Searching for the right super vehicle

While many super trustees are busy polishing the bells and whistles of their super options, and others are planning their next marketing assault, the investor reigns supreme on which investment option they will choose for their superannuation.

However, the choices that clients make usually come down to the options presented to them by a financial planner.

While most clients may have some superannuation invested with their employer’s corporate superannuation funds, the three most common choices for superannuation investment vehicles in the financial planning industry are self-managed super funds (SMSF), small APRA funds (SAF) and master trusts.

According to Macquarie’s technical manager David Shirlow, despite master trusts such as Asgard and Summit increasing in popularity within the industry, SMSFs have experienced a steady increase in awareness in the past 12 months.

Shirlow says investors who are either looking for investment freedom or are approaching retirement often find SMSF arrangements suit their needs.

He says while demand for SMSFs is increasing, there have been developments within this superannuation investment vehicle to provide investors with various types of fixed income pensions.

“Often complying lifetime pensions are being considered to deal with excess benefits and higher levels of super funding generally, because they can assist a person to qualify for the higher pension Reasonable Benefit Limit (RBL) and can produce favourable RBL assessments,” Shirlow says.

“However, various types of non-complying lifetime pensions and fixed term pensions are also being considered where suitable,” he says.

Shirlow says in line with the interest in SMSFs, more investors are addressing RBL issues.

Echoing Shirlow’s comments is Australian Super Nominees managing director Ben Smythe who says a lot of clients will be seeing advisers with RBL problems.

“A lot of clients set up super options five to 10 years ago, and more and more of them will have RBL issues,” Smythe says.

“Advisers who are able to position themselves as experts in this area, either in their own right or through alliances with specialists, will be able to assist accountants in managing their clients’ SMSFs and SAFs. In particular, advisers who can provide solutions for retirement, RBL issues and estate planning, will be able to tap into this area and grab a larger slice of the market.”

According to Smythe, the types of investors usually attracted to SAFs are those in their retirement phase, or time poor executives, who want their own fund, but don’t have the time to be the trustee.

So if SMSFs and SAFs are seemingly targeting the same market — retirees and time poor executives — what exactly is their relationship to each other?

Shirlow says while there are similarities, one key difference between the SMSF and the others, including SAFs and master trusts, is that the SMSF client has trustee responsibilities and the level of administrative support they may call upon to carry out these duties is quite variable.

“While both the SAF and the master trust have a professional trustee, a key difference between SAFs and master trusts is the legal structure,” he says.

“An SAF is typically used as a solution for a cluster of associated members, and has a stand-alone deed. A master trust could potentially provide similar features to an SAF, including solutions tailored to clusters of associated members, but the one deed may be used to embrace those clusters. A master trust will typically include un-associated members and clusters of members,” Shirlow says.

Smythe, says the relationship between SMSFs and SAFs is moving to the side, with the focus now on the emergence of master trusts.

“SMSFs and SAFs go hand-in-hand, while master trusts are trying to compete in the small fund area,” he says.

“Master trusts have always seen the SAF/SMSF area as a competitor. But a lot of fund managers will offer SAFs and SMSFs for their clients because they realise the opportunities in this market. A lot of these fund managers will badge a service. It’s a very specialised area, so a large fund manager might not have this expertise internally, so they tap into our area,” Smythe adds.

On the other hand, BT’s head of corporate superannuation Geoff Peck disregards any semblance of a relationship between SMSFs and SAFs and master trusts.

“There isn’t a relationship as such. Do-it-yourself funds are great for small businesses where they’ve got a reasonable amount of assets for members, or a company that has 10 people. The rest of the companies out there use a master trust and a corporate fund,” Peck says.

He says the master trust industry has probably experienced the greatest increase in inflows in the past year. Peck says this can be attributed to a number of factors, in particular, by moving a super fund into a master trust, members are no longer responsible as the trustee of the fund. Further, a master trust offers a package of services without the employer having to fight and scratch for the extra services.

“From our perspective, corporate superannuation companies are coming to terms with the new Financial Services Reform Act (FSRA). That legislation is basically making every type of super fund look at how they are licensed to provide those sorts of super. A lot of companies that are still running their own super fund are looking at this as the final straw,” he says.

While Peck says the complications related to the FSRA are the next big thing to impact the master trust sector, other trends are also evident, in particular, the continued growth and refinement of Internet services for members.

“More and more companies are recognising the value of incorporating financial advice to members. There is now the appointment of financial advisers, which traditionally happens at the smaller ends, but is now happening at the larger ends of the market as well,” he adds.