Setting up an SMSF: how much is enough?

A new report from the SMSF (Self-Managed Superannuation Fund) Centre of Excellence, a collaboration between SuperConcepts and The University of Adelaide, has highlighted how crucial the size of an SMSF is in relation to its overall performance.

Entitled When size matters: a closer look at SMSF performance, the report analysed data from more than 20,000 SMSFs between 2008 and 2015[1]. The researchers discovered that the average balance across the funds was $845,000, with the average annual expenses coming to around $8919, or 2.8%. It is worth noting that all SMSFs in the data set have outsourced their administration to external providers.

The report’s main finding was in relation to the recommended minimum size of a fund, and the benefits of economies of scale in this instance are as clear as ever. Despite a decline in operating costs in recent years, an SMSF’s expense ratio generally does not fall below 2% (approximate annual expense ratio of a retail superannuation fund) until funds reach $550,000[2]. This size is also generally the point where performance improves, and where the fund reaches a level that allows for diversification. SMSFs can be set up with balances of as little as $200,000, but these smaller funds are often insufficiently diversified which drives down returns. They become more viable if the trustee chooses to take on some of the administration themselves, however in many cases this is best left to professionals.

That being said, an SMSF can have up to four members, so funds may be pooled with spouses and/or family members in order to maximise the starting balance and subsequent contributions.

Establishing an SMSF can be a fruitful exercise for high-net-worth investors due to the increased flexibility and control it offers. However, with these benefits come increased responsibility. Investors must be aware of the regulatory requirements and associated costs which are unique to the SMSF sector.

This report is the first in a series of upcoming reports from the SMSF Centre of Excellence which aims to examine the relationship between fund activity and performance, diversification and performance, and the relationship between trustees seeking advice and performance. The full report may be viewed here.