As we touched on last week in Wealth Creation for Gen X – Is Superannuation still so super? whether you are currently engaged or otherwise with your superannuation, this is an asset class that will be a large part of most Gen Xer’s & Gen Y’s quest for future financial freedom. But what super fund is right for you?…And what are your options anyway?
There is no shortage of super funds to choose from. And everyone has an opinion as to what the better structures are. Those opinions can all have a lot of merit. However, what’s the right Super fund for one person isn’t necessarily right for another. Your Superannuation structure decisions should be made in the context of your goals and circumstances and nobody else’s. Additionally your choice of super fund should also be made in consideration of how much you currently have inside of superannuation…and are likely to have in the coming years through ongoing contributions. I don’t believe that “one size fits all”. And I don’t believe superannuation (or your overall financial strategy for that matter) should be a set and forget forever approach.
In general though, choosing the right super fund for you is a bit like choosing fruit. Whilst there is a lot of choice, whatever you choose and contribute to regularly is likely to be good for you longer term…provided the insides are fresh & ripe (good quality investment options).
Remember that superannuation in itself is not an investment, it’s a tax structure. What you invest in is limited by the investment options within the particular super fund (and the broader super rules). Also your tastes and your focus may change over time. As a kid, the only fruit I ever liked to eat were apples…mainly due to growing up they were my dad’s favourite and our staple fruit in the weekly grocery shopping. Now, whilst I still enjoy the occasional apple, I’m branching out to watermelon, lots of bananas and the occasional kiwi. I like to have choice, control and variety. Choice, control and variety can be good – provided they are all healthy (quality) options.
Enough with the fruit analogies…what about my superannuation options (I hear you say)?
There are 4 main Superannuation Funds to choose from;
- Industry Super Funds
- Retail / Employer Super Funds
- Wholesale Super Funds, and
- Self Managed Super Funds
Below let’s cover the high level pros and cons of each along with what type of personal circumstances and preference might suit the various options.
Industry Funds (and some Employer sponsored funds)
The great thing about industry funds is that they are low cost. However with lower costs generally comes with it a lower amount of investment options compared to other super structures (not to mention limited insurance options – see Wealth Creation for Generation X – Protect your greatest Asset (part 1)). Whilst some Industry Super are definitely better than others, in general the investment choice within Industry Funds is usually a variety of diversified options ranging from Balanced, Conservative, Growth and hand full of other choices. On top of this there are also the general sector specific options such as Australian Shares, Property, Fixed Interest, Cash and International Shares.
Without mentioning names, at The Practice we work very closely with who I believe is the best Industry Fund in the country. Typically Industry Super funds & advice firms don’t have a great working relationship…or any relationship for that matter. But we are one of only a handful of advice firms in Melbourne that they choose to partner with due to our holistic strategy focus and fee for service approach. We choose to partner with them as they are the leaders in the Industry Fund space, a delight to deal with, and a very suitable superannuation option for around half of our wealth advisory clients. We highly recommend that most clients with less than say around $200,000 in superannuation use this particular Industry Super fund. As at this level of super balance and below, reduced cost is usually one of the main drivers. Plus there is not as great a need or want for a wide variety of investment options & control as those with higher super balances. A Diversified Balanced or Growth Fund (based on the individual risk tolerance and investment time frame) is a solid set and forget option…not forever, but for several years or so.
Whilst a quality industry fund is a good super option for younger Gen Xer’s (and probably most Gen Y’s), they are certainly not all created equal…and they are not the best option for everyone in my opinion – especially older Gen Xer’s and Baby Boomers.
Retail Super (and some Employer sponsored funds)
As with most industries, there is a Retail market and a Wholesale market…a Retail price and a Wholesale price. As you could imagine, typically Retail super funds are a higher fee structure compared with Industry Funds (and Wholesale funds above a certain account balance). Retail funds are typically run by large financial institutions and available to every person who walks in off the street asking for advice on superannuation. Due to this a very large proportion of Australian’s still hold their superannuation in Retail Super funds…mainly due to people being disengaged. As mentioned in Wealth Creation for Gen X – Should you fix your mortgage (now) or stay variable?…complacency can cost you.
Retail Super funds historically have also been the domain of most commission remunerated advisers and advice firms. Whilst Retail funds can have more investment options available than Industry super funds, for all the above reasons I believe Industry funds and/or Wholesale funds (below) are a superior choice.
Wholesale Super Funds
Wholesale funds are typically only available to people with either a “squillion dollars” in super….or via Wholesale super funds commonly known as Wrap Accounts or Administration Platforms. These are available through licenced wealth advisory firms but not typically directly accessible for individual super investors (unless you are one of the few with a “squillion dollars” in superannuation, in which case I’m sure they would be happy to deal with you direct).
Whilst Wholesale Super Funds are available at any dollar level of super balance, it makes the most sense for those with around $200,000 or greater in super. It makes more sense at this level (or higher) as most Wholesale super funds have tiered administration fees structures which become cheaper the higher the account balance. At around the $200,000 account balance, Wholesale super becomes a lot more competitive fee wise with Industry Super funds. Due to the very minimal administration of Wholesale Super funds at higher account balances (especially over and above $500,000), Wholesale super funds just keep becoming a far more compelling option the higher the individuals super account balance.
Whilst Wholesale Super Funds have some great features, the absolute biggest benefit is the very wide variety of different investments and the ability for tailored and transparent portfolios to be constructed. The handful of market leading Wrap accounts have around 700+ different investment options available from all the leading investment managers. These range across index funds, active funds, diversified funds, direct shares, and exchanged traded funds. The main Wholesale Super funds we recommend also have options of Separately Managed Accounts, see Wealth Creation for Generation X – Structures for Regular Investment Plans.
At The Practice we currently manage portfolios for around 300 clients (as part of their overall financial strategy). We build 3 main types of portfolios that we operate through Wholesale Super funds;
- Portfolios of sector specific funds across 100% Index funds (for clients who want some control and transparency but have a focus on minimising costs).
- Portfolios of sector specific funds, with 50% in Index funds, but the other 50% in active funds with a long and strong history of outperforming their respective markets (for clients who want some control and transparency that are partly focused on minimising costs, but are happy to pay slightly more for potential outperformance of the market for 50% of the portfolio).
- We also partner with one of the worlds leading investment management firms to operate Separately Managed Accounts for the whole of a clients portfolio. This provides transparency and direct ownership coupled with constant asset allocation management between the various asset classes (for clients who want control and transparency, but who are happy to pay more than option 2 for greater active management along with potentially greater capital preservation).
Self Managed Super Funds (SMSFs)
SMSFs have been the fastest growing area of superannuation for the past several years and there are now around 600,000 SMSFs Australian wide. The benefit of SMSFs is that they have the highest degree of flexibility in regard to direct ownership of investments (provided it’s within the superannuation rules). SMSFs can also have up to 4 members and in SMSFs typically husband and wife pool their super together and invest together.
Apart from running their own self directed investment portfolios, most people who set up SMSF’s do so for their ability to use superannuation to buy investment properties (residential or commercial) including the potential of borrowing to buy these properties under a Limited Recourse Borrowing Arrangement (LRBA). In next weeks blog we’ll cover the LRBA strategies in detail. However as a guide we’d never typically recommend that anyone set up a SMSF unless they 1) have say around $300,000 (minimum) in super and 2) have a burning desire to either manage their own super investment portfolio and/or borrow to buy a property inside of superannuation. Unless either (or both) of these exist, then a SMSF isn’t the best option.
Also with our preferred Industry Super Fund bringing out their Member Direct option where self directed individuals can pick and choose their own direct investments (including direct shares and Exchanged Traded Funds (ETFs)…there is now even less reason for people to go to the effort or take on the responsibility of running and operating a SMSF.
There is a high level of responsibility in managing your own SMSF including arranging yearly tax returns and audits. It’s not for everyone and the decision to set up and operate a SMSF should never be made lightly – no matter how much you feel like you can “do better than the fund managers” or want to borrow to buy an investment property in super.
For what it’s worth I have had a SMSF since 2011 as we were keen to use part of our superannuation to buy an investment property via a Limited Recourse Borrowing Arrangement (which we carried out in 2014). Ongoing contributions go into an SMA structure and build a diversified mix of assets over time in addition to the property. A diversified, prudent Investment Strategy are other key responsibilities of operating your own SMSF. (By the way I only share the occasional personal stories on my own financial strategy as I’m a huge believer that advisers should 1) do what they recommend and 2) only recommend what they are prepared to do themselves. A bit like mechanics and their cars, there are far too many advisers running around providing “advice” and haven’t got their own strategy in order).
Next week we’ll delve into some of the complexity around buying property in SMSFs via a Limited Recourse Borrowing Arrangement. Whilst this is suitable for some people, it won’t be suitable for the vast majority of people.
As we covered last week, I believe that due to Longevity issues, Superannuation has never been more relevant for Gen Xer’s and Gen Y’s. I’d like to challenge you to become more engaged with your superannuation strategy. Additionally seek out professional, fee for service advice to help with guidance around reviewing your current super structure and deciding whether an Industry Fund, Wholesale Super Fund or Self Managed Super Fund is right for you. And remember, as with all areas of life – including your financial strategy – only take advice from those who follow their own advice.
Matthew Morrison is the Director of Wealth Advisory at The Practice, a Personal Wealth Advisory & Business Advisory firm based in Parkville, Melbourne. Matt along with The Practice team are committed to and passionate about developing & implementing wealth creation strategies for clients to enable them to Fuel their Family’s Future (while protecting them along the journey).
Matt and The Practice team can be contacted via http://thepractice.com.au or (03) 8888 4000.
Disclaimer – the above views and ideas are general advice only and are purely the opinions of the author. It’s important that you seek professional advice tailored to your needs before taking action regarding your financial future.