Flawed by the Productivity Commision’s Super Flaws

The Productivity Commission reckons you now need $1m to make a Self-Managed Super Fund (SMSF) a viable proposition.

In support of this (ridiculous) claim, the Productivity Commission published the following chart…showing the ‘average’ return for SMSFs based on account values.

Source: Australian Financial Review
[Click to enlarge]

The data shows that lower valued accounts are having returns eroded away by costs.

But what you see is not always the truth.

For instance, what constitutes ‘costs’?

As you’ll read shortly, insurance premiums paid by SMSFs are included in costs.

Whereas, these are not accounted for in calculating net returns from institutional funds.

In addition, SMSFs with non-recourse borrowing to invest in real estate could be negatively geared…meaning the fund is losing income in the hope/anticipation/belief of capital appreciation.

And, as mentioned in Monday’s Markets & Money property revaluations, on average only occur every three years. These revaluations may also be on the conservative side…not fully reflecting the extent of the capital appreciation.

When you add the three elements together — life insurance premiums, interest costs exceeding income, and a delay in accounting for any notional capital gains — you can understand why funds may have returned a negative balance.

But these elements have NOTHING to do with the ongoing running costs — accounting and audit fees — associated with managing an SMSF.

The Productivity Commission’s draft report $1m minimum for an SMSF is flawed.

As promised on Monday, here’s the second part of the ‘SMSF v Public Offer Funds’ article published in The Gowdie Letter on 30 June 2017…

‘SMSF v Public Offer Funds’

The following graph is the actual performance of the fund for each year from inception — 2000 — to end of 2016.

Source: Australian Super
[Click to enlarge]

Over the past 16 years, the fund has not delivered a negative return.

Then again, it’s had a strong tailwind of falling interest rates (which produce a capital gain) behind it.

The falling interest rate dynamic (producing capital gains) is evident in the fund’s stellar performance after the GFC. With central bankers slashing rates to stimulate the economy, long dated bonds became much more valuable.

The 12% return in 2012, was a function of about 2% in interest payment and 10% in capital gain.

Since then, as interest rates stabilised, capital gains have been harder to come by.

I’d love to see the fund’s flow data for the end of 2012…my guess is money poured into the fund on what has been returned and not what will be returned. Just a guess made on my observation of investor behaviour.

Here’s a thought. If the fund expects 3 out of every 20 years could be negative, could this expectation be fulfilled with the prospect of rising interest rates in the coming years?

If your objective is capital preservation, then this fund might not achieve that outcome in the near future.

Secondly, the investment aim is to achieve a return of 0.5% above CPI.

The following is the latest CPI number from the ABS.

Source: Australian Bureau of Statistics
[Click to enlarge]

Add 0.5% to our CPI of 2.1% and we require a return of 2.6% to achieve this objective.

The following is a screenshot from Info Choice on current 12-month term deposit offerings from Authorised Deposit-taking Institutions (ADI) — those covered by the Government’s Deposit Guarantee.

PLEASE NOTE — this information is provided for illustrative purposes only and IS NOT a recommendation to invest in any of the ADIs in the table.

Source: Info choice
[Click to enlarge]

The 12-month returns on offer range from 2.55% to 3.0%…objective achieved with a Government Guarantee.

The public offer funds ARE NOT covered by the Government Guarantee…not even the cash holdings within the public offer funds.


Industry funds are recognised as being lower cost alternatives to retail funds.

I agree with this observation.

But how do they compare to SMSFs?

That all depends on how much money is invested, where it’s invested and the complexity of investments.

As noted above, my estimate of annual costs on Jim’s fund is around 0.2% per annum…wafer thin.

In flicking through the Australian Super information, I came across this table on the costs associated with SMSFs.

Source: Australian Super
[Click to enlarge]

Having been in this business for a long time, I was somewhat surprised at these numbers.

They appeared to be a touch on the high side…especially when you consider my estimate for Jim’s fund is $3000, and the table suggests the fees are in the range of $9,100 to $18,200.

As always I look at the fine print.

The data to support the figures are sourced from ATO reports — ‘SMSFs A Statistical Overview…’

Source: Australian Super
[Click to enlarge]

Prima facie there’s solid data to support the figures in the table.

But…then you go and have a look at the ATO’s ‘SMSFs A Statistical Overview…’ reports and you find this qualification…

Source: ATO
[Click to enlarge]

‘Monies flowing into or out of an SMSF…operating expenses are calculated using the formula above.’

One of the expenses flowing out of an SMSF is life insurance premiums. These payments form part of the calculation of operating expenses. Hardly an ‘apples with apples’ comparison with the Management Expense Ratio of public offer funds that DO NOT include payment of insurance premiums in their calculations.

However, the ATO does cover its backside with this cautionary disclaimer…

Source: ATO
[Click to enlarge]

‘Caution should be taken when using or presenting this data…’

Caution is duly noted.

How does Jim’s estimated annual cost of $3,000 compared with the public offer fund?

Source: Australian Super
[Click to enlarge]

According to the information, the Diversified Fixed Interest has an annual expense of 0.39%…$6,000 per annum PLUS a few hundred dollars in Australian Super admin fees.

In summary, Jim would be paying twice what he is now to invest in an option that may or may not meet his stated capital preservation objective and there IS NO Government Guarantee.

Whereas, the SMSF has a lower cost, will meet his capital preservation objective, will achieve the Diversified Fixed Interest fund objective of 0.5% above CPI and IS protected by the Government Guarantee.

In my opinion, the answer is rather obvious. However, I’m not Jim.

The lesson in this exercise is to do the work.

Know exactly what it is you are investing in, what it’s going to cost and be somewhat cautious when it comes to product marketing material.

One other thing….

While reading through the Australian Super site, I came across this performance chart dating back to 1996.

Do you notice anything?

Source: Australian Super
[Click to enlarge]

For most people, this chart reinforces the benefits of growth assets in a portfolio.

The best performing assets have been Direct Property (six-fold increase) and Australian shares (five-fold increase).

Both asset classes have been major beneficiaries of the greatest period of credit expansion in history.

The worst performing asset class has been cash.

Can shares pull out another 500% return over the next 20 years? Or, will shares be subjected to mean reversion?

Can bond funds produce another four-fold increase if the long-term cycle of falling interest rates is now replaced with one of rising rates?

If we’re on the cusp of a major downturn, one that flips the last 20 or 30 years of investment behaviour on its head, then the unloved asset class of the past 20 years could be the future star.

What has been, is not necessarily going to be what’s in our future.

Worth thinking about.

Technology has significantly reduced the cost of running a straightforward — cash, term deposits and direct shares — SMSF.

In my opinion, those who seek to take control of their retirement capital with a sensible, well balanced portfolio can establish a SMSF with $100k.

The real value in this hands-on approach is the transparency…you know where the funds are invested.

And, if absolute security is important, then you can invest in bank accounts that are protected by a GOVERNMENT GUARANTEE.

This important security feature does not exist in institutional funds…a fact the flawed Productivity Commission report forget to mention.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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