Disadvantages of SMSFs

Opting for a Self-Managed Super Fund (SMSF) over a traditional superannuation fund offers several advantages, but it also comes with certain drawbacks that should be carefully considered.

Below are the key disadvantages:

Responsibility

The responsibility of managing an SMSF rests entirely with the trustees, who are often the same individuals as the members of the fund. This means that trustees are solely accountable for:

• The operation and administration of the fund.

• The investment performance and strategy.

• Compliance with superannuation laws, tax laws, and the governing rules of the SMSF.

• Meeting all lodgement deadlines.

While trustees can outsource certain tasks, such as financial statement preparation, audits, and compliance, to professionals like administrators, accountants, financial advisors, or brokers, the ultimate responsibility remains with the trustees.

Cost

For SMSFs with small account balances that do not grow quickly, the fixed costs associated with managing the fund can make it more expensive than opting for a non-SMSF.

Limited Ability to Diversify

Larger retail, industry, and wholesale superannuation funds often benefit from economies of scale, enabling them to access certain investments that may be unavailable or more expensive for SMSFs. This can limit the ability of SMSFs, particularly those with smaller balances, to diversify their investments. However, the investment market is evolving, and more products are being developed to address this issue.

Lack of Compensation Scheme

Unlike members of non-SMSFs, who have access to compensation arrangements in the event of fraud or theft, SMSF members do not have this safety net. As trustees, they are responsible for all operations of the fund, including investment decisions. Although some avenues for compensation exist, such as taking action against service providers, these options are limited.

While a Self-Managed Super Fund (SMSF) offers unique advantages, it also comes with significant challenges that must be carefully weighed. The responsibility of managing the fund rests entirely with the trustees, who are accountable for compliance, investment decisions, and the fund's overall administration. The fixed costs associated with SMSFs can be burdensome, especially for smaller funds, and the limited ability to diversify investments may restrict growth potential. Additionally, the lack of a compensation scheme in the event of fraud or theft leaves trustees vulnerable. These disadvantages highlight the importance of thoroughly understanding the responsibilities and risks involved before opting for an SMSF.