Future Focus: Is there a better option than SMSFs?
Direct Investment options may offer a happy middle ground for investors who want control of their portfolio, but not the headache of portfolio administration.
Last year I wrote an article for Firstlinks about why I’m not ready for a Self-Managed Super Fund (SMSF). My main reason was the fixed cost in relation to my current balance. In response to my articles some readers shared their thoughts about why an SMSF was or wasn’t right for them. A few reflected that SMSFs were a lot more effort to effectively administer than they realised. Others thought this effort was worth it as they enjoyed the freedom to customise their investments.
SMSFs provide a lot of great features. They allow investors to access the investments they want in the proportion they’d like to. They allow a level of customisation to invest in asset classes that aren’t available through traditional superfunds. However, the popularity of SMSFs with investors – particularly investors with high balances – has caused the industry to innovate to provide a middle ground.
Enter the direct investment option. If you use AustralianSuper, you may know it as Member Direct. CareSuper offers Direct Investment Option (DIO). Superhero offers Super Control. More and more superfunds are offering the ability to invest not just in multi-asset funds but also the individual securities themselves.
Direct investment options for your superfund sits between pre-mixed options and the full choice and responsibility of an SMSF.
What’s the difference?
Direct investment options through industry or retail superfunds are for investors that do not want the complexity of SMSF administration. The trade-off for a lower administration burden is a limited number of direct securities that they can invest in.
Many large superfunds have started offering investors the ability to choose their own allocations towards listed investments and some direct shares. Most offer ASX 300 shares, ETFs and LICs. For example, instead of choosing a 40% allocation to Australian equities, I can choose a 3% allocation to CBA, a 4% allocation to BHP, a 30% allocation to the NASDAQ 100 ETF NDQ, and so on.
The other approach an investor can take is to use a self-directed option for a portion of a portfolio. Although the article is from 2018, Tom Garcia from AustralianSuper reveals that investors typically allocate 30% of their portfolio to the Member Direct option
This offers insights into how investors are thinking about this feature. Rather than choosing to self-direct their entire portfolio they are implementing a Core/Satellite approach. They still have most of their portfolio professionally managed, but they use part of their portfolio to make concentrated investments into companies or ETFs. Some funds make this mandatory, such as Superhero, who only allow 75% of the balance of your superfund to be in direct investments.
On the other hand, Self-Managed Super Funds (SMSFs) allow complete control and transparency for investors. In exchange investors take on regulatory and compliance burdens, as well as flat service and administration fees that mean a SMSF only suit balances of a certain size. I have written on this before.
SMSFs are heavily regulated – they require a lot of work to remain compliant, including investment strategy documents, buy and sell trails, meeting minutes and notes. This is a meaningful time commitment and this upkeep does not go away. On top of this, superannuation is an everchanging landscape. The regulations change more often than you think, and it is your responsibility to keep on top of this.
Understanding whether you have the propensity to meet these obligations is vital. Are choosing your own investments really that important to you? Or, are you happy to pass on all the paperwork, administration and compliance to a large industry or retail super fund?
We’re seeing more SMSFs opening, as investors look to access the benefits and flexibility of the vehicle. They offer options that none of the other choices can match – the ability to invest in direct property, the ability to have multiple members in the Fund (particularly appealing to reduce the flat service fee cost across multiple individuals).
If those are not important features for you, a self-directed option at an industry or retail fund may be a better option. They provide you with a little more control than the multi-asset options but less responsibility than a full blown SMSF.
How much does it cost?
There are many industry and retail superfunds that are adopting this option to retain self-directed investors that are more engaged and want more control over their super. There are slight variations between the superfunds and their offerings.
Costs vary between superfunds. Below are some indicative fees.
This compares to the cost of an SMSF or a pre-mixed option in your fund. You’re able to find a comparison in this article I have written here. At a high level, ATO data shows that the Median SMSF cost was $8,611 in 2020-2021 (the latest data available).
What types of investors will it suit?
The choice that an investor has varies on their desired level on control. With increased involvement usually comes increased choice, control and transparency.
Let’s take a look at how these options compare.
Final thoughts
When you’re considering the best way to hold and manage your retirement savings there are a number of factors to consider. How hands on do you want your investment to be? What is your balance? What are your retirement goals?
Direct Investment options may suit investors that want the convenience of a large industry/retail superfunds’ portfolio administration abilities with the flexibility and customisation of choosing individual securities.
It doesn’t have to be an either/or choice. You’re able to utilise a hybrid approach with pre-mixed options. Ensure that you’re not paying two sets of fees over the long term that may hinder your retirement outcomes. This is on top of brokerage that you may incur which will be influenced by your own behaviour and how frequently your employer pays contributions. Simpler may be better for some investors after costs are taken into consideration.
Invest Your Way
For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.
We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.
The book is currently in presale which is an important time to build momentum. If anyone would like to support this project you can buy the book now. Thanks in advance!
