also a very defensive investment strategy. Anyone can easily achieve the above list of  investment options without the use of SMSF.

Therefore, are people trying to complicate simple investment strategies?

Given that most of us are time poor and our resources are limited, are self managed super funds really as beneficial for our financial health and wellbeing as we think?

There are many types of investments possible. Thus it is important to see the bigger picture and put in place an appropriate long-term investment mix. The diagram below shows the best and worst performing asset classes on a yearly basis.

High level total percentile market returns for major asset classes: financial years ending between 1987 and 2017.

Source: Vanguard Australia

Also take a look at the general administration, operating and investment expenses involved with a self managed super fund (ATO)

Note: A&O stands for Administration and Operating expenses, Inv stands for Investment expenses.

As an SMSF advisor, here’s what I think about Self Managed Super Funds.

Given the right personal circumstances, goals and objectives, a self managed super fund can have lots of advantages and aid long-term wealth creation.

However, it can cause a significant amount of detriment to your financial health and wellbeing when used inappropriately.

An SMSF on its own does not create wealth and is not for everyone.