It’s no different from choosing a pet. Do I get a dog, cat or bunny. They all have their pros and cons, but what is the right one for you will be different to the next person based on their specific needs and wants. They are different in many ways, they are not the same and need to be treated accordingly.
It can be so confusing, you’re been advertised from all corners of the super industry, it’s a multi-billion dollar industry and they all want your money.
From compare the pair (industry funds) to the big banks (Retail super funds) to Self Managed Super Fund admin providers, their all spending millions of dollars a year to get your business.
But as a consumer and investor this can be overwhelming. So what is the right one for me?
We are going to dissect each and give you some real information to hopefully help you with making the right decision.
Firstly, what is super?
Since the Global Financial Crisis, where a lot of super funds suffered significant losses (on paper) most tend to think that super is a bad investment. Although those who stayed the course would be seeing the benefits of doing so.
I think there is a misunderstanding of what super actually is. In the first instance super is a tax structure and secondly a structure in which you can invest.
Super’s main purpose is there to help you build up a nest egg to eventually fund your retirement.
It’s one of the best tax structures going around.
While you are still accumulating money within super you are taxed at 15% on income and 10% on capital gains.
Once you are retired you are able to convert it to an income stream to replace your salary to meet your living expenses. At this stage, the earnings are tax-free along with any capital gains while receiving your income tax-free as well.
If you would like to know more about super strategies you can download our Super Changes Cut Through e-book by clicking here>>
As I mentioned above super is a tax structure first and secondly a structure whereby you invest in just about any worthwhile investment. Some see super as worthless investment are misinformed about how super works. This post is not about that, but you can find out more by clicking the link above to gain a better perspective on what super is all about.
So, now that we have a better understanding of what super is, what are the main super structures you can use?
Industry funds were predominately created by industry bodies to provide super benefits for their own members. Generally, most are supported by trade unions and are low cost in nature. They are not for profit super funds.
Although industry super funds are low cost in nature, the changing landscape in the super fund industry is challenging that. No longer are industry funds the lowest cost funds out there.
They provide limited investment options and provide a set level of insurance cover generally at a lower cost than retail funds (although in recent years there have been significant increases).
Generally, the age of members in industry funds is lower than most other funds and the average balances are lower.
Although there have been limited investment options in recent years, industry funds have been proactive in addressing this area and adding more and more options.
Some industry funds have introduced access to direct shares, exchange-traded funds, and their usual main investment options.
Retail super funds are generally owned by institutions and largely dominated by the big banks although there is a number owned through private companies.
The low down is they were developed for people and advisers who wanted to make their own choices and have greater flexibility when it came to what investment options they had available.
Yes, most are owned by big institutions that generate a profit from the operation of these types of super funds. However, now more than ever the fees are pretty competitive and what I find now is that most are fee competitive with industry funds so the gap is not as much as what is advertised through the media.
You are able to invest in managed funds, direct shares, and exchange-traded funds. The options are wide and varied and offer the ability to customise investment portfolio’s based on individual needs.
The main advantage with Retail super funds is that you have more control over when you sell and buy an investment, when you realise capital gains and the ability to generate income for which most industry funds do not allow. This helps with cash flow particularly prior to retirement and in retirement when you are taking an income. It allows you to control capital drawdowns, ie you don’t need to sell down investments when markets are weak.
However, there has been significant negative publicity around these funds as part of the royal commission, mainly due to the bigger organisations funneling clients into their own product.
To be fair in some instances they have been used and found inappropriate for some clients, but to be fair industry funds are doing exactly the same thing.
Self Managed Super Funds (SMSF)
SMSF’s have been extremely popular over the years largely due to the ability to have greater control over your money within the super system. The attitude if someone else is going to lose my money, I may as well be in control and lose it myself.
SMSF allow you the greatest flexibility in investment options. You can invest into just about anything as long the main reason is to build up funds to provide for retirement. There are strict rules around what you can invest into.
The most common investments most will use inside this structure are direct shares, managed funds, exchange-traded funds, private company shares, direct residential rental properties, commercial property, and collectibles.
There are an enormous amount of rules that you need to follow along with keeping good records so you need to deal with this extra layer of complexity.
However, the name SMSF is most probably a little misleading as most members of SMSF’s rely on some sort of professional advice to run their fund. There is only a small proportion that goes it alone.
SMSF’s can be more expensive to run with lower balances, however, the larger the balance the lower the cost as generally costs are fixed.
To be honest there are a lot of people that are in SMSF’s that should not be. There needs to be an overwhelming reason why you are in such a structure.
So, how do you choose which one is right for you?
This is always a hard question to answer, but what I will do is let you in on the process I use for clients.
Contrary to a lot of pre-conceived ideas about what financial planners do, and there is a view we just recommend product and investments. To be honest there are some in the industry who still do this, unfortunately. However, I reverse engineer it. This is the last thing that I consider for clients, yep that’s right it’s last on my list.
Why might you ask?
What is most important is what our clients are looking to achieve. Are they looking to increase their wealth, are they planning or preparing for their Next Adventure(aka retirement), are they looking to reduce their working hours or have one spouse finish work early or are they just looking at building wealth to provide them with a greater level of options to name a few?
From here we can determine their main priorities, break them down into short and long-term priorities.
When then look at what’s required to fund those priorities or lifestyle changes they are looking to achieve.
We explore all the strategies available to them to get them their quicker and in the safest possible way. No need to take on any more risk than needed if they don’t need to take the extra risk.
Then it’s about whether their current super is the right structure to achieve their desired objectives or lifestyle goals.
Questions I ask my clients to gain perspective on what is best for my clients?
What is the client looking for?
Are they looking to have control over their investments? Do they want to choose the investments they are in?
Do they have ethical preferences?
Are they looking for the lowest cost fund?
Do they want regular communication around what is happening with the investments?
Do they want the investment manager to make choices based on whether markets are expensive or undervalued?
Do they want the investment manager or super fund to have the option of going totally to cash if markets are showing signs of falling to protect your capital?
Do you want to have control over the tax treatment of your investments?
Do you want cashflow in your super fund?
Do you want to customise from time to time?
Do you want to see the investments you are holding?
What type of insurance are you wanting to hold?
What risk level are you willing to accept & do we need to customise it?
As you can see, it’s not as simple as it looks and just looking at the best investment return in most cases can be misleading especially in good markets. Also picking the best return from last year is fraught with danger. There are many factors that are at play and for the uninitiated, this can lead to unnecessary consequences.
By answering the above questions you can in most cases narrow your choices and start to pick the right structure for you.
In light of all this we have recently introduced a new investment partner that caters for all the above decisions, something that is fully customisable, provides updates on a weekly basis and will adjust the investment allocations based on market expectations, ie adjust investments based on whether they are deemed to be expensive or undervalued.
I must say I’m excited about our recent introduction as I been wanting to introduce something like this for many years.
Some people are afraid if they speak to a financial planner they are going to sell them a product. However as stated above, my first priority is gaining a good understanding about what our clients are trying to achieve, working through what they have to work with and then looking at what’s getting in the way.
Ultimately, can we help them, can we help them make their money work harder for them and help them further their adventure?
We then work through all the strategies and options that are available to them and tailor to what they are comfortable with.
Sometimes that means retaining what they currently have, sometimes that means making some changes to improve their position. I’m not here to sell products, I’m here to provide sound solutions that will take clients from where they are today, create a clear path or plan to where they want to get too and avoid the pitfalls along the way.
I see myself more like a sherpa, where there to guide and support our clients so they enjoy the journey.
If there are questions you have or something you are trying to work through, feel free to reach out and we’ll arrange a 15 min call and help you work through that. Email me at firstname.lastname@example.org or phone me on 0401 253 729. I promise I don’t bite.
If there are questions you have, feel free to email me and I’ll answer them for you.
Make it a great Life!
Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at June 2018. This is an online information blog. It does not imply an offering of securities.