A lot of the debate has centered on what is the minimum account balance required to make an SMSF cost-effective.

Courtesy of the Australian Securities and Investment Commission (ASIC) we now have a considered, quantified view on when a SMSF makes sense on a cost basis.

Independent consultants Rice Warner were commissioned by ASIC to determine the minimum cost-effective balance for SMSFs.

As investors we cannot control future market performance but we can control the costs we pay and every dollar saved in costs is another dollar to fund your retirement lifestyle.

However, cost is certainly not the only deciding factor when it comes to setting up an SMSF.

The Rice Warner report developed a comprehensive matrix of the costs involved in running an SMSF - from compliance, administration and investment costs. It then compared the costs of running an SMSF with being a member in either an industry or retail super funds.

The full analysis is available to download from the ASIC Website but the bottom line results are:
•    SMSFs with less than $50,000 are more expensive than all alternatives
•    SMSFs with $100,000 to $150,000 are competitive with traditional retail personal super plans provided the trustees undertake some of the administration
•    SMSFs with $200,000 or more are competitive with both industry and retail funds provided trustees are doing some of the administration
•    For balances of $250,000 or more SMSFs become the cheapest alternative provided the trustees are doing some of the administration
•    Rice Warner also found that above $500,000 SMSFs can provide equivalent value to industry and retail funds on a full service basis - i.e. where trustees opt to pay to have all the administration done for them.

Importantly, above $500,000 Rice Warner found that SMSFs can be the cheapest alternative. Given that 66 per cent of SMSFs have assets between $200,000 and $2 million it suggests most people with SMSFs are enjoying cost savings compared with industry and retail funds.

But account balances do not tell the complete story.

At the low end - say $50,000 account balance - an SMSF may make either no sense or absolute sense. If you are relatively young and planning to build up the fund balance quickly then a low account balance is not the worry. SMSF administrators will say that setting up an SMSF takes time and it is often 18 months before a fund is fully established because of the time it takes to shift and consolidate assets.

And as Rice Warner acknowledges capital gains tax is a factor in the decision about whether to set up with a low account balance or build up an account balance and transfer into an SMSF later.

The Rice Warner report says: "A superannuation benefit which is accumulated within, say, an industry fund until it is of sufficient size to justify the switch to an SMSF is subject to a CGT event at the point of transfer. The CGT on the withdrawal of the accumulated balance will be included in the unit prices used at the time to process the withdrawal of the benefit."

If the benefit was accumulated within an SMSF then there is no taxable event so the tax saved would compensate for the fees paid while the fund was sub-scale.

The account balance debate is useful because it is measurable data and non-emotional.

But the real world is more complex than that. The great variable in this debate is what type of investor you are. Because, regardless of account balance, if you are not engaged and have little interest in the administering and investment of the fund then an SMSF probably is not for you.

The decision to establish an SMSF has long-run consequences. Certainly ASIC is concerned that some people are being poorly advised to establish an SMSF.

Costs are clearly one factor but getting advice from a qualified SMSF specialist adviser is probably the best way to ensure you are fully aware of the costs, risks and advantages of joining the ranks of SMSF trustees.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia9
20th September 2013