Most financial planners would answer that other financial planners are their main competitor. That might be the wrong answer.
In business, your competitor is anyone who is doing work that you could do. If you have a client with more than $200,000 in super (combined if they are a couple), then there is a good argument that whoever is managing their super is your competitor. After all, at least some of the fees that are being paid to the super manager could be to you as an administrator of a self-managed super fund.
Arguments abound about how much is needed to justify running a self-managed super fund. There is no one answer. This is because whether an SMSF makes sense depends on (i) how the SMSF is invested; and (ii) what the alternative super option might be.
For example, many people are paying more than 1% to have their supermanaged professionally. We recently looked at a managed retail fund aiming for a return of 6% plus inflation. That was the target before fees. The fund was charging members 1.73% (when all the fees were totalled up).
This meant that the target was actually 4.27% plus inflation.
The retail fund manager calls this their ‘high-growth option.’ But to put that in perspective, 6% plus inflation is about the average long-term return on the Australian sharemarket over the last 20 years. So, this fund manager was in fact aiming for an average return – and then deducting 1.73% for their trouble.
An index tracking ETF will achieve the market average as well. The management fee is 0.15% – less than one-tenth of the expensive super fund.
In this case, the client was unnecessarily paying 1.58% to a fund manager. Every year. Do that for ten years and the client has lost 15% of their investment.
Consider an SMSF with an admin fee of $2000 per year – a pretty good fee for a fund that invests in index-tracking ETFs. $2,000 is 1.58% of $126,000. So, a person or a couple with $127,000 in a self-managed super fund that invests in a market tracking ETF will pay lower fees than if they were using the expensive retail fund.
Think about that: you would pay lower fees for the same performance if you had just $127,000 in an SMSF and invested it into an index-tracking ETF.
Financial planners have a statutory duty to provide advice that is in their client’s best interests. Put simply, this means that financial advice needs to leave people better off than they were before they sought advice. An SMSF that leaves a client paying lower fees makes them better off. Therefore, an SMSF that results in a client paying lower fees is in that client’s best interests – provided they are prepared to act as the trustee of their own super benefits.
That said, advisers are also bound to consider alternative managed super funds, such as industry funds. So, if you asked us for assistance with a client who is paying 1.73% to manage $127,000, we would look first at a lower-cost managed fund.
But this all changes once a client or client couple get their benefits up around $200,000. At this point, the simply-invested SMSF starts to beat all comers. This becomes even more pronounced as the balance grows – because the admin fee for an SMSF is largely a fixed cost, whereas managed funds generally charge percentage-based fees. This means that fees grow as the balance in a managed fund grows.
Think about this. Once your clients’ balance goes north of $200,000 or so, they will generally save money if they use an SMSF. And if you are doing the compliance work, you will make more money (which is all fair – you have helped your client save money – you should get paid!)
You win. Your client wins. Who loses?
The fund manager. Which means that the fund manager is your main competitor. And they are a perfect competitor: a big, slow, expensive snail that falls further behind as the years roll by.