What are the pros and cons of SMSF?

Highlights

• Self-managed super funds (SMSFs) allow account holders to take control of their super money and choose where to invest it.
• Opening an SMSF makes an individual a trustee in the fund, which comes with a lot of responsibility.
• One must weigh the costs and benefits of setting up an SMSF before opting to embrace one.

If you are wondering whether you should set up a self-managed super fund (SMSF), the real answer is not as simple as one may expect. SMSFs allow account holders to take control of their super money and choose where to invest it. Direct control over the super funds is an incentive and a huge responsibility that comes with various challenges. Choosing between the costs and benefits of SMSFs is the key to answering the question posed at the beginning of this article.

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SMSFs have considerably grown in popularity as individuals became increasingly aware of the investment options available in the markets. Meanwhile, high-risk investments are reaching a larger population, with young investors particularly taking a keen interest in such areas. To benefit from such risky investment ventures, investors need to have sound knowledge of the market and the related products.

Most importantly, opening an SMSF automatically makes an individual a trustee in the fund, which comes with a lot of responsibility. For SMSFs with a corporate trustee, a company is set up to act as the legal trustee, and each trustee becomes a director in the fund. As attractive as that may sound, a fund director or trustee must be aware of the rules and regulations associated with governing super funds.

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Against this backdrop, let us discuss the pros and cons of SMSFs.

What are the benefits of SMSF?

• Accessing a greater number of investment options: One of the most common reasons individuals choose SMSFs is the broad range of investment options available under them. A retail or industry super fund might not give users access to assets like art and collectables, which includes stamps and coins and even physical gold. However, SMSFs provide freedom to access such investment options. In fact, SMSF holders can also borrow to invest in property, given that the compliance requirements outlined by the Australian Taxation Office are met.

• Greater flexibility and control: Perhaps the biggest advantage of owning an SMSF is that account holders themselves oversee the management of the fund. Being a trustee in a fund means members can tailor the fund deed to best justify their interests. Additionally, members can choose the investment strategy that they want for the fund. In case of high market volatility, trustees can also adjust their portfolios to swerve losses. 

• Quicker dissemination of fund information: Trustees in SMSFs have exclusive insight into the workings of the SMSF and how the investments are performing in real-time. Unlike retail or industry super funds, investment performance is aggregated and not released for many months. Thus, the faster availability of investment performance in SMSFs allows for quick decision making, reducing potential losses to the overall fund. 

• Cost-effective setup: Previously, SMSFs were thought to be a costlier option, but this has changed with time. Trustees get the option to choose a more budget-friendly option under SMSFs. Investment providers have lowered their prices to make their products more lucrative, making SMSFs a more cost-effective super fund.

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What are the disadvantages?

• Higher responsibility: An inevitable by-product of holding an SMSF is the significantly higher responsibility endowed on the trustee’s shoulders. Unlike retail or industry super funds, losses on SMSFs cannot be recovered through any regulatory body. Additionally, there are severe consequences for not adhering to the rules and regulations of managing super funds. Tax penalties can be levied, apart from hefty fines and/or criminal proceedings.

• Doing the homework: Managing an SMSF is a significant duty that needs a high level of expertise. This includes understanding the workings of investment markets, knowledge about recording investments and transactions, and insight into balancing a portfolio with diversification.

• Inaccessible government compensation schemes: Under industry or retail super funds, individuals are entitled to compensation if their funds run into losses. However, in SMSFs, members (who themselves are trustees) are solely responsible for what happens to their super funds. Additionally, there is reduced access to dispute resolution bodies that can help solve legal matters.

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