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Not quite. But they have certainly disrupted the dominance of self-managed superannuation funds (SMSF) as the flagship of DIY retirement savings in Australia.
The primary attraction of an SMSF is control. Investors who want to choose their own shares, managed funds, term deposits or exchange-traded funds often needed an SMSF to do so. Today, modern wrap accounts and superannuation platforms provide much of that same investment flexibility without the administrative burden, compliance obligations and fixed costs associated with running an SMSF.
As a result, the question is no longer whether an SMSF is better than a retail or industry fund. Instead, it is whether an SMSF remains the most appropriate structure for achieving your specific objectives.
Why modern wrap accounts are an attractive alternative to an SMSF
The strongest challenge to SMSFs has not come from regulation, but from technology and product innovation. Modern wrap accounts and superannuation platforms have closed much of the gap that once justified pursing an SMSF.
Modern wrap accounts allow investors to maintain significant control over their investments, including direct shares, ETFs, term deposits and managed funds. These accounts sit inside a professionally administered superannuation or investment structure, which leaves administration, tax reporting, compliance and record-keeping responsibilities with the platform provider. As an extra perk, they also provide real-time performance and asset pricing.
For investors whose primary goal is investment choice, a wrap account can often deliver many of the benefits previously associated with an SMSF at a lower cost and with substantially less responsibility.
When an SMSF still makes sense: Control & leveraging illiquidity
Despite these developments, SMSFs remain highly effective in specific circumstances.
Traditional superannuation fund investment options are designed to manage liquidity at scale. Millions of members may be drawing pension income, switching investment options, or making lump sum withdrawals on any given day. Thus, the portfolios underlying your available investment options are structured around highly liquid, easily tradeable assets.
In contrast, an SMSF can hold specific assets that your traditional retail or industry superannuation fund never could. These may include, but are not limited to:
- business real property
- unlisted assets or private company shares
- bespoke share portfolios
- artwork or collectables.
This flexibility can make an SMSF attractive for business owners wanting to hold commercial property within superannuation, investors pursuing specialised investment strategies, or individuals with complex estate planning requirements.
In these situations, the additional cost and complexity of an SMSF may still be justified.
What to consider before pursuing an SMSF
For those who believe pursuing an SMSF is still the right choice for them, there are a plethora of factors that are crucial not to overlook. These items should be discussed at length with your financial adviser or accountant to ensure you have a holistic picture of an SMSF, before being lumped with the associated burden.
Time and expertise: Running an SMSF isn't passive. Trustees are legally responsible for investment strategy, record-keeping, and compliance.
Insurance: Life, TPD cover, and even Income Protection inside large superannuation funds is often cheaper and easier to obtain (via group policies) than cover arranged individually through an SMSF.
Diversification risk: Because SMSFs are often built around a small number of concentrated positions or a single property, they can carry more concentration risk than a professionally diversified portfolio.
Exit and wind-up costs: Closing an SMSF involves a final audit, a final tax return, and in some cases, asset transfer costs. This cost is frequently overlooked when comparing structures and is an important consideration with respect to net performance.
Cyber and fraud risk: As trustee, SMSF members are personally responsible for safeguarding their fund’s assets and records and lack the fraud protections available from larger institutions / platform provider.
Regulatory attention: The ATO and ASIC regularly scrutinise poorly run SMSFs, particularly those with low balances or non-compliant investment strategies to ensure Australians superannuation is managed for an optimal retirement. Penalties for these breaches can fall on trustees personally.
The bottom line
SMSFs are not dead, but their role has become more specialised.
Wrap accounts and modern investment platforms have removed what was once the most compelling reason to establish an SMSF: direct control over investments. What remains is a narrower set of circumstances where the flexibility of an SMSF genuinely outweighs its cost and complexity.
For investors considering their options, the most important question is no longer, "Should I have an SMSF?" but rather, "What am I trying to achieve, and which structure is best suited to achieving it?"
Answering that question with the assistance of a financial adviser or accountant is likely to be far more valuable than choosing a structure first and attempting to justify it later.
Frequently asked questions
An SMSF is a private superannuation fund run by yourself (and up to five other members) as the trustee(s), rather than relying on a large retail or industry fund to administer your retirement savings. As trustee, you become legally responsible for the fund's investment decisions, compliance with superannuation legislation, and reporting requirements.
In practice, rather than being confined to the pooled investment options offered by traditional superannuation funds, an SMSF can invest in almost anything permitted under superannuation legislation, such as direct shares, term deposits, real property, unlisted or illiquid assets, and in limited circumstances, artwork or collectibles. This flexibility is the primary appeal; however, it also becomes the source of additional costs and responsibilities.
The establishment, operation, and eventual wind-up of an SMSF all incur various one-off or ongoing fees payable to accountants, solicitors, ASIC, and in some cases, financial advisers.
Typically, one-off costs will be incurred for the setup of the fund, including the drafting of trust deeds and establishment of a trustee company, where applicable. Beyond this, each year, one can be expected to pay annual fees and costs including:
- administration and operating costs
- audit fees
- ATO supervisory levy
- accounting and tax return preparation.
Additional costs should also be considered where one’s superannuation affairs, are more complex, such as utilising a limited recourse borrowing arrangement (LBRA).
Moreover, these fees are largely a fixed cost, and don’t vary excessively between a fund with a balance of $150,000 or $1.5m. For smaller funds, this fixed fee can become a challenge for performance. A well-run, small balance fund may yield a highly competitive gross return. However, the overarching fixed fees can eat into performance and see the fund underperform the industry or retail alternative on a net basis. Accounting for this, guidance from ASIC ascribes $500,000 as an approximate minimum balance before one considers pursuing an SMSF as these costs can see performance struggle, inhibiting one’s ability to effectively accrue retirement savings.
A wrap account sits inside a professionally administered superannuation or investment structure but gives the member control over their underlying investments (i.e., direct shares, ETFs, term deposits, and managed funds). All whilst performance and asset pricing is available in real time.
The crucial difference between leveraging a wrap account or pursuing the set-up of an SMSF is where the burden of administration, tax, reporting, and compliance lies. In the case of wrap accounts, this is the responsibility of the platform provider, whereas for an SMSF, this burden sits with you, as the trustee.
Thus, for those who are seeking control over which direct shares or managed funds they are invested in and have no desire to pursue complex structures or illiquid / alternative investments, you can now achieve this by leveraging a wrap account. Moreover, this can come at a lower comparable cost than utilising an SMSF, given the absence of the considerable fixed administration fees.
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