Ask An Adviser - What Are The Costs Involved In Setting Up A Self-Managed Super Fund? (Eric Walters)

Top answer provided by:

Eric Walters

Thanks for raising this issue, Danny: respectfully though, you may not be asking the right questions just yet – as you say you are still at the stage of ‘thinking of starting a self-managed super fund’. 

The important question at this stage of your deliberation is ‘why’: what is your financial objective in considering starting a self-managed fund? 

Another question to be considered is, how does a self-managed fund implicate you from a regulatory and compliance responsibility perspective, compared to some alternatives; and do you have the skills and ability to perform them?  (NOTE: The costs of non-compliance are onerous.)

If I put these questions aside for the time being – and presume that you have determined that there are investments that you want to make, or financial strategies for estate planning perhaps, that you believe can best be facilitated by having a self-managed super fund (SMSF); and that you are aware of the responsibilities of the Trustees of such a Fund – whose Regulator is the ATO – then we can address the direct questions you have raised.

How much do I need in my Super to start this process?

The determination as to how much you need to have to start an SMSF is generally back-calculated from the fees that will be incurred to operate the Fund compared to what it would cost to operate a superannuation account with a similar amount invested through an appropriate public offer fund.  The costs we consider at this stage of the process, are the costs of administering the Fund (see some of these below); and the investment costs of holding the investments in an SMSF.

Administration costs:-

1. An Administration Service is often engaged for this purpose. These services usually offer to undertake the processing of the financial data of the Fund; to produce financial reports (including Member Statements); maintain the requisite registers (of Members, Trustees and Investment assets); liaison with the external auditor (or provide that service themselves); generate returns for lodgement to the ATO – income tax and Fund Compliance annually; and associated administrative functions.  (Depending on the complexity of the investments held in the Fund; and what level of advice you may require of them, this service is typically in the range of $1,200 to (around) $5,000 (at least that appears to be the range in South East Queensland);
2. Depending on your skills and experience, you may be able to attend to some of these above matters yourself but will more than likely need some input from such a service (for purposes of this discussion, let’s take an ‘average’ price of $2,100);
3. Regardless of who is attending to the above matters, there are the following administrative costs that also need to be brought to account –
    - Trustee company (recommended) annual fee to ASIC (currently $276);
    - Regulatory fee to ATO annually (currently $259).

Investment costs:-

1. Adviser costs can be attributed as ‘upfront’ and ‘ongoing’ and can range significantly depending on the amount of complexity in your situation and the amount of funds to be invested. For this exercise, we’ll assume that you are comfortable to attend to these matters yourself – but to alert you to them and to recommend that if/ when you decide to seek advice from a professional financial planner, you research their experience, qualifications, compatibility to you AND obtain a quote for the provision of their advice;
2. ‘Platform’ costs are incurred when you use a platform (and there is a range of them available: some you will need to appoint an adviser to access, some you will have a choice to work through an adviser (at a discounted fee); and there are others that you can use without an adviser. With most of these services, try to compare ‘apples with apples’ so that you understand the services that you will receive for the costs you incur – and what additional, or lesser, work you will need to perform in each situation.  What you don’t engage a ‘platform’ (an ‘investment administration service’) to do, you will need to do yourself – and that can be quite onerous.  I would suggest allowing somewhere between 0.4% and 1.2% of the investment portfolio value for this cost – and for purposes of this exercise, am including 0.4%; on an assumed portfolio of say, $500,000 – so, $2,000 on this item;
3. ‘Transaction’ costs come in all forms, from stamp duty, brokerage, buy-sell costs and in some instances, ‘other’ fees. These can vary dramatically depending on the assets being transacted, the transaction value and the frequency of transactions.  Associated with transaction costs may also be an investment expense ratio where managed funds and ETFs are involved.  The overall annual cost of this area can vary significantly, but for purposes of the exercise, I am applying 0.1% to the abovementioned portfolio of $500,000 – and so, an amount of $500 on this item.

Having worked all of these costs into our consideration, we can now work on the formula to determine what would be an economic amount to have available to start an SMSF: the administrative costs above, total $2,635; and the investment costs (excluding a financial planner), total $2,500 – an all-up cost to compare with a traditional public offer fund, of $4,135.  Taking this figure and assuming that a competent investment professional would be likely to charge something in the range of 0.7% through 1.1% - and a median of around 0.8%, the amount needed to economically justify starting the Fund would be $516,875.

Some years ago, ASIC set a minimum contribution/ rollover required for establishing an SMSF at ‘at least $200,000’ – but they withdrew that guidance after a short period. 

…and ‘are there lots of upfront costs?’

To establish a SMSF there are a number of processes to consider and to undertake according to the decisions you arrive at:

Must haves –

1. A superannuation fund Trust Deed – allow $580;
2. A Trustee(s) – ‘no cost’ if individual member(s) act together as trustee (although advice should be sought on this: a sole-member super fund has to have a corporate trustee, as does a fund with more than four members – and there are good reasons to use a corporate trustee regardless);
3. Registration with the ATO, a TFN (and possibly, an ABN) – no cost, unless professional services engaged to attend on your behalf.

Optional, but worth considering:-

1. Advice as to whether this is the appropriate course of action – allow $3,500;
2. A company as trustee – expect between $650 and $850 (allow $850 for this example);
3. Ongoing advice and services of a financial planner – allow $2,000 for initial Investment Strategy advice and implementation (cost higher if adviser/ planner not used in resolving to establish the Fund).

For others reading this reply, I strongly recommend that you consider the question raised in the opening comments above.

 

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Article by:

Eric Walters

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