Millennials are making the switch to SMSFs
The younger generation’s drive into SMSFs should give the sector a further growth boost, putting pressure on incumbents to lower fees and enhance services.
Known for its older, wealthier membership, the SMSF sector is seeing an influx of young investors buoyed by their own investing success and with encouragement from a fintech industry eager to capitalise on the demand.
However, experts caution there are traps for the unwary including the risk of making poor investment decisions, advisory and compliance costs and no government compensation in the event of fraud or theft.
Research by StakeSMSF, an offshoot of online broker Stake which introduced an SMSF pilot program late last year, found 77 per cent of Australian investors aged 18 to 40 would consider switching to a “non-traditional” super fund such as industry funds with DIY options, super wrap accounts and SMSFs.
Among these investors, 44 per cent would like to completely self-manage their super, StakeSMSF’s September 2021 survey found.
Head of product Kris Kitto says millennial investors are looking to take charge of their retirement savings.
“Millennial investors want control. They want to pick their investments to invest in companies they use every day and are familiar with,” he says.
"They also want the digital experience, so no paperwork and the pricing has to stack up.”
Research from Vanguard and Investment trends also shows SMSF trustees are getting younger, and have been for several years. The average age of a trustee fell from 48 to 46 years in 2021.
Vanguard says SMSFs are "no longer just the realm of older investors."
Those aged 35 to 44 years were the most active age group in setting up new SMSFs during the June quarter 2021, accounting for 34.3 per cent of new funds, according to June quarter 2021 ATO data.
Stake is not alone in pursuing this new demographic. Trading platform Superhero is developing a superannuation product for its investor base, albeit under a slightly different model, allowing them to self-manage up to 75 per cent of their retirement savings.
Source: Vanguard, Investment Trends
Risks attached
Running an SMSF isn’t easy and StakeSMSF’s warning list includes investment risk and insurance risk. Then there’s the time and skill required to manage an SMSF, the fees and costs associated with the operation of an SMSF and the lack of government compensation in the event of fraudulent conduct or theft.
Other issues for those new to SMSFs are the need for a comprehensive investment strategy, which needs to address diversification, liquidity, risks, insurance and relevance to investment goals.
“Our customers are typically experienced investors, who are strongly self-directed and know how to choose investments that are suitable for their needs,” Kitto says.
“We provide guidance to help them meet their requirements under the law, but the portfolio construction is completely under their control.”
SMSF specialist adviser Liam Shorte warns younger investors to also consider the risk of a future market downturn.
“My concern is that many who have invested over the last year may believe that investing is easy, as all shares have tended to do fairly well in the recovery since the COVID market correction in February-March 2021,” he says.
“Hopefully they can see the value of investing longer-term rather than looking to sell when they get a decent profit.
"I have had a number tell me they regret having sold down in the last six months, only to see their stocks continue rising. So, education is required on taking profits and also riding the momentum of a rising market.”
How low can you go?
A lingering question for new trustees is 'how much do you need to start a viable SMSF'? This topic has been hotly debated within the industry for years, with numbers ranging from $100,000 to $500,000. Set-up and running costs for an SMSF include platform fees, accounting, auditing and tax advice.
In October 2019, ASIC issued Information Sheet 206 to guide professionals providing advice on SMSFs. As Graham Hand writes in Firstlinks: "It shocked the industry by stating that it takes 100 hours and $13,900 a year to run an SMSF. This set the bar at $500,000 which was much higher than most service providers had suggested to their clients."
ATO data suggests an average expense of around $3,900 is more realistic. They also say the median assets per SMSF member was $414,912 in fiscal 2020.
Research conducted by Rice Warner in 2020 for the SMSF Association found that SMSFs with less than $100,000 “are not competitive in comparison to APRA-regulated funds” unless they could be expected to grow to a competitive size “within a reasonable time.”
However, SMSFs with balances between $100,000 and $150,000 are considered competitive, providing they use cheaper service providers, while those with $200,000 or more are considered competitive with both industry and retail funds, “even for full administration.”
Kitto argues the debate over the minimum starting balance is misguided.
“Attempting to boil down the suitability of an SMSF to a simple dollar figure, in my opinion, has never been appropriate, as there are simply too many additional variables influencing the decision of people who choose to be self-directed with their super,” he says.
“For some people, regardless of how much super they accumulate, an SMSF will never be appropriate as they have no interest in being self-directed with any of their investments, including super. With others, they may have a super balance below any particular threshold that’s recommended, however they may still decide that it is appropriate for their personal situation.”
StakeSMSF charges an annual fee of $770 for the entry-level SMSF product, and $2,640 for SMSF Plus, which includes access to support, cryptocurrency and collectables. The ATO charges an annual levy of $259 and ASIC adds fees of $56. StakeSMSF says its service includes providing financial and tax reporting together with arranging an independent audit.
However, customers are advised to seek independent financial advice since Stake operates under a ‘no advice model’.