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Why DIY super is OK

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At the moment there’s a backlash against self-managed super funds from the funds management industry and a whole lot of the media is going along for the ride as well as the kicking!

Of course, many of the journos are being sucked in as they have to write a money story each week. That’s why public relations outfits for the big financial institutions are targeting the overworked and sometimes limited-thinking members of the media with easy stories on what’s wrong with self-managed super funds or SMSFs.

Super sector

Believe it or not, Aussies are so smitten with SMSFs that it’s actually the biggest sector in super. The Australian Prudential Regulation Authority tells us that there are $432 billion in these funds with 854,000 members as of March this year. This is 32 per cent of the country's total super savings and, by way of contrast, retail super funds run by professionals manage $370 billion, while industry funds have $257 billion.

Of course, there are more members in the latter two super groups but their balances are smaller and that’s why the professional funds have SMSFs in their sights.

In the nine months ending March, there were 23,561 new self-managed funds created.

There are 447,000 actual SMSFs with average balances of $965,000 and once again this is why the professionals want to bag these DIY funds.

But while the funds are out there poking holes in what some people do with their SMSFs and what some advisers do to get their clients into these funds, the simple facts are that a SMSF, run well with the right amount of money in it, can be cheaper and even more effective than the many professional funds.

Growth of SMSFs

The latest breast-beating by the funds about their greatness compared to SMSFs comes as these funds are growing and when retail funds have been forced to cut costs to match the lower costs of industry funds. This latter group not only outperformed many retail or financial institution funds, but were a lot cheaper too.

Also, many advisers recommend SMSFs and it means that many members of professional funds draw their money out and set up their own funds. The professional funds don’t like this and so are tarring all SMSFs and advisers with the one brush, which isn’t fair.

A lot of the growth of SMSFs came out of the poor performance of so-called pro funds during the GFC and many of these charged outrageous fees and paid advisers big commissions.

The simple facts are if the costs of a SMSF are managed and the investment strategy is wisely constructed, say with a heavy emphasis towards quality companies with a good track record of paying healthy dividends, then this investment alternative can be a real winner. 

History reveals…

As we become more money savvy, a lot of people are asking why their pro fund manager has not beaten the stock market index. History says about two-thirds of fund managers can’t beat the index!

The challenge is to find the best one-third but there’s another problem – the guys and gals who beat the index one year don’t necessarily beat it the year after.

Research from the University of Chicago found that to beat the stock market index by active management, that is, going with a pro fund, is a one in 36 chance. In case you need help in understanding what I’m saying – the odds on a roulette wheel are one in 37!

My accountant buddy says the odds are even worse in trying to beat the index when you throw in tax and other charges. 

What’s needed for a SMSF?

In general, a SMSF needs a good balance of money and the total costs – accounting, auditing, broker fees, adviser etc., which are tax deductible for the fund – should be worked out and compared to one per cent of funds under management.

So, if you have $400,000 in a SMSF and your costs are around $4000, then you’re paying one per cent or so, which is not dear. And if you get the benefit of an adviser helping you with money-saving and moneymaking strategies, then you could have a very good deal.

And if you’re doing it without an adviser, while still using an accountant or a super administrator, you can drive those costs down even further.

If you’re a poorly organised person who doesn’t follow the markets and other investment asset markets, then you might not be right for a SMSF. However, if you find a good adviser and the costs are fair, then you could be on a winner.

Also, if you have a good adviser or you decide to go for an index-tracking ETF, then you could easily do better than two-thirds of professional fund managers!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, June 29, 2011

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer, Roger Montgomery, Paul Rickard and Charlie Aitken the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

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