Thursday, 24 July 2014

Self Managed Super Funds are closing!

This is a guest contribution from Mr Ikonz, of Project Ikonz.

Whilst we all know that self managed super funds (SMSFs) are the fast growing sector in the superannuation market, it’s important to remember that they aren't for everyone.

All the stats that you see and all the media reports focus on the continued growth of SMSF accounts, but not a lot of people focus on how many SMSFs are wound up on an annual basis.  Did you know that according to the ATO, in the 12 months to 30 June 2013, 2,230 SMSFs were closed? In the last 5 years, over 38,000 SMSFs were wound up!!

What are some of the reasons why an SMSF might be wound up?

There are a huge, number of reasons as to why an SMSF might be wound up, but below are my top 3 reasons why:

1 - They aren't as easy to run as you would think.

The name says it all! SMSFs are self-managed, meaning that you will need to take on the workload of a trustee, which previously was designated to a fund manager. This work includes managing the asset allocation, administration, account and audit of the fund. Whilst you can certainly outsource a lot of this work to experts such as accountants and financial advisers/brokers, as the trustee, you are still responsible for the running and compliance of your fund. Not an easy job!

2 – Being a fund manager ain't that easy

Selecting and managing the assets in the fund isn't as easy as
it may look. Asset allocation, the process of allocating your investments across different asset classes, such as cash, fixed income, property and equities/shares. Making investment decisions can be complex and time-consuming.  A lot of trustees quickly find their funds heavily overweight cash and term deposits, possibly landing them outside of their risk profile. As at 30 June 2013, 31%of funds held in SMSFs was sitting in cash or term deposits!

3 – The costs add up

A lot of new SMSF trustees have dollar signs in their eyes, thinking that running a fund themselves, they think they will:
  • Perform better than a professional fund manager
  •  Save money on management fees
  • Access investment classes that have been inaccessible to them in the past (e.g. direct property)

In reality though, setting up and running an SMSF can be a costly exercise:
  • Setting up an SMSF could cost $5,000+ depending on the structures you employ
  • Accounting, admin and audit every year can cost thousands of dollars
  • Inappropriate asset allocation (e.g. being overweight cash) can cost you in terms of performance returns

Think before you leap

Every time I talk to someone about my SMSF, so many people react by saying “I've got to think about setting one up myself”. To be honest, when I hear that, I cringe.

SMSFs shouldn't be seen as a fad, it’s a massive choice to make to set up a fund. The stats clearly show that a bunch of people have made a mistake setting one up and have to wind it up.

Make sure you weigh up the pros and cons before going through the motions of setting up an SMSF.

About the author...
Mr Ikonz is a personal finance blogger from Sydney, who has more than doubled his net worth since he began to focus on his wealth discipline. He focuses on using different investment structures (including an SMSF) and asset classes to work towards his early retirement with $10m in assets.

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