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the new school of super podcast series

Episode 8

Thinking of starting an SMSF?

January 2019

In this episode, Sunsuper's Dream Team is joined by Joshua van Gestel, Sunsuper's National Education Manager to help you get wise on self-managed super fund and if one could be right for you.

Voice-over: Welcome to The New School of Super, a fresh look at money matters, your super, and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist, Brian Parker and Head of Advice and Retirement, Anne Fuchs.

Anne Fuchs: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper's podcast series covering investment markets, money matters, superannuation, and most importantly making sure you fulfill your retirement dreams. Today, as per usual, the fabulous Brian Parker, Chief Economist, is by my side. The man that knows everything there is to know about money markets and the economy. Hello, Brian. [inaudible 00:00:47] see you.

Brian Parker: Hello, Anne. Great to be with you again.

Anne Fuchs: And we have a special guest today. A very special appearance. Joshua Van Gestel, our national education manager is joining us today. Josh is going to break down self-managed super funds for us Brian.

Anne Fuchs: And before we get into it I should introduce myself, too, even though I'd like to think all of our listeners know who I am by now. My name is Anne Fuchs and I head up advice and retirements here at Sunsuper and we make sure on my team that all of our members get fabulous trusted high quality financial advice so they maximize their retirement savings.

Anne Fuchs: So Brian, what do we need to do to stay in the good books with our compliance team?

Brian Parker: Oh, thanks Anne. Well, as you mentioned Josh is here today to explain self-managed super funds and I think a lot of people are attracted to the idea of an SMSF for its flexibility and the control it can offer. That as always the devil's in the detail and one detail we definitely need to share with our listeners is that before we start we need to let you know that what you're going to hear today is general information only. That anything we say here, any advice that we give here, doesn't take into account your personal situation. You really should consider your circumstances and think about getting personal financial advice before acting on anything we discuss. You can also get a copy of our product disclosure statement from our website or give us a call on 13 11 84.

Anne Fuchs: Beautiful. Well, Joshua, welcome. It's lovely to have you here.

Josh Van Gestel: Thank you. It's wonderful to be here at last.

Anne Fuchs: And I look forward to all of our listeners being that much wiser about this SMSF thing, this thing called self-managed super, 'cause you're going to educate us all about it today. And probably it's worthwhile starting with what on earth is it? Are you able to break it down for us?

Josh Van Gestel: Well, we'll certainly break it down but I think really probably the thing to think about is the main consideration I think around SMSFs and their popularity is maybe there's been a bit of a disconnect between perceptions and what they can actually do. We've seen this incredible growth in them, with I've personally had a lot more people talk to me at barbecues about them than anything else once they know what I do for work.

Josh Van Gestel: But we have a lot of questions from people about what they're actually wanting to achieve with it. Is it that they think they can perform better? Is it going to be cheaper for them? Does it give them opportunities? And those are some of the things that I think we should actually unpack tonight.

Anne Fuchs: So SMSF, is it sort of this niche kind of very boutique investment opportunity or is it a sizable part of the superannuation market? How big is this sector?

Josh Van Gestel: Oh, it's a very big part and the growth has been absolutely unbelievable. So at the moment they probably make up a good quarter of the entire superannuation industry.

Anne Fuchs: That much.

Josh Van Gestel: Probably have about a million members or more but they do have incredible wealth within them. But really at the end of the day, Anne, they just run like a normal superannuation fund. They look the same, feel the same, largely have the same opportunities. But the main things is that when you've got an SMSF, you're the one in control. You're the one who not only calls the shots but you also have to take on all the responsibility.

Anne Fuchs: So is that ... 'Cause I was going to ask you why do you think there's been this sort of surge in popularity over the last how many years with SMSF and why it's a quarter of the market now. Is the psychological sort of concept of control? Or people are repressed investment managers and want to be like Brian? 'Cause we all want to be like Brian.

Brian Parker: [crosstalk 00:04:30] be like Brian.

Josh Van Gestel: I think it goes back to the original point. There's this perception versus reality. I think a lot of people perceive that they can do better than Brian and his peers. And the reality though is maybe they've bitten off more than they can chew. And so although we've seen this tremendous growth, it should be noted that we're also seeing now a bit of an uptick in how many people are actually closing their SMSF because maybe they have the realization that they just can't look after it.

Anne Fuchs: So you said earlier it sort of looks like a super fund, smells like a super fund, quacks like a duck, that type of concept, but surely that can't be true. And I just, in a sense of you said earlier that concept of you take on all the responsibility. So it's our responsibility here at Sunsuper to make sure we protect and grow our members retirement savings assets and so that they have that money when they retire. But when you're in a SMSF, what happens when you invest in a dodgy investment, like a unit of the plan and something goes wrong.

Josh Van Gestel: Absolutely. So when you're on your own SMSF you have the same obligations and outcomes as we do at Sunsuper. You are trying to achieve a good retirement outcome. I do wonder though how many people maybe go into a SMSF not realizing that that's actually what they're trying to do. I think a lot of people might go into a SMSF because it feels glamorous, because they can access property, because they can do a number of things.

Josh Van Gestel: Truth just is they want all the rest of it, but do they actually realize at some point in time they're going to have to withdraw from this thing. That they need to draw down an income or lord forbid that they actually need to make a withdrawal because someone passes away or they suffer a disability or some event like that.

Anne Fuchs: So, Josh, a friend of mine has just become a barrister and he's going into the Inns of Court in Brisbane and he's talking about thinking about rolling out of his industry fund and buying rooms at the Inns of Court and setting up an SMSF and there are some scenarios where SMSF is reasonable and appropriate.

Anne Fuchs: In general advice terms, are you able to give some just general principles around when SMSF sort of feels right or when it's more likely to be considered as something that might be right for you and-

Josh Van Gestel: Absolutely. And I think it's very important to realize SMSFs are actually a really great investment vehicle or superannuation vehicle, but definitely for the right person. Firstly, you need to think about the balance. So you don't want to start or even considering starting an SMSF unless you've got some reasonable money to put in. Different research suggests anywhere between 200,000 and half a million is probably a good starting point.

Josh Van Gestel: The second thing to think about is then what are the costs? What's the reality of it? If you are going to buy property with your SMSF, well that property will actually come with legal fees, management fees, everything else that normally is part of purchasing a property.

Josh Van Gestel: Thirdly, you also need to think about am I really interested? Am I personally going to invest the time to run my SMSF? Or do I actually have to pay someone to help me run it? So ultimately you are in control and you have to make the decision am I going to do it or am I actually going to outsource elements of it? And if I do then it comes back to that very first thing, do I have enough money? And what is the cost going to be?

Anne Fuchs: I think it'd be worthwhile bringing in our illustrious Chief Economist at this point. 'Cause I would like to jump to the fact that the Productivity Commission recently highlighted I guess the significant underperformance of SMSFs compared to a typical balanced fund within my super and the lack of investment strategy and philosophy and active management. Brian, what's your experience in this area?

Brian Parker: I'd say a few things actually, Anne. The draw on Josh's point about how much money you can put into this. And personally I think you need sort of up towards the half a million and above before you'd even think about it given the cost of actually running your fund. But it's also worth bearing in mind that you want to build, if u go back to investments 101 you want to build a sense of reconstructed diversified portfolio. And I can do that a hell of a lot better with $55 to $60 billion than I can with $500,000. But getting a really well-diversified portfolio is a real challenge unless you've got serious money to put to work in your self-managed super fund.

Brian Parker: And I suppose the other thing is, and again to Josh's point about what are you actually trying to achieve, and if you think you can do better, you have to ask yourself can you really? And one of the things we saw after the global financial crisis when your returns were very poor, 'cause markets were very, very unkind obviously, and a lot of people say well why am I paying superannuation fund fees to get negative returns? I can do better myself. Now frankly the productivity commission data suggests that that's simply not the case. That and those markets have recovered and as super fund returns have really performed well in recent, or really over the last nearly decade, those super funds have actually come back with a vengeance and they have outperformed most self-managed super funds.

Brian Parker: Now we really shouldn't be surprised by that and it's not just the investment expertise that you get by investing through major super funds, but it's also just simply the fact that these funds are able to invest in a very widely diversified way and invest globally. I mean the investment universe that major super funds are able to access is just far greater than whatever's available to the typical self-managed super fund investor.

Josh Van Gestel: And I think the other advantage is though when you've got someone like Sunsuper looking after investments, and it brings all of that with it, but you know can also to some extent set and forget. You know that your money's in good hands. If you're looking after it yourself and you're SMSF, then you have to invest the time. You absolutely have to invest the time. You can't just set and forget.

Anne Fuchs: And I mean you've both heard me talk at length about why I think money's such an emotional thing. And people make decisions about money, it's not rational, it feeds back into what their parents taught them, what their emotional relationship is. And I do think there is a strong connection, in my experience anyway, with people who estimates in a lot of cases where they just ... It's a lack of trust and desire to control. And that's sort of the rational things that Brian and you have referenced in a lot of instances just aren't as important as the desire to just control my nest egg at all costs. But they can't, as we all know, 'cause we live and breathe superannuation governance every day and compliance, there is a lot attached to governing a superannuation fund.

Anne Fuchs: So it's probably worthwhile, Josh, if you just high level explain what are the obligations, the paperwork with APRA, which is the regulator attached to super, what are the things our listeners need to know?

Josh Van Gestel: So I think again, it comes down to this perception versus reality. The reality is it's not easy. And whether that's lodging tax returns each year, getting audits done each year, managing the investments, we've already spoken about, all of these things you have to make a decision. Am I going to do it? Or am I going to pay someone else to do it?

Josh Van Gestel: So once you've answered that questions it really is going to drive two things: How much work you, yourself, have to do? And how much money you're paying out of the fund in fees? The obligations are many and I would actually go as far as saying a lot of people go into an SMSF without actually knowing what those full obligations are.

Josh Van Gestel: So besides tax return and audit, there's also just operationally. How do you make sure that the fund is doing what it's to and doing it legally? Are you purchasing and selling investments within the fund in the right way? Are you allocating returns to the members in the right way? If you're running a pension out of the fund, are you actually able to manage all the issues and requirements around that? There will come a point where you, yourself, have to think about am I up to it and am I still willing to keep doing it.

Anne Fuchs: And I was going to ask that question actually around the transition from when you're accumulating retirement assets to decumulation when you're actually drawing on those assets to draw an income in retirement. There's not only the, I guess the compliance obligations of how you structure that, but I guess too, Brian, to throw to you again, is what is a change in investment strategy required? Are different assets required? Because-

Josh Van Gestel: You can't sell one of the bedrooms.

Anne Fuchs: Well no, and this is right, we spoke in our previous episode about the importance of diversification and risk. And it probably is worthwhile just touching on that now, in light of SMSF investment strategy and the different phases of your retirement and accumulation lifestyle.

Brian Parker: Absolutely. And the key question is can you have a self-managed super fund that is big enough and diversified enough to be able to pay you an income without you having to basically sell down a chunk of assets really. And to go to Josh's point where can't sell a bedroom, you can rent it out, but you can't sell a bedroom. And that is an ongoing challenge for self-managed super funds.

Anne Fuchs: So I think any final tips. Brian's very good. You're sort of following someone who's very good at giving our listeners tips. Joshua, I have to warn you. I don't know if you heard our previous episode about tips for investors-

Josh Van Gestel: Brian's seven tips.

Anne Fuchs: Brian's seven tips do we have-

Josh Van Gestel: Do I have seven-

Anne Fuchs: So does Joshua have any ... Does he have any tips?

Josh Van Gestel: I might be a bit more succinct than seven. I think first and foremost if you're thinking about an SMSF, don't listen to your friends. Don't listen to the family. Don't just read the newspaper. Really important to get good advice. Really, really important. Know exactly what you're chewing off. What you're biting off. Know what the reality is not the perception. That would be the first thing.

Josh Van Gestel: Second thing is I think if you're going into a SMSF you have to research. What are you paying? What are you going to invest in? Are there elements you can do yourself? Are there elements that you have to outsource? Know exactly what you, yourself, are going to do.

Josh Van Gestel: And I think thirdly, going back to an earlier point, SMSFs can be a really great option for the right person. And I think the right person is someone who not just wants to invest through it, but also invest the time in it. Maybe have a bit of passion about it and enthusiasm about it.

Josh Van Gestel: If you're wanting a set and forget superannuation product, I'd suggest an SMSF ain't right for you. And there's got to be a greater reason to have one other than to be able to talk about barbecues about it. That would be my closing thoughts I think.

Anne Fuchs: Thank you and I think it's probably I'd like to just highlight to our listeners if they are thinking about an SMSF, they can contact Sunsuper. We have some fund-based advisors. They're able to provide simple advice on super, but they can after talking with you refer you to advisors. We have a number of advisors, external advisors to Sunsuper around the country. We have, we call them [inaudible 00:16:40] but they pass the [inaudible 00:16:42] test. We've stringent sort of guidelines and education standards that they [inaudible 00:16:46] and we have the highest level of trust that they can and will provide you the right advice for you. And if setting up an SMSF is what you need, then they will provide you that advice.

Josh Van Gestel: And Anne, I'd suggest they can also talk to them if they're at a point in their SMSF life if they have one where they feel it's actually time to pass that trust and responsibility to a superannuation fund like Sunsuper and how they actually go about that.

Anne Fuchs: Well I like [inaudible 00:17:13] and Nuser and I think Nuser is absolutely a hotspot for people who like to wind down SMSFs as life becomes more lovely and relaxed and anyway on that note I think I would like to thank you, Joshua.

Josh Van Gestel: Thank you, Anne.

Anne Fuchs: Josh, it's been great to have you. Brian, it's been a bit unnerving. You've been a bit quieter because there's been a special guest on the show but-

Brian Parker: I know. It's been physically painful [inaudible 00:17:36] honestly talk enough. I think I've done well, absolutely.

Josh Van Gestel: Thank you, Brian.

Brian Parker: Thank you, Joshua. Thank you, Anne.

Anne Fuchs: All right, well look forward to you joining us on our next episode of the New School of Super.

Voice-over: This has been The New School of Super. For information and inspiration to help you plan your future, manage your super, and enjoy your retirement visit sunsuper.com.au/thedreamproject, or if you've got a superannuation or investment question you'd like Brian and Anne to discuss, then get in touch at newschoolofsuper.com for it to feature in one of our future New School of Super podcasts.

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