SMSF Risks | Squirrel

SMSF risks

While we love SMSFs at Squirrel, it’s really important that you understand while there are lots of benefits in setting up and managing your own SMSF, you should consider and understand the risks associated with setting one up. We’ve done our best to summarise these below.
As always, if you need to clarify anything please give one of our team a call on 1300 500 499 or you can also check out some really useful guides (linked at the bottom of this page) from the ATO along with information from ASIC’s consumer education site, moneysmart.gov.au

No advisers means no financial advice

At Squirrel we operate a “no advice” model and therefore do not provide personal financial advice or recommend whether an SMSF is appropriate for your particular circumstances, objectives, needs or financial situation. We recommend that you do review a much information as possible to make an informed decision on whether a SMSF is right for you.

While we’re not big fans of a lot of financial advisers, we do recommend if you are unsure about the appropriateness of an SMSF you should talk to an independent financial adviser, one who has no ties to any product manufacturer and who charge you either a fixed dollar fee or an hourly rate. These advisers are often difficult to find, but in our experience the effort is certainly worth it. We believe that advice without the product bias means these premium advisers are working exclusively for you and not for a product provider.

You’re ultimately responsible

Obtaining independent financial advice doesn’t change the fact – as Directors of the Trustee Company you are ultimately responsible for the activities and management of the SMSF. Please remember that Squirrel as a general advice provider cannot advise you about which super fund best suits you or which investments should be in your fund. Should consider a range of options before making a decision about managing your own super.

Time and skills required to manage an SMSF

The Trustee Company controls the SMSF and makes all the investment decisions on behalf of the members for the SMSF. It is also responsible for complying with all legal obligations including ensuring that the SMSF prepares and lodges an annual tax return, lodges company returns with ASIC, and keeps appropriate records amongst others. Squirrel establishes all SMSFs using a Corporate Trustee Company, and as such each Director of the company is also responsible to ensure the SMSF is managed in a compliant manner.

The primary responsibility for Directors / Trustees is to ensure that you have invested the SMSFs money appropriately and that the investments are made for the sole purpose of providing for retirement. It’s important to make sure you devote sufficient time and skills to managing your SMSF. The Squirrel School, ATO and Moneysmart websites all contain information and training to assist Trustees and Directors fulfil their obligations. And where you have a question or just want to double check something, please email: tech@squirrelsuper.com.au.

Ultimately a SMSF can be rewarding, but you should be confident that after taking into account all fees and costs you can get a better result managing your own than a traditional super fund would. If you are not confident you can, you might be better off leaving it to the professionals.

SMSF costs and minimum setup balance

You need to make sure that the cost of establishing an SMSF and its annual operating costs are not prohibitive and that your fund will therefore have enough in it to make it viable. While Squirrel charges fixed dollar fees as detailed in our Financial Services Guide for both establishment and annual administration, there could be other costs like brokerage fees on share trading, Indirect Cost Ratio/Management Expense Ratio costs if you invest into managed funds, property management fees/maintenance costs/rates/insurance costs/loan repayments including interest on investment properties etc.

At Squirrel all the fixed costs (not related to investments) associated with managing your fund are covered by our fixed annual fee per fund (ie not per member) – including tax returns, auditing, ASIC company return fees (regardless of how many companies), ATO supervisory fee, pension, actuarial certificates, replacement/upgrade of deed/s etc.

While you may hae heard rumours that you need $200,000 to operate an SMSF this may not be the case given the simple, low and flat fee model Squirrel uses for all clients. At legislation no minimum balance is defined to setup a SMSF, it is however important that you compare your current fees (for all proposed members) to those which would apply to establish and operate an SMSF and see if a SMSF makes sense. At Squirrel we would expect a minimum balance to start from around $70,000 – and see whether this is appropriate in your particular situation.

Ultimately it is your decision, though with particularly low balances it might be a good idea to investigate some of the new low-cost super offerings under the MySuper legislation which as a general rule are substantially better than funds and fees from 5 – 10 years ago.

Investment risk

As Directors of the SMSF’s Trustee, you control all the investment decisions for the SMSF. Financial decisions carry risk, so it’s really important to think carefully about how you choose investment options to balance the level of risk against the potential financial return. For example, cash is a conservative investment as it doesn’t carry a risk of losing your initial capital. Conversely shares and property are much higher risk as both could lose the initial capital invested.

You also need to make sure everything you invest in is legal and complies with the investment rules set out under the SMSF Trust deed and the relevant legislation. Squirrel’s technology is designed to help you stay within the lines and our online Squirrel School can help you understand the different types of investments, risks and rewards as Trustees you need to be aware of.

Often a good way to think about investments is thinking about your age and when you’ll need to access your super for retirement. While we don’t recommend a particular strategy, when younger often you can afford to take a little more risk as you will have a longer time until retirement and can therefore ride out fluctuations. Conversely, if you are close to retirement or in retirement have a good think about how a major reduction in income or capital could affect your retirement – perhaps a lower risk approach might give you more comfort.

A common strategy is diversification, meaning by spreading your investments you can help control the total risk within your portfolio – for example if one of your investments is not performing all that well, the other might be doing really well and thus helps to offset the not so great ones.

Thinking about the different sectors of the economy is a good start – think about say companies that operate in consumer discretionary, banks, resources, technology versus just buying a range of companies in the same segment. For emaple, all four banks versus a couple of banks, a supermarket, insurer. Plus your fund might have an investment in cash or term deposits, a property and alternatives.

While there isn’t a legal requirement for fund diversification, all Directors of the Trustee company really must consider diversification when making investment decisions for the SMSF. A great resource for understanding the different types of investments is the ASIC consumer website www.moneysmart.gov.au

Life insurance

Whilst it is optional, if you set up an SMSF, you should think about whether members hold adequate life insurance in case you pass away or you are unable to work because of a serious illness or accident. Most major super fund offer life insurance benefits to a certain level – often based on the age of the members. It’s also worth considering the difference is costs between the insurance cover from your current super fund versus cover you could arrange for your SMSF.

Squirrel offers a referral for a non-compulsory insurance service with Squirrel Insurance – and as with everything we do, there are absolutely no obligations, commissions, admin fees, kick-backs associated. You can obtain an indicative quote by completing our online application.

Lack of government compensation

The Trustees of an SMSF have fewer options for resource against fraud and theft compared with Trustees of APRA regulated super funds. SMSFs are not prudentially regulated but are subject to compliance regulation by the ATO, with a focus on compliance with super laws. Without the jargon, this means the ATO recognises that members of an SMSF (as therefore either Trustees or Directors of a Trustee company) are in a position to protect their own interests.

Under existing superannuation laws, no government or industry compensation is available for members of super funds operating outside the regulations of APRA.

A key part of a SMSF is that all members are involved in the decision making process and control of the fund. As SMSF members usually have more control and choice over the fund’s investment strategy and assets than members of APRA regulated funds; the resulting responsibilities for investment decisions also vest with the members / trustee. Some more info is available at the ATO’s website:

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/

Useful ATO publications
How a SMSF is regulated smsf-regulations
Winding up a SMSF – winding-up-a-smsf
Running a SMSF – running-a-smsf
Setting up a SMSF – setting-up-a-smsf
Thinking about self-managed super – thinking-about-smsf

For more information on SMSF please contact a member of the Squirrel team on 1300 500 499