This month: Marcus Padley on the SMSF downsides

Instead of chilling out, you’ll be stuck at home stressing over strategies

There are a few myths about self-managed super funds. The main ones are that the costs are lower and the returns are better, but anyone in the industry knows that those are marketing lines more than reality, depending on who is helping you, what they’re charging you and how well your investments go.

I have an SMSF. In the early days, I wondered whether it was all worth it when the accounting fees alone were taking 5% of the fund and when I lost $40,000 on Slater & Gordon shares. Yes, we all have one of those. And let me tell you a couple of other stories.

I once had a broking client whose retirement as a football coach to a house next to the local football oval was ruined by visiting an accountant who suggested that now he, and his loving and untroubled spouse, had retired “they” should set up an SMSF. He only had $400,000.

You really have to watch out for “that visit” to an accountant or a financial planner at some crucial moment in your life (marriage, divorce, inheritance, retirement, illness). There is a huge professional industry out there relying on people using SMSFs rather than industry and retail super funds. All the professional activity and involvement, be it accounting fees, investment fees, advice fees, broking fees, start there. If you step onto the car yard expect to be sold something. Often an SMSF. But it may not be for you, even if it is for them.

So, the coach with $400,000, rather than wandering the local community talking to friends and watching the football without a worry in the world, found himself stuck in a back room with the door shut (always a sign that your partner is cocking up your finances) stressing about what shares he was supposed to invest in, getting it wrong and “failing his wife” financially. Something that put tremendous stress on their hitherto unruffled marriage.

He thought the employment of a high-profile stockbroker like myself would be the solution. But it wasn’t. The solution was to open the study door, talk to each other again, get rid of this pretence that they could pick stocks, reset their financial expectations, unwind the SMSF, put it back into an industry super fund, and go and watch the local football hand in hand. The solution was to simplify, not dig harder.

Burden of responsibility

Another story. I was asked for a second opinion on a financial plan a friend had been presented. Single, three kids, living with her mum and dad. It was a financial plan for $200,000 of super that was currently sitting in an industry fund. The adviser was young, the inexperienced ones get the small clients. If my friend had signed that piece of paper, the financial planning business would have taken $9000 from her in year one – $5000 immediately. You had to delve pretty deep to work that out. There were fee disclosures but (take note, government, of the spaghetti nightmare you have created) they did little more than camouflage the fees, not explain them. You don’t need to look any further than the fees versus funds ratio to understand where some advice is coming from.

Armed with these experiences I have spent some years warning people about the pitfalls of an SMSF, almost none of which are to do with costs, returns, tax or money, and have almost all to do with the mental and administrative burden and your suitability to take on any sort of investment responsibility if you have no experience or interest.

At the same time, I have to tell you, honest financial professionals can explain why and when an SMSF is a must, and for some of you it is. But it is only a musthave structure for some people. They are usually for wealthier people and usually for tax reasons, for the tax benefits or tax avoidance (deferral) strategies rather than anything else, and certainly not because “everybody has one”. I know very wealthy people who don’t have an SMSF, and the lack of costs, admin, decision-making and fees is reason enough. If you do have an SMSF and know the activity it creates and the time wasted, getting one piece of paper in the mail every year has obvious benefits.

So, if you have no interest in investment and are nicely tucked in some industry or retail super fund already, watch out for the idle suggestion that now you are married, divorced, retiring or inheriting you need one, because maybe you’re not suited to make decisions about investments. Especially if you are already in one of those funds that has a website that allows you to click on “cash” on your mobile phone when the world goes to hell. That’s about all the decision-making ability some people need.