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SMSF unbundling - how much can it save you in 2017?

by David Olsen, Senior Marketing Manager - Content/SEO, Sharesight

We’ve written before about the concept of SMSF Unbundling – but much has changed in the three years since Sharesight CEO Doug Morris wrote his original SMSF unbundling blog post. So we thought it would be useful to revisit and update the numbers behind SMSF unbundling in 2017.

What is unbundling?

There was a time that it made financial sense to bundle all of our financial service products together with a single institution – ie: buying our insurance from the same bank we hold our home loan with, who we’ve also held a savings account with for most of our lives.

Unbundling refers to the process of moving away from these monolithic, expensive, vertically integrated financial products and building your own “unbundled” solution – connecting products from across the fintech ecosystem to achieve the same outcomes – usually for a fraction of the cost.

If you think of traditional financial services as being a vertical column of children’s Jenga blocks. Fintech has disrupted the tower of blocks, toppling it over so consumers now can build their own financial services solutions from a marketplace to meet their needs – just like an app store.” - Doug Morris ‘Why you should partner with Sharesight’

The unbundled SMSF solution

There are four ‘problems’ an unbundled SMSF solution needs to solve:

  1. Execution: The actual buy/sell transactions of investing.
  2. Accounting: Ensuring your SMSF meets compliance requirements of Australian SMSF legislation.
  3. Research: Choosing shares, funds, or other investments based on your investment strategy (the part you will probably spend the most time on if you unbundle).
  4. Portfolio tracking: Tracking how your SMSF portfolio is performing against your investment strategy.

featured unbundled-smsf

Let’s see how an SMSF trustee with a $500,000 portfolio might tackle these four problems if they used an unbundled SMSF solution compared to the traditional bundle.

Execution – CMC Markets

CMC Markets charge $11 per trade for their entry-level service. So let’s assume for this example that this SMSF trustee is turning over 20% of the shares in their portfolio of 50 holdings each year, that’s 40 trades ($440 over the year). Plus, let’s assume that 50% of this trustee’s SMSF is allocated to Exchange Traded Funds (ETFs), which carry their own management fees (typically in the range of 0.2% to 0.5%, so let’s use the Vanguard MSCI Australian Small Companies Index ETF rate of 0.3% – so $750).

Accounting – Xero + Accountant

For this piece of the unbundled SMSF puzzle, you’ll need a cloud accounting solution such as Xero Cashbook ($15/m or $180/y). Then you can share your Xero account details with your accountant who will need to sign-off on your numbers at end of year. The accounting fee will vary depending on the complexity of your financial situation, but let’s assume $1,500 for this example.

Research – The Motley Fool

The Motley Fool offers a number of investment research products, but their core product, Share Advisor is a great place to start. The $399/y subscription unlocks a number of Australian and international share recommendations/reports each year and includes access to their investment community.

Portfolio Tracking – Sharesight

Sharesight not only your tracks and reports on your portfolio’s performance, it is indispensable for all SMSF trustees. The Sharesight asset allocation and custom groups features help trustees prepare their investment strategy documentation each year with their accountant.

Sharesight can also connect your SMSF to both CMC and Xero, which means that every trade made in CMC will be recorded in Sharesight, and appear in Xero, in real time. It’s only $25/m or $275/y for the Sharesight Investor plan (plus the Xero Cashbook subscription, listed above).

Unbundled SMSF solution total (On a $500,000 portfolio): $3,654 – or a MER (Management Expense Ratio) of 0.73%

Unbundled SMSF cost breakdown

What?Who?How Much?
ExecutionCMC Markets$440
Execution (ETFs)Vanguard$750
AccountingXero Cashbook$180
ResearchThe Motley Fool$399
Portfolio TrackingSharesight$275
Unbundled SMSFTotal$3,544

An SMSF investment platform bundle

A bundled SMSF solution will typically be based on what is called an SMSF investment platform, or alternatively an SMSF wrap account. This will bundle together the execution, research and tracking components (you’ll still need an accountant) together for you. But this comes at a cost, with bundled solutions charging fees for administration, adviser fees, dealer fees and fees on the assets you have under management.

With our $500,000 example from above, using pretty conservative figures:

  • You’ll see between 0.5% and 2% of invested assets lost each year to the SMSF investment platform or wrap in administration costs (let’s use Macquarie Wrap Accumulator for our example, which charges 0.62%).
  • Your financial adviser will then usually charge an ongoing ‘advice fee’ + a fee to to get your money ‘on’ an SMSF platform, which is usually negotiated between you and your adviser (usually this fee runs to about 1% of invested assets – so in this case, $5,000 of your $500,000).
  • Then the financial adviser’s dealer, firm or licensee will take a slice of the action (in the region of 0.2% to 0.5% – let’s use 0.2% here).
  • Then you’ll incur fees on the actual amounts invested, depending on the investment products chosen (such as actively managed funds or SMAs). In this example, 50% of the portfolio is invested in actively managed funds – which typically charge between 0.75% and 1.5%. Using 0.92% (which is what Macquarie Master Balanced Fund charges) these fees will eat $2,300 of your $500,000.
  • Just like the unbundled solution, you’ll still need to pay an accountant, but in this case the accountant will incur additional fees for SMSF software like Class to do the part that Sharesight + Xero does (this increases your accounting cost to $2000).

The SMSF investment platform bundle cost with $500,000 invested: $13,400 (MER of 2.68%) ‘lost’ yearly

Bundled SMSF costs breakdown

What?Who?How Much?
AdministrationSMSF Platform/Wrap$3,100
Advice FeeFinancial Adviser$5,000
Dealer FeeDealer/Licensee$1,000
Investment ProductsFund Manager$2,300
Bundled SMSFTotal$13,400

SMSF investment platforms - a raw deal

If we assume a reasonable return of 8% per year on that $500,000 SMSF investment, that 2.68% fee represents 34% of your profit lost to costs for bundling. Compare that with only 0.73% for a comparable unbundled solution. The choice to unbundle your SMSF suddenly becomes clear.

Unbundling is of course, not for everyone. But for those willing to build their own unbundled SMSF solution using Sharesight like investor Andrew Bird the benefits are clear.

Do you run your own SMSF? Do you use an SMSF platform or have you built your own unbundled SMSF like the one above? Tell us in the Sharesight forum!

This information is not a recommendation nor a statement of opinion. You should consult an independent financial adviser before making any decisions with respect to your shares in relation to the information that is presented in this article.