Personal Insurances
As a Financial Planner for over 20 years, this is something that I’ve advocated for a longtime and thought that I’d share my views on how important transparency in investing is. I’m only going to focus on superannuation at this stage, but transparency in investing is something that should be applied not only within Super, but also for any investment outside of super.
This section is not to discredit any particular superannuation fund, but more to bring to light something that many insiders of my industry are aware of and are becoming more and more concerned about given the many superannuation mergers of late and the increased super payments heading into funds from 1st July.…. Superannuation funds with high illiquid (under/overvalued) assets.
A report was released last week noting the percentage of unlisted assets per superannuation fund. HostPlus was named as having the highest unlisted asset exposure at 51%, followed by Australian Retirement Trust (QSuper & SunSuper) 35%, Australian Super and Cbus at 27%. Most retail super funds were at only 9% exposure. The method of valuing an illiquid asset is subjective at best. Australian Retirement Trust came out on the 1st of July stating they’ve had a ~10% return for the past year. They were widely panned by experts as there is absolutely no way they could have accurately valued illiquid, non-listed assets in half a day into the new financial year.
I’ll start by going back to the basics and providing a ‘101’ on the superannuation landscape in Australia. For those that know, happy for you to skip this section.
What different types of Superannuation funds are there?
Generally speaking, there are only two types, the first being Accumulation Funds, and the second are Defined Benefit Funds. Most super funds available are classed as Accumulation Funds, and under that category there are a number of offerings that have their own ‘branding’ –
Self Managed Super Funds (SMSF) –
- The most flexible for the types of investments that you’re able to buy, and given the flexibility, you will be charged accordingly.
- A SMSF allows you to invest into direct assets such as property, physical gold, collectables and artwork to name a few.
- You are the Trustee of the fund, so therefore you need to abide by the rules and if you don’t, you’ll find your fund panelised or deemed non-compliant.
Retail Offerings –
These can split into two main categories –
- Company related/owned; AMP, BT, Mercer, Colonial First State etc.
- This is where you will have access to a larger range of investment options, however, you generally allow the company that owns the fund invest and manage your funds, with very little customisation and visibility. Advisers are able to help with portfolio recommendations though.
- Platform/Wrap. A platform is superannuation ‘shell offering’, Macquarie, NetWealth, Hub24 are examples of this category.
- Basically, providing you the shell of a complying superannuation fund, with the ability to invest into pretty much everything that a SMSF can invest in (apart from direct assets mentioned above) providing you with a large amount of flexibility and transparency.
- This type of fund is commonly used by a Financial Adviser as this allows us to customise investments to meet your individual investment needs.
- Some of these platforms will not allow (or limit the investments) an individual to hold this type of fund unless they have an adviser attached/advising them on the investments.
Industry Super Funds, or ‘Profit-for-Member’ funds –
- These are funds such as HostPlus, QSuper, Australian super etc.
- They generally have limited investment options and have little to no visibility on where your funds are invested.
Costs
The sales pitch that Industry funds are the cheapest is just not true. For example, we could setup a Retail super fund and invest into a range of customised investments that would result in the costs (Admin fee + Investment fees + Trustee Fee) to be cheaper overall. I would agree though that most Industry funds administration fees are cheaper, however, they don’t mention that the investment fees are some of the highest in the market. Further to this, adding the cost of their insurance offerings into the overall cost of the fund, most of the time results in the total costs to be much higher than if you hold an external insurance policy that’s not related to the industry super fund, but paid for by your super dollars.
Why is this important?
Knowing what’s best for you and your needs, while overlaying the level of risk associated with each option is critical. The Australian Financial Review has recently published an article criticising the industry funds on their lack of investment visibility and liquidity. During Covid, you were allowed to take out $20,000 from your super fund over two financial years. Putting it bluntly, this almost bankrupted a number of super funds and has forced more merger talks between funds.
Given that most of us have anywhere from 5-35 years before you need to draw on your super, the funds that have high illiquid assets are literally relying on new members to fund withdrawals. This I dare say resembles something called a Ponzi Scheme “A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.”
This is so serious that APRA (the superannuation governing body) are currently reviewing this issue and are likely to hand down a report in the coming weeks outlining a range of new governance to hold these super funds accountable.
What is I have a SMSF that holds Property?
I understand that many of you hold property within your SMSF. This is not as big of a concern, as unlike the large superannuation funds, you are able to value your asset quickly and accurately. You have complete control over the investment and can decide on what you’d like to with that asset. That being said, it’s important that you consider the diversification of the fund to ensure your returns are heavily reliant on one asset to perform. I have seen this relied on too often, resulting in poor overall performance of the fund.
Further to this, I’ll add in once again… ensure you are aware of the cashflow of your SMSF. If you have debt within your SMSF, refinance if your rate is high. Don’t be afraid to dispose of an asset if it isn’t performing.
Want to know more?
If you’d like to discuss any of the content in this newsletter and how it may impact to you, please call me on 07 3709 8485. To make an appointment, please call 07 3709 8485 or email admin@thesan.au.
Written by Matt Tuton
Director of Financial Services
MBA, GradDip FP, FIML, SA FIN, AFP®. ASIC# 275713
Financial Planning advice is provided by Thesan Private Wealth Pty Ltd, ABN 54 661 639 247, Corporate Authorised Representative #425962 of TFS National Pty Ltd, Australian Financial Services Licence No. 532141. This document contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider if it is appropriate for you. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. Past performance is not a reliable indicator of future performance.