A super grab for your funds

They’ve watched billions in funds drain out of their super coffers into self-managed funds. Now, the big boys want it back.

PORTFOLIO POINT: With more and more Australians launching self-managed super funds, the big institutions are bleeding. Prepare to be wooed.

Those operating self-managed superannuation funds should prepare themselves to be wooed by most of the big institutions, led by AMP, BT and MLC.

For most of the last two decades, big institutions have ignored self-managed funds in the belief that they would fade away. They worked very hard in Canberra to try and get regulations passed to curb self-managed fund development but the self-managed juggernaut was just too strong – Australians did not want to be dependent on high fee charging institutions for their savings. They want to control their own money.

Self-managed funds now represents around 35% of the superannuation market and, according to the self-managed fund association, of those people actually drawing money from superannuation in some form of pension 80% of the base savings are held via self-managed funds.

In other words, when people retire they take their money out of the big institutions who manage industry or large funds and either spend it, holding savings in their own name or (probably unlikely) start a self-managed fund. And the swing to self-managed funds shows no sign of abating.

In a few years they will pass 40% of all superannuation funds, heading towards half the market.

So, faced with such a massive market share loss, institutions have no choice but to try and sell their services to self-managed funds (Also see Caleb Samson’s recent article, A third way for super). They will not find it easy because the culture that leads people to operate their own fund is very different to that which pervades most big institutions.

Nevertheless let’s look at some of the areas they may seek to attract your custom. Most obvious is in platforms to manage your investments. There are a number of platforms currently available and any new institutional platform will need to be good to capture significant market share. Beware of the charges if you use institutional platforms. You really need to read the fine print.

If institutions are charging a percentage of your total assets, then in most situations there are better ways to have your funds managed. They will also offer their investment management services, with particular emphasis on specialised products.

You might be offered a resource unit or a property trust, or overseas shares etc. Again, look at the charging. Remember that if you are looking for a wide portfolio of Australian shares you can invest via listed investment companies such as Australian Foundation Investment Company or Argo Investments, or if you really want to you can use an index fund. In mining, groups like Global Mining Investments provide a spread of mining investments while an investment in Rio Tinto, BHP or a gold miner like Newcrest provide a very wide coverage of minerals. These investment avenues are available without significant management charges.

In the case of overseas investment, it is harder. The Templeton Global Growth Fund is available, but for many people the institutions may have products that suit their purposes. But you will need to make a decision of how much of your fund you want invested in overseas equities.

One of the most successful investment avenues in the last two or three years has been the long-term bank term deposit. The institutions, even though they are often owned by banks, have not offered these to their superannuation clients because they don’t get enough fees out of it. This has been a national disgrace and is one of the reasons why institutions have lost so much market share. Most institutions offer a cash type product that is a shandy of a whole range of securities. I am not sure how well it will stand up if we had a crunch. Bank term deposits under $250,000 represent a government guaranteed security, which is an enormous attraction to self-managed funds.

The institutions will also offer financial planning advice, and sometimes this can be very valuable. But just be careful of the costs. It is well worth sitting down with a financial planner and discussing the amount of equity you want to invest in and the way you want that equity invested and, of course, there is also funds distribution and other matters.

Many superannuation people use their accountants to tell them of the options that are available in the distribution area and frankly make their own decisions on asset allocation. The institutions have stuffed Australia full of equity, and we have run into this difficult market with too much superannuation money punted on equity.

As I explained last week (Surviving a euro trashing and the mining bust), we currently have two very different outcomes in Europe on the table. There is the plan by the president of the European Central Bank Mario Draghi, which is affectively a money printing exercise that would boost markets. Conversely, the Germans what to restrain money printing and want the troubled countries like Italy and Spain to get their houses in order.

The German plan will, in my view, split the euro and greatly damage the world capital system, although longer term it is the best solution. At the moment the market is punting on the Mario Draghi plan, plus another quantitative easing in the US. Greece looks like it might explode and leave the euro, which could turn market sentiment.

Many older Australians have 60% and 70% of their money riding on that dangerous situation. They may come out on top, but they certainly haven’t done so in the last five to seven years.

This drive by the institutions to sell their services to Australian self-managed funds comes at the time a great many people in the Asian community have come to the conclusion that private banks are not the best groups to manage their money.

Private banks charge fees that are too high and often take much greater risks than individuals are comfortable with. We are seeing lower profits in private banking situations across Asia.

I believe it reflects a growing belief amongst middle and upper income people in both Asia and Australia that they want control over their own money.

Here in Australia I don’t blame the institutions in having a try with the self-managed funds area, and if they gain market share then it will mean that they have learned from past mistakes and that their new products are well adapted to the needs of self-managed fund customers.