Keep it simple: avoid complexity when seeking an SMSF
Posted by Julian Nowland
When new clients come to see us, they usually need help with some financial complicity or milestone event in their lives they don’t have the time, expertise or motivation to deal with themselves.
And that’s fine.
Many of these people also have a financial path or investment option they’d like to take on.
And again, that’s fine.
But what isn’t fine is when that path or investment option is overly complex, and their reason for wanting to do it was they heard someone at a friend’s barbecue talking about how great it was. (The financial decision, not the barbecue.)
So why isn’t it a good idea? Because that complexity is going to cost that person both time and money. While the financial decision may have been good for someone else, it may not work for them, which means they could end up wasting both.
Unless you know (not just believe, but know) it will give you the strategic or personal outcome you’re after, then you really need to ask yourself, “What benefit do I get from all that complexity?”
The classic example is people wanting to set up a self-managed super fund (SMSF). Now don’t get me wrong: SMSFs certainly have their place in a variety of retirement planning scenarios. But to think of them as the ultimate goal or aspiration to strive for on your wealth accumulation journey is a mistake.
Industry super funds, retail super funds, corporate super funds and SMSFs all have their own unique set of pros and cons. The most compelling reasons people give for wanting an SMSF are generally (but not exclusively):
- “I’m self-employed, and I want to put the business premises I own inside my SMSF.”
- “I want to invest in direct property in super, and I already have sufficient money in super to do it.”
- “I have specific expertise in investment markets, and want to run the investments myself. I also have enough time to do it effectively.”
Unfortunately, people often have misconceptions about what an SMSF can do for them. Here are three of the biggest misconceptions people have when they want to set up an SMSF.
1. “My wealthy friend/family member/financial ‘guru’ has an SMSF, and they said it makes heaps of money.”
Maybe they do. And maybe it does. But what they’ve said is probably more of a ‘vibe’ than a thorough analysis. How they invested their money (and what they invested it in) may have worked for them. But it could be completely inappropriate for you.
2. “I want to reduce costs.”
Well, before you start an SMSF look at what you’re paying in your existing fund. There’s a good reason advisers suggest a minimum balance of around $300,000 to start an SMSF: they have fixed costs that you need to pay regardless of whether you get a decent return.
3. “I can make more money doing it myself than my super fund does.”
Perhaps. But you won’t know unless you’ve been investing personally and can compare returns. (And if you’re that good at it, maybe you should get into funds management.)
Even potential clients who already have an SMSF can often get a similar portfolio and outcome without all that cost, administration and personal input.
So the next time you hear about a complex investment option at a barbecue, look at your family and friends sitting around enjoying themselves and ask yourself, “How would I rather be spending my time?”