A potential alternative to SMSFs?

Self-managed super funds sit as a unique investment structure, offering a mixture of tax advantage, investment control and (for large enough balances) low fees.

Indeed, SMSFs feed into a number of effective personal finance strategies such as salary sacrifice, transition to retirement income streams, and tax-free pensions to fund retirement.

So it’s no wonder that their growth has been so significant. The June 2013 Australian Tax Office report on SMSFs shows that 159,220 more funds were created than were wound up. Clearly investors are impressed by the benefits offered.

However, it’s important to keep in mind that the SMSF industry is a large one. The same 2013 ATO report suggests that there are just over 500,000 funds in existence. Assuming an average payment of fees of $2,000 a fund, that is a $1 billion a year industry. There are a lot of people who make a fair bit of money out of SMSFs, and who have vested interests in promoting them as solutions.

As investors we should therefore be on the lookout to make sure that nothing else is available that might better suit our needs.

An investment product that I have seen advertised recently, that I wanted to take a closer look at, was CareSuper superannuation. It has been advertising the ability of investors to access direct shares through their super fund – making their own investment choices. Further, it allows investors the ability to access term deposits directly.

CareSuper is not the only fund to offer such an option. Australian Super, a particularly large fund, also offers that choice.

The ability to choose and manage a portfolio of direct shares is an interesting option. Perhaps those investors who mainly use a SMSF for direct share investments might be better off in one of these? After all, SMSFs do have their shortfalls – there is paperwork to be done, responsibility to be taken by the trustee, and often costs for accounting, administration, supervision and audit – let alone advice fees. They do have a habit of adding up.

The CareSuper option is relatively cost effective. The primary fee is 0.15%. While many people are (rightly) suspicious of the percentage fees charged throughout the financial services industry, this tends to be because of the wealth destroying effect of the old-style 2% annual fees (MERs) on managed funds. In this case, a 0.15% fee equals $1,500 a year for a $1 million portfolio. On top of this is a flat $78 a year fee – $1,578 a year in total.

To access the direct investments there is a further fee of $25 a month, or $300 a year. Brokerage starts at $13.75 a trade, and does not seem excessive.

Against the fees for a SMSF, this all looks reasonably attractive.

CareSuper vs. SMSFs

However, this is where further digging starts to show that there is a difference between a SMSF and the type that CareSuper is offering.

The first is that there is a limited range of cash investment options. My experience of working with retirees is that they like to see their cash working hard, and a SMSF gives them the option of finding the best cash investment, wherever it is. That said, people would be able to retain a significant cash holding outside of superannuation and pay no tax. So it would be possible to use CareSuper for shareholdings while keeping cash outside of super, and investing that wherever the best opportunities might be.

There are restrictions within the way share-based investments can be held. For example:

• Only 75% of the balance can be invested in ASX 300 securities and exchange-traded funds;
• You can only use ASX 300 securities and ETFs – i.e. no small companies;
• You are limited to 20% of the balance in any one ETF or security – not a huge limitation, but not something that you have to worry about in a SMSF (assuming you have met the requirement of diversification through your investment strategy).

The other limitation remains that you can only invest in investments that are provided by CareSuper. If, for example, you see an unorthodox opportunity that you want to pursue (hedge fund, private equity), or invest in direct residential property with your superannuation assets, while it is possible through a SMSF it is unlikely to be available through CareSuper.

The place for a CareSuper style fund

I am not sure that, at this stage, people with significant assets in a SMSF will find enough in the CareSuper offering to change.

However, as CareSuper and similar offerings increase their range of choices they will become more attractive as a ‘self-directed’ superannuation option – especially for investors who are not comfortable with the ‘trustee responsibilities’ of a SMSF, or who value the benefits of anti-detriments payments (Anti-detriment payments a super opportunity) offered by such a fund.

I think the attraction of this style of fund might be for someone with up to, say, $500,000 of assets who are still in the accumulation phase of their superannuation journey. The lower costs coupled with investment control will be what many people are looking for as they build the assets required for their own SMSF.

Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.