SMSFs “appalling” option for ordinary Australians

Self-managed superannuation funds (SMSFs) with assets under $2 million may return zero or even negative returns, Industry Super Australia (ISA) has warned.

Analysis by ISA found that, in the 2015-16 financial year, funds with balances under $500,00 earned “shocking” average returns ranging from zero to negative 16.7 per cent on funds with less than $50,000 in assets.

Even those with higher balances did not perform very well. While funds with balances over $2 million delivered returns averaging 4.3 per cent, those under $2 million did not deliver performances as strong as either Australian Prudential Regulation Authority (APRA)-regulated or industry funds.

ISA said that this pattern was consistent in the five years to 2016, as the table below illustrates.

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Smaller SMSFs also compared badly against retail funds on outlays, incurring a “disproportionally” high expense ratio of over six per cent.

ISA chief economist, Stephen Anthony, said that while sophisticated, high-wealth individuals may be able to make managing their own funds work, these figures showed why doing so was a poor decision for “ordinary Australians.”

“The pattern is clear: the less you have, the worse you perform,” he said. “It’s important to know how your super fund stacks up on fees and net returns – otherwise you could be in for an unpleasant surprise.”

The ISA analysis also found that limited recourse borrowing arrangements (LRBAs) had grown, experiencing an 18-fold increase to $25.4 billion since June 2011. The organisation warned that this could have negative consequences for the wider financial and real estate industry, as LRBAs could be driving up property prices.