The following case study demonstrates how SMSFs can be suitable for members with a balance under $500K and emphasises the other important factors that should be taken into consideration when proving advice.

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Read the ASIC case studies here.

Example 1A: Superannuation balance of $172,000 (SMSF may be suitable)

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Background

The clients, Lauren and Chen-Xi, have been thinking about how to continue building their wealth. Five years ago, based on advice from their financial adviser, Roger Fore of ABC Advice Pty Ltd, Lauren and Chen-Xi used an inheritance to substantially reduce their mortgage and establish a personally held direct share portfolio. Lauren and Chen-Xi are actively involved and interested in this portfolio. They are both interested in investing as they work towards their long-term retirement goals. Recently, Lauren and Chen-Xi spoke with Roger about the benefits of an SMSF. Lauren’s parents have an SMSF and Lauren and ChenXi thought that an SMSF may be suitable for them. Initially, they would like to set up another direct share portfolio within superannuation so they can play a more active role in their financial future.

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Current situation

Lauren is 38 years old and married to Chen-Xi who is 35. They have no children and no plans to have children in the future. Both Lauren and Chen-Xi work in the construction industry, each earning $125,000 per year including superannuation.

Lauren and Chen-Xi live in their own home. Using their inheritance, they have reduced their mortgage and now have a balance of $15,000 outstanding. Lauren and Chen-Xi have an annual surplus cash flow of $30,000, which they have been directing into their mortgage. After setting aside a suitable cash reserve, on the advice of Roger, they now plan to redirect this surplus to increase their contributions to superannuation.

Lauren and Chen-Xi have gained investment experience through their personally held direct share portfolio. They have also sought Roger’s advice on their APRA-regulated superannuation funds and investments. Through both investment portfolios they have experienced market volatility and gained an understanding of the concepts of risk and return. Lauren and Chen-Xi value Roger’s knowledge and expertise and will work with Roger to continue managing their superannuation arrangements. Lauren and Chen-Xi are in good health. They do not expect any changes to their personal circumstances. Lauren has $90,000 in superannuation and Chen-Xi has $82,000. They both have default insurance within their superannuation fund.

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Indicators that an SMSF may be suitable

Roger considered that an SMSF may be suitable for Lauren and Chen-Xi, outlining his main considerations for this conclusion:

• Lauren and Chen-Xi’s goal is to continue building their wealth and understand whether an SMSF is suitable for them.
• Lauren and Chen-Xi have an interest, willingness and available time to play an active part in the management of their finances. These attributes suggest that Lauren and Chen-Xi have the potential to understand and manage their SMSF trustee responsibilities.
• Lauren and Chen-Xi understand that specialist knowledge and expertise is required to manage their diversified investment portfolio, and therefore, they may be required to engage Roger on an ongoing basis.
• Lauren and Chen-Xi have a strong surplus cash flow position.
• Lauren and Chen-Xi have demonstrated an ability to save and the intention to increase contributions to their superannuation. This means the SMSF will be cost-effective for them as their balance grows.
• Lauren and Chen-Xi’s current superannuation arrangements allow them to hold direct shares. Roger compared the cost effectiveness of their current arrangements with an SMSF. As Lauren and Chen-Xi will be contributing to their SMSF, it will be cost-effective for them as their balance grows. Roger also considered Lauren and Chen-Xi’s insurance arrangements and will make recommendations to ensure they are suitable for their relevant circumstances.