Story sponsored by Parker Financial.
Self Managed Super Funds (SMSF) can provide a lot of financial benefits but they're not for everyone. More to the point, if they aren't managed properly, your net position in retirement can be seriously impacted.
As a financial adviser with more than 20 years' experience, I've seen my fair share of SMSF success stories and more than a few failures too. This is why I have seven simple rules to follow for anyone thinking about establishing a SMSF and investing their hard-earned cash.
While I'm not offering any specific product advice in this discussion, I do believe that the majority of people who get into trouble with a SMSF, do so by breaking one or more of these rules:
1 - Don't get into a SMSF on a whim because they're not right for everyone.
This one sounds obvious but every year people who shouldn't have their own SMSF decide to have one anyway.
The biggest advantage of a SMSF is the flexibility and control it allows you to have over your own money. However, there is a cost associated with running an SMSF and generally speaking, it isn't suitable for people with balances under $500,000.
Furthermore, if you're on a modest salary, with a lower super balance, you'll likely be better off by sticking with an industry fund.
2 - Be wary of financial advisers who have a financial stake in the investments they're recommending.
Avoid advisers who recommend investing in products that they or the business they work for, receive a fee, commission or any form of income from - this is a clear conflict of interest.
Legally, if an adviser or a business has a financial stake in the product that's being recommended, they have to disclose it but the obvious question you need to ask in this situation is, "Are they recommending this to me because it's good for me or are they recommending it because they're making a profit or getting a kick back from it?"
This is an important thing to think about because - as the Royal Commission exposed - these types of conflicted products and the unscrupulousness of bad faith advisers can cost you in the long run.
3 - If someone tells you that you always need to be in the market... they're wrong
We've all heard the old adage that it's not timing the market that makes you money but time in the market. While this is generally true, there are circumstances in which it may pay to take a conservative approach. For example, at the moment, there are trade wars going on and there's Brexit but more importantly, there's a lot of uncertainty and it's hard to know what markets are going to do.
If you're looking for lower risk investments or are planning on retiring in the near future, it may be a good time to be building up a cash reserve or thinking about converting some investments to cash to protect against market volatility and uncertainty.
4 - Make sure you know how much your SMSF is actually costing you
Again, this one sounds obvious but it isn't always as simple as it seems. Like any industry, there can be hidden fees. That's why you should pay a fixed fee for your advice and make sure you know what the total cost of running your SMSF is.
A common practice within the industry is charging a percentage based fee. So, for example, if you invest $500,000 and the adviser charges a fee based on one percent of the portfolio value, you will pay $5,000. If the share market goes up and that $500,000 becomes $600,000, you are now paying them $6,000!
A percentage based fee can also create a conflict of interest because it can encourage risk taking and riskier investments which may pay higher dividends in the short term but when it's your money and not theirs, you're the one who stands to lose in the long run.
5 - Make sure your assets are diversified across shares, property and cash
Put simply, you need to diversify your assets in order to manage your risk. Sometimes the property market goes up, sometimes the stock market goes up and at other times they fall. It is important to have money in cash as a backup.
It's a basic principle but one worth adhering to because if you've got all of your eggs in one basket, for example, if all of your money is tied up in investment properties and the property market goes down, you can get yourself into real trouble without ready access to cash.
Property can also take some time to sell which brings me to the next rule...
6 - Make sure you have the ability to sell an investment if you want or need to
Property is a great investment but it is expensive to buy and hard to sell in a hurry. You can't just sell one bedroom and one bathroom off the house to raise $50,000. On the other hand, if you've got shares in a company like the Commonwealth Bank, for example, it is a lot easier to sell them if you really need access to money.
That said, there are other shares listed on the ASX which offer limited liquidity and they can also cause problems. The same applies to some unlisted property trusts which can provide a good income stream but there is no exit plan. Which leads me to the final and perhaps most important rule...
7 - If you don't understand what you're investing in... DON'T!
I can't stress this one enough. Make sure you understand the investments you're buying into and how they work!
There's no point investing in some new cryptocurrency or a complicated investment trust with loads of debt. If you invest in an established, publicly traded company, you at least know what it is and what it does.
There are plenty of scammers out there who are looking for their next mark. It's important not to give them your hard-earned money.
So there you have it...
If you follow these general rules, you will give yourself the best possible shot at growing your nest egg. Some people are happy to manage their SMSF personally while others prefer to access professional advice.
After having advised clients for more than 25 years, Parker Financial have significant expertise in the SMSF area. More recently, Parker Financial have been helping clients who have not been getting the right advice nor receiving the outcomes that they've been seeking with their retirement savings. If you need advice, make sure you're getting it from a trusted source and that they are working in your best interest.
They are passionate about giving the best advice to every client, every time and recognising that each client has different circumstances and a one-size fits all approach does not work. If you would like to start a conversation about any of the issues raised in this article, Parker Financial would welcome the opportunity to meet with you.
Story sponsored by Parker Financial.
NOTE: Any advice or information in this article is of a general nature only and has not taken into account your personal circumstances, needs or objectives therefore, before acting on the advice, you should consider its appropriateness to you, having regard to your objectives, financial situation or needs.
Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
Dean Easterby is an Authorised Representative of GWM Adviser Services Limited
Parker Financial Services, Corporate Authorised Representative of GWM Adviser Services Limited, ABN 96 002 071 79 AFSL 230692
105-153 Miller Street North Sydney NSW 2060 and a member of the National Australia group of companies.