Within the next few months, there will be more than 560,000 SMSF's in Australia with over a million members with a median balance of $810,000, and average returns around 12%.  Most start by rolling over their balance in their employer/managed super fund to the SMSF.  The media says that an SMSF should have a minimum $200,000 balance, as does AMP in its advertising and also ASIC.  Why $200,000, why would AMP care, what would public servants know about investment, all good questions?

Some of this 'advice' has a place; super is about investment for retirement, not just saving some tax each year.  SMSF's include those who want to invest in property such as their own business premises, undertake flexible estate planning, and even pool super savings to acquire otherwise unaffordable assets.

But, there are weaknesses in some funds, hence the criticism.  Some will never have enough assets to become financially feasible or have poor investment diversification.  In some, trustees are out of their depth, such as poor investment knowledge and understanding of their legal obligations.

Before establishing a SMSF, critical questions to consider include:

1. Am I dissatisfied with the performance of the managed funds?  Returns over 10 years in a balanced portfolio were 6.5%, but have been 9.7% over the last 12 months.  These portfolios are widely diversified, spreading the risks and opportunities.

2. Do I want investments not available through a big fund?  An SMSF is necessary if you want to invest in direct property or in shares not held by the big funds.

3. Do I want to hold my business premises in Super?  This stacks up for tax-effectiveness, asset protection, succession planning, and security of tenure.  An SMSF can acquire commercial property from a member or related party and lease the premises to the business, a concession allowed under the in-house asset rules.

4. Do you want to spend time managing your own fund?  You need to know the duties and responsibility of a trustee, especially a few 'don'ts'.  If you only have a few investments, there will not be much administration or need for investment advice, but you still need to prepare Accounts and a Tax Return, attend to secretarial, have an audit, pay ATO fees, etc.  Costs are often less than the expense ratio charged by the managed funds.

If all you do is replicate the portfolio of a managed fund, there is probably little advantage with your own SMSF.  But, research by the 2015 SMSF Survey shows most funds benefit because of their purpose and strategy.

We'd be happy to talk about a SMSF with you, not its particular investment choices, but its overall suitability or advantage for you.  If you want to talk investments we can put you in touch with our financial planning associate, Gary McNamara.