Superannuation: Choosing the right path

Australians have a lot of choice when it comes to superannuation. Yet while basic choices such as the type of fund or the level of risk have been available for some time, it seems that now more than ever the super industry is coming up with products, strategies and options that can make the choice really count.

The goal is building up the retirement savings pool and, for the head of financial advice for Australian Unity Personal Financial Services, Craig Meldrum, there’s no sense in making it complicated.

“There’s no substitute for actually getting money into super,” he says. “So there’s lots of choice available in terms of low-engagement models, moderate engagement (which would constitute exercising choice of fund), and then you’ve got those that are highly engaged with their super on a long-term basis — being self-managed super funds [SMSFs] and so forth.”

“But whichever way you go, they’re all playing largely to the same rules,” Meldrum adds.

“And the way the contribution caps now work (as of 1 July 2007) means that you can’t wait until two days before retirement to get a heap of money into super.

“Tax benefits and accumulation strategies aside, it’s a long-term commitment to actually build up enough in the tax-effective environment of super so that you’ve got enough there when you retire.”

Meldrum says that information also has a role to play.

“Going back to when I first started work, we had this thing called superannuation that you put off to the side because you didn’t understand anything about it,” he says.

“It was a defined benefit fund and all you knew was that work was putting some money in and you were putting some money in and that was all there was to it.

“But while there’s no doubt that there’s a lot more information about particular super products now, what we find talking to clients is that there’s still a fair bit of misunderstanding about what super is and how to get the most out of it,” Meldrum continues.

“In fact, I think a lot of the disengagement we see comes from the fact that people, particularly those in their 30s and 40s, think they can’t get to their super until they’re in their 60s, so they don’t really care about it. They want to save up for their first house, pay off a loan, travel — all of that sort of thing.

“They simply don’t realise how big a difference getting involved early and making these choices can make.”

Looking at the choices that will result in the best retirement outcomes more broadly, Matrix Financial Planning managing director Rick Di Cristoforo says that the individual’s personal situation has to be thebottom line.

“Realistically, the very first thing is to actually have a proper consideration of the client’s circumstances,” he says. “So what they’re trying to achieve and whether they take control of their own superannuation outcomes via an SMSF or outsource the job to the primary providers.

“Ultimately, I think that’s decision number one and that’s not just about how much money people have,” Di Cristoforo continues.

 “It’s got a lot to do with the client’s personal circumstances, what they value in terms of transparency and control versus the convenience of not having to do it themselves.”

According to Di Cristoforo, once a client’s personal circumstances have been established, the next step is taking a strategic approach.

“So is their overall strategic structure set properly? And then the next level down is what they’re actually going to choose,” he says.

“Does it come down to getting a low-cost option? Does it come down to getting an option with more features?

“I say that because the features may not have anything to do with superannuation per se — they may be a lot more to do with risk insurance, for argument’s sake,” Di Cristoforo continues.

“It could also mean the way people access individual markets. I know there are some players out there who are obviously making more of a foray into direct securities as opposed to managed investments, so direct securities, whether they are individual shares or exchange-traded funds or listed investment companies — the whole range is open.”

Di Cristoforo says that the one key message is that there isn’t one particular answer for everybody.

“That’s always a dangerous thing to assume — that we’ve got the simplest option or the best option or the cheapest option and that it’s always going to be the right option,” he says.

“The simple fact is that it won’t be and it never ever will be.”

Industry super funds

But despite Di Cristoforo’s belief that there will never be one right answer within superannuation, the fact remains that super sectors have very different track records.

Research presented by Chant West in January has again presented proof that industry super funds are, historically, those most likely to outperform.

But according to Landmark Financial Management principal wealth adviser Paul Little, there is much more to it.

“The first thing is that whenever we look at differences between the performance of peoples’ superannuation funds over time, and you do get people coming in with two or three different super funds that have performed differently. Inevitably, it comes down to differences in asset allocation,” he says.

“So we’ll look at someone who has money in a balanced super fund versus other money in a global equity fund and they’ll say one has done better than the other.

“But the reason, inevitably, is that they’re different asset allocations. So if you look at the industry versus retail super fund issue specifically, most of the statistics that indicate that industry super funds have outperformed retail funds are historical returns over three years, five years, seven years — whatever period you want to pick.

“Now in recent years, the industry funds have had two things over those sorts of periods: they had higher levels of Australian equities than most retail funds and a lot of them had a significant amount of unlisted funds that weren’t revalued during the GFC [global financial crisis].”

Little says that the classic example has been MTAA Super.

“MTAA Super shot the lights out for a couple of years, but then they were forced by APRA [the Australian Prudential Regulation Authority] to revalue their funds and they then went from the highest performing fund for three or four years to the worst in the space of a year,” he says.

“So you’ve got to be careful with statistics.

“If you’re starting at a particular point where returns are high for particular reasons (which is essentially different allocations into Australian equities and unlisted assets) and work backwards, then you will always look better over three, five, seven years.”

For Meldrum, one of the favourite arguments for industry funds has been that they’re cheaper and that they don’t pay commissions to financial advisers.

“But going on the Future of Financial Advice reforms and the fact that professional advisors are generally on fee-for-service anyway, that’s another point that’s out of the argument,” he says.

“As things now stand, we all want to provide good outcomes for clients so we’re all singing from the same hymn sheet.

“It goes further too because while industry funds have always had a bone to pick with financial planners who traditionally charged commissions, there’s the argument and a mandate within the Cooper Review for all super fund providers to provide intra-fund advice,” Meldrum continues.

“So they’re very much coming around to the idea of fee-paid advisers charging for advice on particular aspects of the client’s situation.

“If it’s not the case already, it certainly won’t be an ‘us and them’ attitude between retail funds and industry funds for very much longer.”

For his part, Di Cristoforo says that when it comes right down to it, industry and retail super funds are simply product providers.

“When we separate out industry funds from retail, all we’re saying is that they’re businesses that operate in different ways,” he says.

“But ultimately, both of them are just product providers providing superannuation through a series of products.

“That’s the first principle, and what that then means is that if you believe that not every solution is right for every person, then there is room and logic for both structures.”

Doing it yourself

So where then do SMSFs fit into the picture? Getting an accurate gauge of their relative performance as a superannuation sector may not be possible, but can the kind of investment control that these vehicles boast translate into superior outcomes? Meldrum’s answer is a qualified one.

“It can, but again it depends on the advice that the client receives,” Meldrum says. “I mentioned low engagement before as being the industry fund default funds, the MySuper funds, that sort of thing as opposed to the other end of the spectrum which is what we class as high engagement in super, SMSF members for instance.

“Now, people don’t go and open up a SMSF unless they have quite an interest in either saving fees or having the flexibility that a SMSF will offer because obviously they can have direct property, they can have artwork and collectibles, things that an industry and retail super fund won’t allow you to have,” Meldrum continues.

“So that flexibility’s always seen to be one aspect that a SMSF member and trustee will go for. The other, of course, is management of costs.”

According to Meldrum, a SMSF trustee will look to either engage a professional fund manager and do better, or do the investments themselves and do it cheaper — but either way, they’re looking to be in control of their own destiny.

“And because a third of the nation’s superannuation is invested in SMSFs, you’d hope that across all of those 700,000 or 800,000 SMSFs in existence at the moment that people have got some sort of outperformance along the way,” he says.

“The advisers we have at Australian Unity deal with hundreds and hundreds of SMSF clients and, just to break it down and give some perspective, we tend to see two main types of SMSF member or trustee.

“In the first instance, there are those that have never obtained any advice and just worked on tips from people. They may have bought some direct shares and some property and that sort of thing, there’s a fair bit sitting in term deposits and cash and it’s never really been reviewed,” Meldrum says.

“But then there are also those that actually do go and seek professional advice and may have a sharebroker or a financial adviser — or their accountant has put them on to somebody who can give them advice in that regard.

“So if they’ve accepted the advice, they’ve gone with a model portfolio or a recommended portfolio that a professional has put together for them and away they go, hopefully for the better.”

Di Cristoforo says that there is also an element of psychological performance when it comes to SMSFs.

“In a client’s mind, having direct control of a bunch of shares sitting on a portfolio will, for some reason, appear to perform better simply because they’re able to see it,” he says.

“They’re more transparent, and while it doesn’t necessarily mean that the portfolio result is going to shoot the lights out, for many people it makes a difference.

“In the case of an SMSF, what you could have is the very same managed investment that would normally be within a superannuation fund — or it could simply be a non-super fund that’s attached to an SMSF,” Di Cristoforo continues.

“So you could have exactly the same portfolio management with exactly the same securities under an SMSF versus having it all bolted together within one super fund.

“It’s the same manager doing exactly the same thing, but it’s that transparency and control that are absolutely killer here — they’re two valid reasons why you’d do it that have nothing to do with performance.”

Of course, if the SMSF sector’s growth in recent years is any indication, it is evident that those two reasons have been more than sufficient to get a number of superannuants — particularly those with larger account balances — to make the jump.

Naturally, such a move is not without it difficulties — but according to Meldrum, the key challenge is much more related to ongoing maintenance than initial setup.

“We tend to find that if a person has gone to an accountant and set it up, they’ve got their trustee, they’ve got some assets that they’ve bought, they’ve contributed some cash or rolled over some cash into the fund’s bank account, maybe bought some shares and all the rest of it, it can be as simple as you like,”Meldrum says.

“You can really, on a very simple level, get a fund operating in a very quick amount of time, with everything signed up in a week or two at the max.

“But again, what we tend to find is that the better the advice and the better the systems and so forth that you’ve got operating for your SMSF, the better outcome you’re going to have as well.”

Getting started

Outlining the details behind an SMSF setup, Multiport chief executive John McIlroy says that the first step is largely information gathering.

“Using Multiport as an example, we then prepare and issue an establishment kit, the key bits of which are nomination of the fund’s trustee, an application to register the fund with the ATO [Australian Taxation Office] for a TFN [tax file number] and an ABN [Australian Business Number], member applications, bank account applications if we are to be the administrators and then, of course, rollover documentation,” he says.

“So in terms of timing, if the client’s on top of things, that could be done as quickly as a week before hitting the ATO — whose maximum timeframe is 28 days.

“So say it’s taken 28 days to get the ABN and then another 28 days for the rollovers from your previous superannuation accounts, you’re probably looking at something like an eight-week delay to get to the point where you’ve got the money in your SMSF and can start trading,” McIlroy continues.

“That’s how long you’re going to be out of the market.”

“It may take longer if you want to appoint your own accountant or auditor and then put together an effective investment strategy, but the initial setup is quite straightforward.”

However Di Cristoforo, like Meldrum, points out that while SMSF setup is indeed straightforward, individuals looking to set up an SMSF need to look beyond that.

“In terms of setting the thing up, it does greatly depend on the administrator you pick but, for argument’s sake, let’s say a fortnight to a month,” he says.

“That’ll set it up but, with every superannuation fund choice, the set-up is easy in relation to the fact that you’ve got to keep the thing running.”

Di Cristoforo says that people constantly underestimate the ongoing running costs, in terms of both time and capital, when it comes to SMSFs.

“It’s one thing to set something up or do a transaction, it’s another thing to keep managing it,” Di Cristoforo says.

“This goes to the value of advice, this goes to running a super fund, this goes to having a share portfolio.

“The easiest thing is the first transaction but people don’t think about it like that,” he adds.

“It’s the ongoing costs and the ongoing work that are going to make the difference in terms of getting the outcomes they’re looking for — so keeping on track, keeping an eye on whether the portfolio is still following the mandate that was originally set up for it, or if there’s been a change of life that’s meant something has to be changed. If it was simply about product choice, it wouldn’t be nearly as complicated.”

Again taking a broader view of the superannuation sector debate and looking at how the industry, retail and SMSF sectors stack up, Little says that the key is to not compare apples with oranges.

“So when a client comes in, we generally point out that there are three things that you can choose to pay for in superannuation,” he says.

“You can pay for none of them, or you can pay for all three — and your costs, whether you’re in an industry fund or a retail fund or a wrap account or a self managed super fund, will be broadly the same depending on which of these three things you choose to pay and which ones you choose to do yourself.

“The first of those three things is administration, so getting your accounts done, getting your ASIC [Australian Securities and Investments Commission] returns done, tracking where your money’s going, knowing what your taxable amounts are, all of that admin stuff,” Little continues.

"Now typically, whether it’s an industry fund or a retail fund or a wrap account or a SMSF, you’re probably going to be paying about 0.5 per cent for that process, give or take.”

According to Little, the second thing Landmark asks clients to contemplate is investments.

“So you can select all the investments yourself, pick your own shares, do everything yourself or you can pay professional managers to do that for you or you can use index funds or anything in between,” he says.

“And most wrap accounts give you the option to do that with direct shares, cash accounts, whatever.

“So if you choose to do the investments yourself, the question isn’t so much ‘what cost am I saving?’” Little continues.

“The question is: ‘Am I getting a better return after costs by doing it myself than I would if I paid professionals to do it?’ And that’s a call that every investor needs to reach their own level of comfort with.”

Little says that the third area of choice, where clients could choose to pay something or pay nothing, was advice.

“And that really comes down to strategy, to say: ‘Well, the first two bits — admin and investment — get me a structure, they get me a tool, but it’s only really advice that helps me use that tool,’” he says.

“So I can learn and teach myself how to use that tool or I can pay someone else to make sure I’m using that tool correctly.

“The thing is, that person has to more than earn what I’m paying them back in extra benefits from a good strategy,” Little says.

“So really, in my experience, the differences in costs between different superannuation options come back to whether someone is paying for one of those things, two of those things or three of those things, not whether they’re in a retail, industry, SMSF or wrap account structure.

“Each and every superannuation sector is capable of delivering good outcomes.”