Cost management and minimising the costs and fees in a client’s SMSF is one of our biggest mantras.
One of the highest and most unproductive costs in an SMSF is the use of an investment platform to manage the assets of the fund.
Recently some trustees came to us with a portfolio that they felt was underperforming. A review of the portfolio showed two major issues. Firstly, the portfolio holdings did not match their risk profile and the SMSF assets were held on a retail wrap platform.
The trustees were correct about the performance. We completed a risk profile and determined they should be invested as Balanced investors.
The existing asset allocation of the fund was 80% income and 20% growth assets, with half of the growth funds invested in Australian equities and the remainder in two frozen Australian managed property funds.
A review of the holdings of the fund revealed the clients were paying platform fees of $21,587 per annum. The return on the platform did not reflect this level of cost. The adviser was also taking a fee of 1.5% of the assets under management.
The advantage of a platform is that it provides the investor with access to a variety of assets, reports on the performance of those assets and allows the investor to transact centrally via a call centre. It also requires the investor to lodge documents every time they transact.
A platform also allows the adviser to draw his fees from those assets automatically without the need to invoice the trustees every year. It facilitates a percentage of assets under management charging regime which we do not support and cannot see how it is justified.
We proposed an approach where we used a portfolio of listed assets invested in accordance with the fund’s risk profile. The investments were made using a broker where the only cost is the brokerage and as the portfolio consisted of a number of exchange traded funds, the ongoing holding costs were reduced to $3,063 per annum.
Under our proprietary processes, we were able to have all the client’s investment data and cash management account data fed directly into their accountant’s software, thus reducing the processing time to complete their tax return. Our systems provide real time access to their portfolio and we are able to generate the level of reporting they require to meet their needs.
We invoice our clients annually for our fees based on the number of hours we expect to work; and draw these each month via direct debit from the cash management account. An invoice and service agreement are provided in advance and the trustees are free to terminate the agreement at any time.
Too often we see the fund balance of an SMSF being eroded by unnecessary costs and fees. Not only does this take dollars out of your fund but it also erodes the capital that is generating returns for your retirement. We recommended you complete a review of the costs and fees being charged to your SMSF. If your SMSF is paying platform fees or adviser percentages, talk to us about a low cost, transparent alternative.