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Compare apples with apples
I read with amusement an article I found on the website of a SMSF services company that compared the fees they charged for doing SMSF administration with the management fees charge by large Super Funds and of course concluded that it was cheaper to have an SMSF. The writer of the article is assuming the only costs for running a fund is simply administration fees. In 2008, I did some research for a friend who was planning to start fund management company, and what I found was that the administration fees are only a small part of the costs of a fund management company. The biggest costs are for research and investment management expertise.
The writer of the article must assume investing requires no skills and choosing the right stocks to invest in is as simple putting the stocks page of the newspaper on the wall and throwing a dart to choose a stock to buy, or taking tips from your neighbour or taxi driver. He assumes there is no need to pay for financial education, research or advice to properly manage an investment portfolio. I wonder how well his clients’ portfolios are doing this year – not too well I suspect if they believe no skills are needed for investing.
For anyone who is considering starting an SMSF, you must factor in a cost for investing. Some of the costs would include
1) Education – if you plan to invest in stocks, you must know some basic techniques for analysing stocks such as fundamental analysis and technical analysis so you have a basis for what stocks to buy and when to buy or sell a stock. If you wish to invest using other more complex instruments such as options, futures, warrants or CFDs, there is more education that you will need to invest in. There are many education companies out there and most courses I have seen costs a few thousand dollars each. I have spent quite a lot of money on books, courses and seminars but I see it as an investment in myself to develop the skills I need to help me manage my investments, no different from paying for Uni to get the skills I need to help me find a job.
2) Research - with the internet, a lot of information today is now free. You can get free fundamental data and news on listed Australian companies on Google Finance and Reuters and you can get free stock charts from Bigcharts but it takes time to do the analysis on each stock. There are a number of research companies who cover the top 200 stocks on the ASX and subscribing for the research could save you time and provide you with some investment ideas. Be careful not to confuse “research” with “advice”. There are many financial advisory companies that provide recommendations on what to buy but do not provide the basis for their recommendation. I would strongly advise that you come up with your own investment criteria so that when you decide to buy a stock, you know exactly why you are buying that stock. Before you buy, you should also have a plan for when to sell the stock and that is only possible when you understand why you bought it in the first place. Buying blindly based on someone’s recommendation is a very dangerous practice.
It is not easy to make a direct comparison of costs for running an SMSF vs management fees charged by large Super Funds. All I would like to point out is that there is a “investment management” component that should be included in the cost of running a SMSF. When we compare fees, we should take it into consideration so that we are indeed comparing apples with apples.
Christina
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I have read your blogs with interest and agree with your article. The primary reason for setting up my SMSF was that I wanted control of my finances as well as the flexibility to act. Although it looked attractive from a fees perspective, I soon realized that the management fees of public super funds covered not just their paper work but also their market analysts and investment strategists costs, something I now do (and must say I enjoy doing). The control forced me to increase my knowledge through education. I have spoken to people who have been advised that running their own SMSF can save them the fees that the public funds charge. The sad part of this is that these people do not have the financial and/or investing skills to really take this on. I know some of them are in the process of educating themselves, while others take the advice from columns they read online or in newspapers.