by Olivia Long

The Financial System Inquiry (FSI) has put the issue of erecting barriers to entry to self-managed super funds back on the table. It is disappointing for those of us in the industry who believed the Cooper Review finally put this issue to bed in July 2010 – but it seems not. So it’s back to the barricades.

It’s been my long-held position that people only have to fulfil two conditions to set up a fund – and they have nothing to do with the funds they have under management or whether they are a cross between Warren Buffet and George Soros.

No, what it comes down to is that people need to have a strong desire to take control of their own retirement savings, and the time to do it. It’s as simple as that.

So who are these people? A solid majority of trustees are nearing or in retirement – and that’s hardly surprising. At this stage of their life, their superannuation goes from being the odd statement in the mail typically destined for the waste paper basket to something very important to them and, naturally, they want to take control of it. Post the Global Financial Crisis, I would argue that sense of needing to have control has grown exponentially.
Then there is a far smaller minority of younger people who are opting for SMSFs. Their number should not be exaggerated; but reports by reputable organisations such as Russell Investments show they are steadily increasing.

Their account balances are often low, but the fact they are demonstrating a desire to handle their retirement savings earlier in their working lives is, in my opinion, laudable. I suspect many realise they are paying above the odds for this privilege – someone with FUM of $50,000 will obviously have a higher expense ratio than someone with $1,000,000 – but that’s the price they willingly pay to take control of their superannuation. It’s also worth adding that competition and technology are driving costs down, as ATO figures attest.

Critics of our sector often argue that SMSFs should have at least $200,000 in funds under management before they should be given the regulatory tick of approval. Other suggestions include a minimum age and being able to demonstrate a degree of financial literacy. The real reason, of course, is that the other superannuation sectors, particularly industry and retail, are bleeding funds to the SMSF sector, and they want tighter barriers to entry to stem the flow.

They have also latched on to the issue of administrators waiving their SMSF establishment fees, arguing that potential trustees are being lured in thinking it’s a free service. Nothing could be further from the truth.

What they are saying is that people who have considered taking control of their superannuation , and all that entails – fees, investing, legal, accounting or auditing – are suddenly going to sign on the dotted line because of a fee. It might play a role in deciding which administrator to choose; not whether they set up an SMSF.

In fact, quite the opposite. Free set-up costs give them time to determine whether an SMSF is the right option. Although there will be an exit fee, it allows people to sign on at a relatively low cost to determine whether their interest is genuine and they have the time.

Obviously, I would have preferred the FSI had not raised this issue; but that’s the nature of wide-ranging inquiries. After all, our sector now has about $550 billion in FUM, so perhaps it was inevitable.   

But I do take comfort in the fact the FSI highlighted the important role that SMSFs are playing in Australians being engaged with their retirement savings, and how it is increasing competition across superannuation. When coupled with the fact that the FSI clearly wants to tackle costs in superannuation – and the role it expects competition to play in this – then I am confident Murray will reach the same conclusion that Cooper did four years ago.