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Half of SMSFs not cost effective

A new report by the Australian Securities & Investments Commission (ASIC) has found that half of all self-managed super funds (SMSFs) are not cost effective.

Analysis conducted by actuarial firm Rice Warner on behalf of ASIC suggests that SMSFs need at least $500,000 in assets to make them cost-effective and competitive with other superannuation options.

Close to 50% of the 478,000 SMSFs have less than $500,000 in assets, with the majority holding between $200,000 and $500,000 in the 2010-11 financial year. Rice Warner did find SMSFs in that bracket could provide the equivalent value to industry and retail funds, as long as the trustees undertake some of the administration.

But its perhaps the choice of investments that makes many SMSFs uncompetitive on costs. Holding simple assets like equities, term deposits and cash allows SMSFs to keep their costs down. Doing the majority of the administration and only using advisers for the tasks they can’t carry out, such as audits and tax lodgements will lower the cost even further. Add in complex assets such as loans, property, unlisted shares, derivatives, in-house assets or private trusts and the costs can quickly escalate. Of course, there’s not many industry or managed funds that can provide access to those types of assets, hence the appeal of setting up your own SMSF.

ASIC is also concerned that the quality of financial advice trustees of SMSFs are receiving is not up to the standard they would like. ASIC is increasingly heading down the path of ensuring that only sophisticated investors manage their own retirement savings, to ensure the self-managed super sector stays healthy. ASIC deputy chairman Peter Kell said in a statement today that “ASIC doesn’t not want to see an influx of trustees who are ill-equipped to cope with the responsibilities and obligations of running a SMSF.”

That could see more regulation for SMSFs, and potentially more revenue for wealth management companies like Perpetual (ASX:PPT), The Trust Company (ASX:TRU), IOOF Holdings (ASX:IFL) and Equity Trustees (ASX:EQT).

Foolish takeaway

Interestingly, the SMSF sector has in aggregate delivered higher gross returns than APRA regulated funds in six of the last seven years, including both good and bad years, suggesting that setting up a SMSF can be good for your financial health.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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