The Great Debate: SMSF v Industry Fund

The Great Debate: SMSF v Industry Fund

This is a debate that will rage on forever.   The SMSF golden era started in 2007 spurred on by 3 factors:

1. The ability to contribute up to $1m in a single year, in 2007, and
2. Weak investment returns in Industry and Retail funds as a result of the GFC
3. The ability to acquire property under a Limited Recourse borrowing Arrangement

Over the past 5 years, I feel that the Industry Funds have taken the upper hand in this debate.  Some of the key milestones have included:

• In 2013, Rice Warner found that SMSFs were more expensive than industry funds with combined balances of less than $200,000. [I am over simplifying Rice Warner's conclusion, here is their full report].
• In 2015, based partly on Rice Warner's 2013 report, ASIC issued INFO Sheets 205 and 206.  They stated that "an SMSF with a starting balance of $200,000 or below is unlikely to be in the client’s best interests"
• In 2016, the Accountants' Exemption was removed, making it more difficult and expensive to get advice to establish an SMSF.
• In 2017, Rice Warner released a paper which promoted the benefits of SMSFs and dispelled some of the myths.  The paper appeared to fall on deaf ears.
• From 2017, banks started withdrawing from the LRBA lending market
• In 2018, the ALP announced their policy of franking credit refunds, which would have been detrimental to SMSFs
• In 2018, the Royal Commission found very little wrongdoing in the Industry Fund sector
• In 2019, the Productivity Commission produced a report which concluded that SMSFs with less than $500,000 perform significantly worse than regular funds.  Prior to this report being issued, industry representatives such as Class Super, BGL and the SMSF Association had provided feedback on the Productivity Commission's draft report, pointing out numerous errors in the calculation methodology.  If this feedback had all been taken on board, it is likely that the Productivity Commission would have come to a very different view. 
• In 2019, ASIC adopted the flawed Productivity Commission's report recommendations.  It updated its INFO sheets to reflect the new $500,000 threshold
• In 2019, ASIC followed this up with a "Fact Sheet" which urged customers to question whether SMSFs are right for them. The "Fact Sheet" claimed that the averager cost of running an SMSF is $13,900 p.a.  This "Fact Sheet" has been described by some in the SMSF industry as a "Fiction Sheet" and even a "Bull Sheet".  Nonetheless it represents the pinnacle (to date) of SMSF bashing. 
• In 2020, the ATO calculated the average cost of running an SMSF as $3,900 as opposed to $13,900.  
• At the time of writing this article, ASIC has not committed to updating its "Fact Sheet".

I am going to make a bold prediction for 2020 and 2021:  That the tide will start to turn, and we will see the number of SMSF establishments increase again.  There are 3 factors that will drive this:

1. As we saw with the GFC, the industry funds and retail funds are delivering poor returns this year due to COVID.  Members will want to take back control of their super.  This will become evident around September 2020 when members receive their annual statements.
2. Many industry funds have high proportions in illiquid assets, yet allow daily liquidity.  This is OK when cash flows are positive, however creates some significant equity issues when members want to switch funds or withdraw from super altogether.  In contrast, SMSF trustees can select the appropriate amount of liquidity to match their own needs.
3. Some industry and retail funds will need to increase fees (in percentage terms) to cover their fixed cost case as a result of FUM declining

The impact of these factors will come down to community sentiment.  It is up to us, as industry leaders, to increase awareness of these factors and ensure that the debate is even handed. 

THIS ARTICLE WAS CORRECT AT THE TIME OF WRITING. SMSF INDUSTRY DYNAMICS CHANGE OVER TIME AND THE ARTICLE MAY BE LESS RELEVANT IN THE FUTURE.