Podcasts
Steve Mickenbecker
Gareth Lane
Ashwin Ramdas
Updated Sep 11, 2023
Mate Checked
This information has been reviewed by our SMSF Mates before it was published as part of our review process.
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Tim: Welcome back to SMSF Mates Podcast. SMSF Mate is where Aussie mates come together to get the most from their retirement savings and learn a bit more about super. Today, we have a very special guest Steve, you’re from Canstar and let me see if I get this right. You are the group executive financial services and chief commentator is that right?
Steve: That’s me.
Tim: Welcome Steve. I’m Tim and I’m here in the studio with?
Gareth: Gareth.
Ashwin: And Ashwin.
Steve: Good day guys.
Tim: Good day.
Gareth: Thanks for joining us.
Tim: Steve, today we just want to talk a bit about SMSF’s and your experience in the space and just some general information so fire away.
Steve: Terrific. Well, I guess I do have experience in the space myself because I have one but that aside I’ve seen a lot of people get into SMSF. Some of them are the right people to be doing it, some of them aren’t the right people to be doing it. What I guess I’d like to talk about is some of the ways you compare the SMSF style solution with the more traditional super fund that APRA regulates.
Gareth: Sounds good. I’ve got my list of stupid questions ready to go.
Steve: Oh excellent.
Gareth: In your opinion Steve, who is the ideal SMSFer?
Steve: To begin with you must have a pretty sizable superannuation balance. If you’re going in there with a couple of hundred thousand dollars it’s a very, very expensive solution. You could have good reasons for still doing it but it is going to cost you a lot. I’ve run up some of the average costs here. You set up costs just as individual trustees say between 700 and a thousand dollars and add 800 more if you’re a corporate say, if you want a corporate trustee. Then if you have a borrowing strategy add another 1500. That all adds up to a big number just to set up. Your annual running costs, you can be paying your accountant $700 for a very basic and simple SMSF but maybe $1800 for something that has unlisted securities or rental properties or something. You’ve got audit costs of $300 to $600. You’ve got ATO and ASIC levies of $500. If you get the picture from there you can be up for sort of anywhere from $1500 to $3000 and potentially more. Be ready to pay a fair bit if you’re going to SMSF. You can’t justify that sort of cost on a low balance.
Gareth: If you’ve got $100,000 it’s only 3%. Three grand a year is 3% of your whole return in fees.
Ashwin: That’s a healthy chunk going away.
Steve: You’ve got a lot to make up if you’re paying three grand in fees. The answer is really would that be right? I can’t imagine anyone going into to an SMSF with like some people say 300, without 300,000 at least. I kind of think maybe the bar could be a little higher at 400,000. You see all sorts of numbers bandied around though but it will cost you too much. It would mean you’d have to get extraordinary returns on your investment to warrant being in there to cover the cost.
Tim: Steve, I’ve been sort of liking it to say running your own business in the sense that it sounds great that you have all this freedom and upside potential, the sort of it’s on your back sort of thing but really it seems like a lot of work and a lot of effort. You’re right then you as you said have to outperform to sort of make up those costs to sort of make it worthwhile. You look at the investments and often these market returns are very hard to beat and industry or retail funds tend to sort of just be allocated in those products. A lot to consider. You’re right.
Steve: Look, there is. Just to sort of unpack that a little bit more. When you look at the returns that have been achieved over the last five years by the account based superannuation, the funds. They, on average returned over 7% in the last five years. The Canstar five-star rated products have returned over 9%.
Gareth: That’s per annum right Steve not on five years? PA right?
Steve: Yes, per annum. That’s a pretty fat return to be getting. You’ve got to be look, either lucky or a bit of a financial guru to actually come up with returns that are going to consistently outperform those sort of numbers. I just think your investment strategy should even in an SMSF and certainly with those funds I’m talking about, your investment strategy should be also avoiding risk. To get much more than that 9% you’ve got to take on a lot more risk in particular if you’re covering high costs.
Gareth: Absolutely. It sounds like wise words Steve.
Steve: I think it does. The other thing you mentioned there was a lot of work. Look, there can be a lot of work in this and it does require a high level of commitment. Now some people are ready for that level of commitment. Some people have the expertise and the motivation for it. Other people might say well look, i really want to do it but I’m not quite sure how to do it and I’m not sure that i have the skills for it. Be ready for all of that. If you don’t have the skills and or the motivation you shouldn’t be going into it because you can’t just set these things and forget them. When you’re paying for your advisor through a superannuation fund that advisor is monitoring your investments daily. They’re putting all the homework you can imagine into it. They’re professionals. You have to think well, as I’m not a professional what will I bring to the party here that will get me one of those bigger, fatter returns.
Ashwin: I guess it’s all in the first two words there Steve. It’s self-managed so you’ve got to be directed yourself on what you choose to invest in and what you’re trying to outperform with or opportunities that maybe you can’t invest in super. That might be the driving force for you to do it but yes, you’re right. You need the right balance but you also need to be self-directed and take ownership over what decisions you make. It’s not a passive vehicle to be used I think.
Gareth: There’s no way you do it yourself right?
Steve: That’s right. Now a lot of self-managed superannuation people do have an advisor and that makes sense but still the element of it is you are self-managed. You’re either choosing to take the advisor’s advice or whatever but you are effectively self-managed. Now should you pay for advice? It’s expensive but it can be well worthwhile but then that’s another layer over and above the 1500 to 2900 that i mentioned earlier. Be ready for that but a lot do and it makes sense for some people.
Ashwin: I suppose what would be the benefits you have seen in having a self-managed super fund Steve?
Steve: There are some things you can do with self-managed super that you cannot do with a traditional fund. Effectively one of the main things of course is a wider choice of investment. You might have a high level of belief that a certain sector is going to outperform. You might want to put all of your super uh bitcoin or non-functional tokens. I can’t imagine the tax office being too happy with that sort of investment strategy but so that sort of explains…
Gareth: You make headlines.
Steve: Exactly but the reality is that you can go into investments that you can’t do otherwise. If you want to go with your APRA register like your APRA administrative funds you’re really stuck with listed securities and term deposits for example. Now they can be offshore securities of course not just Australian and they are but if you want unlisted investments, if you want to buy property, if you do want to buy one of those exotic things that i just mentioned then you really do need to go self-managed super. You just won’t get that latitude through one of your big super funds.
Gareth: You’re telling me I can invest in my wine collection through my self-managed super fund.
Ashwin: Let’s get stuck in in-house assets.
Steve: I can see that being a depreciating asset somehow.
Ashwin: The order’s going to come check that those wines haven’t been touched.
Steve: Exactly. It’s an interesting point because I mean even storing them on your premises I think would be…
Gareth: A bit of red flag. Self-consumed, self-managed.
Steve: Exactly. There is another really valid purpose in self-managed super and a lot of small business people take advantage of this and rather so. That’s property purchase. Buying your business premises. I think a lot of small business people have gone through the pain of building up a business and getting it to a successful point and then finding they’re priced out of the property or by a landlord who can find another person prepared to pay a higher rent and then lose an element of the good will that they built up. The beauty of this is that they can buy their business premises, assure their tenure in the business but put it through their super.
Now, it’s non-recourse borrowing. It means setting up at their trust. It’s expensive to do. It’s messy. The banks obviously charge more for it because there’s a higher level of complication and risk assessment in it but it is a very valid reason for going into SMSF. A lot of small business people who take advantage of it.
Gareth: You can’t do it in a normal super fund. It has to be a self-managed…
Ashwin: You can’t borrow in an ordinary super fund. You need the bare trust is that vehicle to do it. It was a piece of mind value I think for some business owners to do that but it’s still fundamentally got to stack up financially as well. It is your super money as well. The peace of mind has to be balanced out with those extra costs that Steve ran through but I think most business owners would get financial advice to fully understand what they’re getting into because it’s very hard to undo a recourse loan and the cost to exit it itself can be a problem.
Tim: Ashwin, when you say it’s got to stack up do you mean like the returns on investing in that property versus market returns?
Ashwin: I think you’d be balancing the rental return you’re obviously going to get for your commercial property but it’s also got to factor in the costs of borrowing money at a certain rate. You’d hope that the rental return outweighs the interest costs that you’re paying otherwise you could be eating into your balance effectively. There’ll be reviews typically done by a bank fairly regularly on the fund to make sure it’s up to standard.
Gareth: And valuers every three years.
Ashwin: Yes and then there might be causes that you have to tip in funds if the value drops to a certain level because i think where people sometimes get called out with those borrowings in the super fund is the bank is charging a higher interest rate because the only asset they can get is that property. They can’t touch the shares or the cash in your super fund. Their only recourse on that loan…
Gareth: Is a fire sale of the property.
Ashwin: Of the property because you can’t actually borrow against the fund. That’s what the bare trust does. The bare trust owns the property and that’s where the security is held. It’s a strategy around that. That’s where the advisor and its requirements I think typically with all the loans that you get, financial advice so you understand what you’re signing would explain that to you.
Gareth: Sounds like bare trust might be a topic for another podcast Ashwin.
Ashwin: It could be.
Steve: The banks, they get around that risk by taking a personal guarantee from the, I guess the trustees of the fund but it’s absolutely right. I mean if you’ve got two million dollars in your super fund and you’ve borrowed, you put 25% of that into a deposit and you borrowed the rest from the bank for a million dollar property. The banks cannot get their hands on the two million dollars’ worth of shares you’ve got but it does raise another interesting point that some people sort of are very attracted to the idea of property through their super fund. It makes sense in some scenarios but not all. If somebody just happened to have a super fund and the only real asset was a property whether it’s your business premises or some sort of other investment property you’ve got a real problem on your hands.
I mean you’ve got fees you’ve got to pay. You’ve got all sort of repairs. You’ve got all sorts of other costs of holding the property and you’ve also got the risk of having to come up with cash for some other purpose. It’s an illiquid asset, your property. It’s all or nothing. You either sell the whole asset or you’re stuck in it. You just can’t over commit to one investment in your super. It is a risk that some people take thinking look, I love property and I think property’s the way to go.
Gareth: I think that’s worth unpacking that a little bit. I mean it sounds simple but selling a property isn’t something you can do this afternoon. If you hold a hundred thousand dollars’ worth of shares, you can sell 10 grand today, 10 grand tomorrow, you could buy 10 grand back next week.
Ashwin: It definitely becomes a problem especially in that pension point when there’s certain drawdowns that clients might not get if they’ve just got a property in there but i think it also comes back to the need to have an advisor at certain points in your life at setup and review points so you’ve got a holistic approach to that investment strategy. You’re mindful that okay, getting close to retirement if I’ve got too much in property it might be time to sell. Sell the property so you can then diversify accordingly so you’re not caught into a situation where you’re trying to find an 8% drawdown and you don’t have it in your fund. Those are the, that’s where definitely advisors are needed at different points in your life especially the super fund.
Steve: I think it would be very rare for an advisor to say look, put it all into one property.
Ashwin: I find it very hard to see an advisor say all or nothing on a property but I think as long as that’s presented to a trustee then they’ve made a decision either ignoring it or what not from there i think.
Gareth: I think like it makes logical sense, if you really think about it going all in on black at the casino and then kind of having the black chips stacked there without being able to take a little chip off the top. If you put it in simple terms like that it doesn’t make great logical sense. You’d better off spread your chips around the board a little bit.
Steve: I hate gambling analogies when it comes to super.
Ashwin: You can’t see my face but it would be oh no, Gareth…
Steve: I prefer the horse racing. Don’t put it all on a number eight in the sixth race. Spread it out to number eight on the sixth and number four on the third and number, etc. none of which make very much sense. It’s the indivisibility as well as the over commitment to a particular asset. It’s the, I’m sorry I’ve lost track now but you can’t get out when you want to. Oh and the other thing is it’s been commercial property in a lot of cases. There’s a bit more volatility in commercial property than there is in residential. You could find yourself having to sell because you just have to on a downturn.
Gareth: By volatility Steve means what property might have been worth a million dollars last week or last year is now only worth 800 this year but you need to sell it this year because you need some money out. You can’t kind of wait it out or sell a little bit. You’ve got to sort of wait or realize the loss or the gain.
Ashwin: There’s a lot of other property investments that clients can undertake that have that liquidity that don’t fundamentally have to be trying to pick one property.
Gareth: Like a property listed fund or an ETF. What are your thoughts on those Steve?
Steve: Oh well. I mean they can form part of the portfolio definitely. I mean ETFs are kind of the bedrock these days of a lot of investment strategies. I’m sure that the big super funds are using ETFs, the big funds managers are using ETFs. It’s a way of getting exposure to the general market without at very low cost. You’d hold aside the 20% or 30% of finessing through other investments but use the ETF as the bedrock to keep costs down on indices.
Ashwin: That makes sense to me. I guess Steve, what would be the pitfalls you’ve heard of with people with super funds.
Steve: I’m sorry. I think I missed that mate.
Ashwin: What are the pitfalls you’ve heard with super funds?
Gareth: Self-managed.
Ashwin: Self-managed.
Steve: Look, I think the biggest pitfall I’ve seen is people borrowing, going into the borrowing strategy to buy property. It’s where they can make the biggest mistake and get themselves into the biggest mess. Going in with too little money just generally means you’ll be up to too much cost with a diversified portfolio but where you put it all into property with a loan against the property that can really get you into an awful pickle down the track when you find rents have decreased, you’re not quite covering your costs, you don’t have enough set aside in other investments to subsidise it, to keep you out of trouble, you end up having to sell it at the wrong time. That’s where you can really get yourself into a mess.
Tim: I guess and we’ve just on a previous podcast Steve, spoken about insurances. I guess if you’ve got a loan within the SMSF and then someone within the fund was to pass away say while still working, unable to contribute to the fund and then you’ve got issues around serviceability and sort of that side of it as well. You’re right it is…
Gareth: Yes and getting excess cash into super has tax implications. If you know you’ve run out of cash in the fund to pay what needs to be paid on the loan and the rent and all that and then you got to throw more in you’re paying tax premium on it potentially.
Ashwin: It all comes back to the use and the requirements of the fund. I think the most common one that some people sometimes get called out with the borrowing. The fund is it’s usually a restriction that you can’t go into pension phase. If one of the members of the fund is retired and wants to get all the tax benefits of being retired they won’t let that occur simply because if that person goes to the pension phase they could technically draw their funds out and that would affect the LVRs and the payback. Some people get caught out on that I think potentially as an issue.
Steve: There are many, many pitfalls in superannuation and self-managed super is you’ve made a decision to manage all of those yourself. Now you’ve got an accountant who’s giving you a lot of advice on the technical aspects, your rights and your obligations but not many of us understand all of those in advance of going into it. We will get advice from our accountant on that. We’ll get advice from a financial advisor on the right investment properties but until you’ve been in it for a little bit of time you’re perhaps not always ready for some of the things that can go wrong because you’ve got to put your personal rule over the top of these things and say well, is it likely that that will happen to me.
Tim: Steve, i think we’re all in agreeance there are a lot of considerations that you need to make before taking the plunge into the SMSF space when you sort of touched on before when it starts to make sense when you sort of i think you mentioned have a balance of sort of 400,000 or above. Can you sort of touch on that upper end of the spectrum and I guess the benefits with a large super balance opposed to having that large balance in industry or retail super funds?
Steve: I think $400,000 is sort of a minimum. Now, I’m not quite sure that even that’s a great idea because you’ve got to find a way of returning better than that, well, 9% over five years but the super funds have been providing people but let’s say you do have some millions in superannuation. It can start making a lot of sense because you start having access to forms of investment and investment deals that might not be available for a regular sort of retirement saver. At that point you might say well look to take advantage of some of these deals that have been offered to me as a high net worth or as somebody at least the wealthier end of the spectrum. I need to have a vehicle with flexibility and self-managed super does that for you. It gives the flexibility to take on those other investment opportunities that you might be offered.
Now how many of us are getting off of those? Well not all of us get that sort of offer. We don’t quite get that freedom. The property purchase in the right hands is the other thing that is quite appealing but just one last kind of word of warning on that. If you are putting a lot of your super into it you’re kind of doubling down on your business because if the business fails and you’ve got a purpose-built property for that business then your superannuation is going to hurt as well at the same time. It is doubling down if you do strike tough times but there are good reasons for going in. There could be cost savings for those very high balances mostly around the investment fees that are being charged by super funds because they charged on a percentage basis and go up as the balance goes up but you’ll still be up for advice fees if you’re taking on an advisor. The six of one half does the other than that but for the right people SMSF is the right sort of game to be in. For the wrong people it can be a disaster.
Gareth: I think just to expand on that as well the balance is not per individual. You can combine with wife, family. Is it four beneficiaries I think you can have?
Ashwin: Up to six now.
Gareth: Up to six now. If you’ve got a hundred thousand times six of you there’s six hundred thousand. In theory that’s one set of fees, one set of compliance.
Ashwin: Some people if you’ve gone down the education framework, sometimes people use it as a teaching tool for their kids if they’re part of the fund to say these are things we’re invested in as a family but i would say that that’s the rare percentage of people that are on that mindset but some people do do it for the cost saving but i would I’d use it more as an education tool with my personal one is when the kids get to an age. Only five and three so I’ve got a long way to go.
Gareth: You’ve got a long way to go.
Ashwin: But that’s where I’d like to teach them about money because I think the biggest issue in my frame whether it’s self-managed or an ordinary super fund or a regulated APRA one it’s too many people sub 40 don’t pay attention to their super. You really need to pay attention in those early years from your first job all the way through to those 40s because trying to play catch-up in your mid-50s after the kids leave home is too late.
Gareth: We just ran out of time right? The compound interest and the market and inflation and all those things that our lovely government keep funding and printing money you’ve missed out on.
Steve: You’re right. The problem is that people have a cash need, a more immediate cash need when they’re younger and they’re buying houses and stuff like that. They can do that also but they shouldn’t take the view that well, i can’t afford to put any more in. I worry about this for now. I’ll just leave it. The difference between getting into even with the account-based stuff, the regulated super funds, the difference between our five-star products and the rest of the market is still 2%. That is not trivial when you put it over 35 to 40 years in the workforce. That makes a big difference to your savings and that’s net of fees but you’ve got to keep the fees down as well. People can actually find themselves able to make decisions even though they can’t put more cash in that will improve their situation at the end of their work life.
Gareth: Steve, on that so if you were to give some advice to your 21 year old self. I mean i can’t think of too many 18 year olds who are earning money and then paying uni and rent being able to throw too much in super but by the time most people get 21 they can sort of potentially have a bit of a job and maybe swap a bottle of wine every now and then for putting 100 bucks into their super fund. Any advice for your 18 year old self or 21 year old self?
Steve: Look putting a regular amount into super over and above the required will make a huge amount if you’re in particularly doing it early. I’d kind of not necessarily say it’s right for everybody because at the end of the day you do want to buy a house. All of those measures of how much do you need to retire on are predicated on you own a house and not having to pay rent.
Gareth: Aussie dream.
Steve: That’s right so you still have to make sure that you’re going to find yourself in a position to buy a house. At this stage much as some of us think it’d be good to have some way of accessing it not permanently to get a house. You can’t access it. That’s that.
Ashwin: There is that recent thing Steve where you can so the first homeowners savers thing.
Steve: That’s true. For some sacrificed amounts, yes.
Ashwin: Yes those extra amounts if they put it in there they could actually end up with a healthy tax.
Steve: That’s right. That it does make a fair bit of sense. I know it costs a bit of a bad press sometimes but I actually think it makes a lot of sense that scheme because it’s not diminishing people’s retirement situation at all. They’re just putting their savings in there and getting a tax advantage while they accumulate enough to buy a house so that makes sense but i think there are schemes that could access your equity in your super to support you the risk in your borrowing. I think those sort of schemes might make a fair bit of sense. It’s sort of having your cake and eating it but at this stage those don’t exist so maybe too much salary sacrificing the super expecting it to work for you might not work if you can’t commit to buying a house at some stage.
That aside it’s all those other decisions you make that will help you even without committing more money. It is getting into a lower cost fund. That’s getting into a better performing fund. If you’re in self-managed super it means absolutely committing a lot of time to making sure you’re doing it right.
Gareth: I agree. Absolutely, I think what you can’t see Steve is we’re nodding our heads. The only downside of a podcast is you can’t see anyone. Steve, any other words of wisdom from a self-managed super fund. I think personally it feels very good that we’ve had a very honest debate about is it for me? Should it be for me? I think I’m hearing an overwhelming message of do your homework, do you really have enough? Don’t just get a self-managed super fund because…
Ashwin: It’s not something you do straight off like a barbecue.
Gareth: Yes, right.
Steve: Look, it sounds incredibly appealing to say take control of your own destiny. Don’t pay these big fees to these mega corporations but are our super funds. That sounds appealing but it’s not for everyone. A lot of people will get it wrong and do a lot worse than they would have putting their money into one of the better, higher performing super funds and make sure that if you are going that option that you choose one of the better and the higher performing super funds but there are still some very real and strong reasons for having SMSF and if you tick the boxes and get a bit of advice on this and say well, can i put in the time, do i have the skills, can i find the advice to do it well then they’re a good solution.
Gareth: Absolutely so maybe Steve you could for those that kind of work out that maybe self-managed super funds not for them no doubt Canstar has a really good way of me sort of comparing some funds.
Steve: I’m glad you asked. We do. We compare around a bit over 60 super funds. Unfortunately the field is diminishing with all the mergers taking place but we compare about 60. There are some mega funds in there. We do a star rating on them. It’s based mainly on performance, net of fees but there are a whole bunch of other features taken into account as well the way you can access and use the thing. At the end of the day, we highlight based on sort of broad profiles of different styles of people based on the age and the amount people have invested. We highlight a sort of set of funds that might suit people better than the general market. It helps people to choose a fund. We don’t say to people this is the fund for you. We’d never say that. That’s personal advice. We don’t give that but we say here are a set of funds on these criteria have outperformed others in the market. Have a look at them. See which one works for you.
Gareth: Yes, absolutely.
Tim: All information is good information for people to make. Great idea that Canstar has that view process.
Thank you for joining us once again. If you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.
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