Not So Cheap Super

Can superannuation be sold like orange juice? We may soon find out. Two slick new superannuation brands aimed at younger people with less than $50,000 have hit the market in recent months. Attractively packaged and heavily advertised the new products '” Virgin Super, max Super '” promise very low fees. The funds have been put together by two entrepreneurs: Richard Branson of Virgin and Tim Pethick, the marketing man behind Nudie Juice.

Already these funds are making headlines in an industry not especially known for marketing innovation; but for most investors the crucial question is 'Will offer better returns than the products already on the market?'

Virgin Superannuation is the most visible. With an aggressive campaign that declares “lower fees!” and “better super”, Branson has dug into the bag of tricks that has already worked for him in many other industries. Going to head-to-head with the Virgin Brand is max Super, a Melbourne-based venture led by former LookSmart and Nudie Juice executive Tim Pethick and Andrew Barlow, best known as the co-founder of the internet traffic company Hitwise.

The well-established operators such as STA Super are also fighting for customers in the youth market. Although STA may not have the sophisticated marketing machine of its bigger rivals, it does have 20 years of successful fund management experience.

Virgin Superannuation charges a flat fee of 1% of your total fund per annum. The figure is below that charged by some retail and master trusts, but are you getting value for your money?

Virgin Money’s public affairs manager, Kirsty Lamont, says: “Virgin Superannuation aims to be cheaper and simpler '¦ we wanted to remove the outrageous fees and problems associated with active fund management.” On one level she is correct; the investment options that the fund includes are indeed straightforward.

But the fees are more complicated than they seem. Tucked away of page 33 of the product disclosure statement are notes about the “buy/sell spread”. This refers to the costs involved when an individual joins the fund, switches investments (shifting the focus from, say, property to equities) or leaves the fund. Despite the cost of each of these being identical regardless of whether you have $50,000 or $250,000, the spread at Virgin Superannuation can be up to 0.5% of the sum involved.

Although 0.5% might not sound like much, consider that every superannuation product disclosure statement must contain, by law, a disclaimer stating that fee differences of as little as 1% can reduce your total return over a significant period of time. Taking into account that one of the reasons you signed up in the first place was its lack of entry fees, switching fees or exit fees, you could be forgiven for feeling disappointed when you discover that the buy/sell spread means your super cheap super is not so cheap after all.

max Super sports an irreverent and youthful approach '” attempting to transfer some of the witty marketing campaigns from the juice business into the generally staid world of superannuation. For example, its website describes investment manager Barclays Global Investors as 'The Finance Guys’.

Pethick explains the max Super approach: “max Super is an online brand and an emotional brand, one that speaks to a generation that communicates and transacts with the aid of the internet.”

Much like Virgin Super, members of max Super are limited to selecting from a mix of passive investment options.

Passive investments don’t try to beat indices, but to match them by constructing a portfolio that will move in lock-step with the market. The rationale is that active funds are costly to maintain and often fail to meet their own goals. Passive funds cost little to maintain and deliver consistent results.

The managing director of low-cost industry fund Superannuation Trust of Australia (STA), Mark Delaney, says he doesn’t regard funds such as Virgin Super and max Super as competitors to industry funds such as his.

STA charges members 0.52% per annum plus $1 a week for investment management and at the same time offers members a wide range of investment options, including passive and active funds. Taking into account such member benefits as on-site information sessions and the peace of mind that choosing an established fund offers, industry funds are an instantly attractive option.

Of course, neither Virgin Super, max Super, STA nor any other retail fund mentions that DIY super, which in some circumstances can be an option for people with relatively small amounts in their super fund.

On the face of it, the sloganeering and sentiment behind the two new branded super funds present young people, or anyone with a relatively small amount of superannuation, with an attractive proposition. Investors with little interest in such matters '” who simply want a low-risk approach '” will find super cheap super a suitable and hassle-free choice.

But behind the slick marketing, the details are disappointing. The buy/sell spread is a problem. Virgin and max Super both trade on a platform of a single low, flat-rate fee, but when it comes to the crunch, there is no such thing as a free lunch or a free investment switch.

Similarly, anyone seeking more than the simplest of investment options would find themselves frustrated by the lack of choice. Those wanting to learn about investment strategy and exercise more control over their money would do well to set up a DIY family fund. At some time in the future this experience could provide the investor with valuable first-hand knowledge.

I’m directly in the target market of both max Super and Virgin Super, but the original low-cost models offered by industry funds look better to me. They offer a reasonable selection of investment choices and genuinely low fees. A guaranteed record of investment performance and an education program offers the best of both worlds without the added risk of an unknown quantity.

The bottom line is that over the long-term, marketing savvy and brand strength alone will not convince investors; the proof of all these ventures will be in their financial performance.

As Jeff Bresnahan, of the super review website SuperRatings.com.au, says of the new funds: “They ought to be applauded for making super simpler '¦ but they can expect to be tested over the next several years.”

THE PRICE OF CHEAP SUPERANNUATION
	Max Super	Virgin Super	STA Super
Establishment/Entry Fee	No	No	No
Exit Fees	No	No	No
Investment Switching Fee	No	No	No
Contribution Fees	No	No	No
Commissions	No	No	No
Administration Fee	1%	1%	$1/ week 0.52% pa
Buy/Sell Spread	up to 0.25%	up to 0.5%	0.22% applies only to single company investment plan
Trustee	Equity Trustees Ltd	Trust Company Superannuation Services Ltd	Savings Australia
Administration	AAS	Superpartners Pty Ltd	Superpartners Pty Ltd
Custodian	BNP	BNP	CML Retirement Benefits
Investment Manager	Barclays Global Inestors	Macquarie Funds Management	Offers 13 investment options across 35 investment managers
Insurer	AIG Life	ING	Colonial Mutal Life & ING Life
Commision on Insurance Premium	15%	15%	0%