Is ?SMSF-lite' for you?

PORTFOLIO POINT: Industry funds are at last facing up to the challenge posed by the allure of SMSFs, but although the new and/or improved “direct investment” options will work for some people, they are not an effective replacement.

Investors flocked to managing their own super in the mid-2000s, as the sharemarket was building steam and legislative changes made it possible for them to take charge of their own retirement finances. Industry funds were caught flat-footed by the exodus, but are now moving to counter their more nimble rivals.

Or so it seems. Industry funds are following retail funds in creating “SMSF-lite” products that, they say, give members direct control over part of their super without the cost and effort of setting up their own DIY fund. But either you run your own fund or you don’t, and the new options come with limitations and requirements that restrict choice, simply because it would be a dereliction of trustee duties to offer a blue-sky range of investments.

Still, a direct investment option opens the door to people who don’t have a $200,000 super balance, the minimum the ATO recommends for launching your own fund, and gives them a small amount of control over stock, term deposit and ETF allocations (the $200,000 is a guideline; many DIY funds have balances below this level).

Andrew Baker, managing partner of wealth management company Tria Partners, expects that more and more funds will start giving members direct command over part of their funds and wider ranges of investments will inevitably appear.

AustralianSuper and CareSuper were the first to revamp their existing options last year, to include all of the ASX 300 and, in the case of AustralianSuper, ETFs and term deposits.

LegalSuper is the other fund that allows members to pick their own stocks from among the ASX 200, and construction industry super fund CBus Super is exploring an intriguing property alternative.

At the same time, the move by industry funds to co-opt the sense of freedom and personal control central to SMSF thinking for a product that isn’t similar is exposing deep-seated tensions between the sectors.

The increase in new SMSFs is continuing apace, confirmed by the ATO’s latest Statistical Report, released in December. This shows the number of DIY funds rose by 7.7% to 456,472 in the year to June 30, 2011, and by 14% since 2009.

Association of Super Funds of Australia (ASFA) chief executive Pauline Vamos says the combination of age and higher balances are causing people to take a hard look at their super. This is behind the exodus to SMSFs and the direct cause of the aforementioned industry funds’ evolution into creatures that can be more things to more people and stem the flow towards DIY super.

AustralianSuper is the market leader among industry funds, with its MemberDirect offering.

“It’s about giving members who want more control, more control. It’s not a direct replacement for an SMSF. There’s lots of things that an SMSF can do but this product can’t '¦ putting property into it, for example,” says AustralianSuper marketing manager Susan Fairley.

AustralianSuper members can buy any ASX 300 stock and choose from among 23 iShares ETFs on offer (with a minimum order of $1500 and maximum of $250,000), and term deposits from NAB and Members Equity Bank (with a minimum deposit of $2000), which have been especially popular since the soft-launch in December although the figures are not available yet, Fairley says.

Choice comes at a cost. The administration fee is $15 a month and brokerage starts at $15 a trade, and because you have to maintain a minimum $5000 balance in one of the fund’s other products to access MemberDirect, you’re also paying $1.50 a week management fees on that.

But this may be a small price to pay if you don’t have the budget to take full control of your super or, as Fairley says, if you only want to invest in cash and shares anyway.

“There’s lots of flexibility that an SMSF can provide, but if people aren’t really using it, then hopefully [MemberDirect] is a good alternative.”

CareSuper runs along the same lines, having overhauled its old ASX 200 option where members could only trade on a weekly basis, to being able to trade ASX 300 shares every day the market is open, provided you have at least $10,000 in your super of which 75% can be invested by you.

The fees are higher than those at AustralianSuper and at this stage it doesn’t include term deposits or ETFs, although CEO Julie Lander says they’re hoping to introduce the exchange traded funds by the end of March. So far its membership sits just under 1000 people since launching in 2005, and the majority of investors have balances between $50,000 and $150,000.

Being able to trade shares, play around with ETFs and park some cash in a term deposit may sound like a basic SMSF, except that there are some fundamental limitations here in both how much you can invest and in the situations you can take advantage of, simply because you are not the trustee – the person ultimately responsible for the fund and your money.

Exciting small caps are off limits, as are the full range of ETFs and term deposits, residential and commercial property, and art.

There are checks on the amount you are allowed to invest in one stock (20%), and how much of the total super balance you can access for direct investment.

Taking part in corporate actions and dividend reinvestment plans is a work in progress for CareSuper and something they hope to introduce later this year, while AustralianSuper lets members do this already, although with this interesting proviso in its PDS:

“Where you hold a listed security through your MemberDirect option, which is affected by a corporate action, AustralianSuper may review the nature of the corporate action and determine, at its sole discretion, whether you can make an election in relation to that action.”

In other words, the final investment decision still lies with the fund.

Of course, the key reason people are abandoning large funds in favour of SMSFs are the new rules that allow property to be bought more easily within DIY funds.

Aaron Dunn, who founded the DIY information website SMSF Academy, says ATO statistics indicate younger people are setting up DIY funds, with 25% of new SMSFs being set up by people between the ages of 35 and 44. He suspects that being able to borrow to buy property inside super is prompting younger people considering an investment property, to start thinking about putting it inside a super fund instead.

CBus Super is tackling this head on, by investigating how to let members invest directly in property.

CEO David Atkins says two factors are behind the decision: the nature of CBus Super’s membership mean they’re comfortable with investing in bricks and mortar and the leakage to SMSFs is higher than they’d like.

“While the fund has strong loyalty from its members, we are asking ourselves questions about whether we could be more attractive in retaining a certain group of our members by having a property option available,” he says.

It’s early days yet and there are some bugs to work out, such as whether members could invest in individual properties in the wholly owned CBus Property development portfolio, or a combination; how to manage the risks in a way that means the CBus Super trustees aren’t defaulting on their responsibilities; and how to value a development so all members benefit, even though some will be investing in what is effectively a hole in the ground and others who come later will get the full value of the final product.

Atkin says if it works out, a direct property investment might be up and running by start-to-mid 2013.

The can of worms will well and truly be opened by then, as scepticism on both sides about the motives and realities of industry funds and SMSFs, respectively, come into play.

CareSuper’s Julie Lander suspects the huge rise in SMSF numbers is due to people being “sold” DIY super, especially those with balances under $200,000, when they’re just going to invest in things that could be accessed easily via a large fund.

“The large majority of people are conned into an SMSF when all they’re doing is going into managed investments. I think there is a place for SMSFs but the proliferation of them seems to be just ridiculous '¦ There are lots and lots of people who are being sold an SMSF that has a lot of additional costs to it when they’re just investing in managed funds.”

Andrea Slattery, CEO of the SMSF Professionals Association of Australia (SPAA), says despite being called an alternative to an SMSF or providing 'the control without the expense and paperwork’, these self-directed investment options are in no way similar to a real self-managed fund.

“An SMSF is able to have the flexibility and control of having any investment whereas a larger fund, like an industry fund or an APRA regulated fund, restrict the investments that they have based on their liquidity and capital requirements,” Slattery says. “All the industry funds are doing is providing a broader range of assets than they’ve been offering in the past.”

Effectively what is currently on offer from the industry super funds are limited online trading accounts and an ability to park your money in cash rather than a true alternative to an SMSF. For those without high super balances or aren’t confident managing all of their own super, supervised direct investment is one step towards gaining total control over your super.

For others who want flexibility in tax planning, investment allocation, and asset choice without anyone looking over your shoulder, an SMSF is the better option.

Follow Rachel Williamson on Twitter @RWilliamson_