
When it comes to setting up a Self-managed super fund (SMSF), there are some common mistakes that a lot of people seem to make. These points are too often excluded from the conversation and should be clearly considered before setting up an SMSF in the first place.
The following list covers some of the biggest mistakes people often make:
It is incredible how many people have a super fund set up and the money just sits in cash. This is invariably driven by lack of understanding of the options or what is suitable and/or paralysis by analysis. If an SMSF is suitable and you assume control of your own funds, you need to have a strategy and a plan for how you use the funds.
Costs within the fund can quickly spiral when considering set up, investment costs and ongoing accounting and legal advice. Before you set up an SMSF, you need to draft out your known costs, including:
Only once all costs are known and understood, you can make an informed choice that an SMSF is the most cost effective option.
This is probably the least understood or considered aspect of what it means to start your own SMSF.
In order to manage your super fund effectively you need to have a clear investment strategy. Whether it is property or shares or even buying art that motivates you to set up a fund, you are doing it because you believe you can achieve a rate of return in excess of the Fund Managers that would be investing your money otherwise, were you to leave it invested in a public offer fund.
In order to do this effectively of course, you need to commit a certain amount of time to ensure your investments are managed effectively and your time commitment does not rest at that.
In reality, if you are to manage your SMSF effectively, the time output includes:
You could outsource any one or all of these time outputs (with the exception of preparing your tax work) however you would need to weigh up the costs of this against how this might impact your overall fund return.
Time is a precious commodity that is finite, but it also has a value attached to it.
It is therefore vital that you understand and weigh up what your time is worth, before committing it to running your fund.
If you choose to start an SMSF, you are taking on the legal responsibility of a Trustee. In short, your legal responsibility is to operate under the rules of the SIS Act and to work within the rules of your Trust Deed.
While SMSF’s offer considerable flexibility compared to other super fund structures, the rules they operate within are regularly changing. You as Trustee are responsible and liable, if you breach these.
Your Financial Planner and Accountant can provide a lot of guidance in this regard, however the ultimate responsibility still rests with you as Trustee.
One of the problems with super generally is that you are not given a reasonable point of comparison to see how you are going, compared to the underlying investment markets that you are invested in. The information is out there, but as it stands it is up to you to seek out the answer, and the reality is that most of us would not know where to start.
As a consequence we can all be guilty of making ‘apple for oranges’ judgements on performance.
The same is true for SMSF investors too. Fed up with relying on someone else to manage their funds, they take control back and invest it for themselves, but what do your returns really mean if you are not benchmarking them? You may achieve a 15% return and feel pretty good about it, but if that is 10% less than market for that year, it’s actually a really poor result.
If you do decide to set up an SMSF, it is essential that you identify how you can effectively benchmark performance if you are really going to achieve what you’ve set out to do, and that is outperform the alternative you’re thinking of moving away from.
James McFall CFP®
Yield Financial Planning
James is the founding director of Yield Financial Planning and has over 15 years experience. A CERTIFIED FINANCIAL PLANNER® professional, he also holds a Master of Commerce (Financial Planning), and a diploma of Financial Planning.
Whether you are a professional or business owner, retired or contemplating retirement, James and the team at Yield are committed to helping you grow your wealth sustainably, protect your downside and retire with confidence and peace of mind.