The inescapable conclusion is that fees matter when it comes to your super, so if you want your Self Managed Super Fund (SMSF) to do better, cut the fees it pays or make it bigger. If your super is invested through a public fund, choose a lower fee industry super fund over a higher fee (largely bank owned) retail fund.

The importance of fees is driving a new debate in the SMSF world, with some arguing that SMSFs should have a least a million dollars in assets. Respected journalist Adele Ferguson (or Saint Adele as  Peter Switzer calls her) kicked off the debate on Monday in a piece in the Australian Financial Review.

Ferguson based her argument on a report from Industry Super Australia (ISA), the lobby group for the Industry Super Funds, that argues that SMSFs on average underperform industry super funds and this underperformance is more pronounced with smaller funds. ISA had analysed a report from the Australian Taxation Office, ‘ATO Self-Managed Superannuation Funds: A Statistical Overview 2015-2016’.

The ATO’s report compared average returns for SMSFs and all APRA funds, which includes industry, corporate and retail funds, over the five years from 2012 to 2016. The graph below (Graph 17) is from the ATO’s report.   

This shows that on average, SMSFs performed the same as APRA funds in 2016, and underperformed in 2012, 2013, 2014 and 2015. The ATO cautioned that it was not an “apples and apples” comparison.

The same data (and longer-term data) was considered by the Productivity Commission in their recent report into Superannuation: Efficiency and Competitiveness. The Productivity Commission says: ”Over the period 2006 to 2015, SMSFs, on average, performed favourably against APRA regulated funds and a listed benchmark portfolio before and during the GFC, but less favourably since”. It cautioned about the direct comparison, noting the differences in methods used to estimate rates of return in each segment and the incorporation of set up costs in the returns of newly established SMSFs.

It made the following (draft) finding.

The SMSF segment has broadly tracked the long term investment performance of the APRA-regulated segment on average, but many smaller SMSFs (those with balances under $1 million) have delivered materially lower returns on average than larger SMSFs.

And that’s the rub. Fund size really matters as the following chart from the ATO (Graph 19) so graphically demonstrates. Whereas SMSFs with assets of more than $500K had on average positive net investment returns in each of 2012, 2103, 2014, 2015 and 2016, SMSFs with funds under $200K largely had negative returns in those same years.

The ATO says that in 2016, the average fee paid by an SMSF with a balance of between $100K and $200K worked out to be 6.41% pa compared to the 0.69% pa paid on average by funds over $2m. This is because a number of the fees are fixed so that when they are apportioned over a small balance, they have a devastating impact on investment performance. Conversely, when those fees are applied over a large balance, the impact is relatively modest.  

While being “better investors” will obviously improve performance, the data says that SMSFs should also work on reducing the impact of fees. To improve performance, SMSFs can cut the fees they are paying, or get bigger (by adding balances or more members).   

How to cut fees in a SMSF

The first thing is to identify the fees you can’t avoid. These include the ATO’s Annual SMSF Supervisory Levy of $259, an external auditor’s fee (the latest ATO data says that the median audit fee was $550 although some administrators offer an audit service in the low $200s), the ASIC annual fee for a special purpose trustee company of $53, and for some funds, the actuary’s fee for providing an actuarial certificate, typically around $250.

Next is your accountant’s or administrator’s fee. This is where it pays to shop around because fees are coming down. Scale players such as the AMP owned Super Concepts, Super Guardian and BT are investing in technology and taking market share at the expense of local accountants and other niche operators.

Administration fees range from about $1,000 (for standard services from companies such as eSuperfund and Xpress Super) to around $3,000 for more comprehensive services from players such as BT, Super Concepts or Super Guardian. BT, for example, offers three packages – ‘core’ at $1,900 pa, ‘connect’ at $2,500 pa and ‘custom’ from $3,500 pa. An annual audit fee of $286 is also payable.

Like most services, you pay for what you get. If you have very standard investments (shares, retail managed funds, term deposits), then you can probably make do with a more basic administration service. If you have unlisted investments, including property, unlisted managed funds or collectables, then you will require a more customised (expensive) service. Administrators make their money if they can automate and standardise their processes. This includes getting access to readily available market data, so servicing unlisted investments, where the market price is not always known, will always be more expensive. Again, don’t pay for what you don’t need, so if an administrator has a package that allows you to include one residential property and you have no intention of ever owning one, this is probably the package you don’t need.

Shop around, considering carefully all the additional fees that could be charged. If your accountant is providing the service, make sure that you are getting “value for money”. If he/she is just processing your “shoebox” at the end of the year and charging you several thousands of dollars, you are probably not.

Finally, there are the platform, transaction and investment management fees. While platform fees are coming down (BT is now charging 0.15% pa capped at $1m plus $540 pa), if you don’t need to be on a platform or get little utility out of using it, get off it. Don’t pay just because it suits your adviser.  With investment management, whether it be an indirect fee via a managed product or a direct fee with an adviser, these need to be evaluated in terms of performance and service. Paying big fees for outstanding performance or superior service is fine – paying big fees for below average performance or indifferent service is robbery.

Don’t rob your super nest egg – fees matter!