- Product designed to meet the demand for a low-cost SMSF
- Plenty of investment options, but a limited range of brokers
- High volume investors, or those investing outside of cash, deposits and shares, need to do the math on transaction costs
If you read Trip Advisor, you’ll see resorts rated highly by some and terribly by others. Often these differences come down to expectations – some people want five-star service at a one-star price. E-superfund’s online self-managed superannuation fund (SMSF) administration service (www.esuperfund.com.au) is no different. Internet forums have a wide range of comments from users but you get what you pay for and the price is cheap.
Let’s first make one thing clear: Your author is not an E-superfund customer. This article highlights key considerations rather than offering a Choice style product review. If you are an E-superfund customer we’d love to hear about your experiences.
E-superfund offers you the choice of setting up a new SMSF or transferring an existing one. They offer the flexibility of a company, or individuals, as trustees, although contrary to our advice (Why your SMSF needs a corporate trustee) they make a strong push for individuals. Our guess is that this is to make SMSFs more attractive to small investors by eliminating $400 to $700 of upfront costs.
If you opt for a corporate trustee you can either use an existing company or set up a new one. E-superfund doesn’t do it for you – they recommend Cleardocs (an online document provider). But you can always go to the ASIC website and do it yourself.
On the SMSF side, it’s a full and fee-free offering. They provide the trust deed (which is compulsory) and sample documents (such as investment strategy and minutes), plus look after the audit and tax return. When you reach pension age you can set up a transition to retirement or account-based pension (again fee-free) and run accumulation accounts alongside pension accounts.
Be warned though, the investment strategy document made available on the website is a ‘light’ form of this document. For instance, some advisers are steering away from using 0-100% as a target asset allocation and using more precise bands instead. E-superfund’s document ditches percentages completely.
Trustees are now required by law to review their investment strategies regularly. With that in mind, it might be worth shopping around – there are lots of online providers – to make sure you have an investment strategy you’re comfortable with.
On the investment side, E-superfund is not so full and fee-free (more on this below). You get a list of approved providers (some compulsory) across a wide range of investments, but that’s it. If you’re transferring an existing SMSF you’ll need to close down your other bank accounts, share trading accounts and get rid of any non-approved investments (such as art and overseas property).
Why the restrictions? E-superfund makes much of the fact that it is necessary for them to run their low-cost model. This is their way of saying these are the providers they’ve entered into commission arrangements with. The reason E-superfund has a low annual fee is because they take a clip on the volume of transactions you enter into.
This isn’t a bad thing – unless you do lots of transactions – it simply means you’ve got to factor in any additional fees as part of the cost of using the service. What’s not so good is the effort needed to find the commission arrangements on the website. The only place we could find them was pages 1 and 2 of the Financial Services Guide.
On the topic of fees, they’re pretty simple. Right now (under their special offer) you pay nothing for set-up, nothing for the first year and $699 per annum after that. If you’re transferring an existing fund you pay $699 from year one onwards (but no set-up costs). This deal is called a special offer expiring 15 February, but it seems to be offered at regular intervals.
Based on the current fee schedule everything else comes for free. The only additional charge we could find (outside of transaction costs) is $500 for setting up a residential property loan. Given the work involved, this is fair enough.
For E-superfund to work for you, it all comes down to the investment side of things. Let’s take a look.
The investment possibilities are broad – transaction account, online savings accounts, term deposits, Australian shares, overseas shares, property, bonds, CFDs, options, futures and more – but the banks and brokers aren’t. For some investments you get one option, for others you get several. But you don’t get free reign on many.
For bank accounts, it’s compulsory to set up an ANZ V2 Plus account and use it for all transactions, including share settlements and payment of investment property expenses. The account has a $5,000 minimum balance, no monthly fees, provides five fee-free transactions per month and allows free internet banking. After that, you pay $2.50 or 50c, depending on the transaction. E-superfund customers get a special deal on the interest rate (currently 3% pa).
Similarly, for Australian share trading, you must set up an account with one (and only one) of Commsec or E-Broking. You can’t use anyone else. Whilst both are well known, low-cost providers, you don’t get Commsec’s $19.95 discounted online rate (the minimum is $29.95) and you can’t use someone like Bell Direct. This won’t be much of an issue for an investor with low turnover. But, if you’re an active trader, you’re going to have to do the math. If you’re paying a lot more in brokerage, you might be better off elsewhere.
These are the only compulsory accounts. For certain other investments you can choose between E-superfund’s partners or choose your own (for instance, online savings accounts and term deposits). But for others (for instance, loan-financed residential property) you’re stuck with E-superfund’s partner(s). Table 1 shows the complete list.
|Compulsory E-super account?||Optional E-superfund accounts?||External accounts / service providers allowed?||Comments|
|Transaction bank account||Yes. ANZ V2 Plus account||No||No||All transactions must be done through the ANZ V2 Plus account|
|Term deposits||No||Yes. AMP, ANZ, ING Direct, Macquarie||Yes|
|Online savings accounts||No||Yes. ING Direct||Yes|
|Australian shares (CHESS sponsored)||Yes. One of Commsec or E-broking||No||No|
|International shares||No||Yes. Halifax Brokers, Interactive Brokers, Commsec International Trading Platform||No||Note comments re unsecured credit exposure on Halifax and Interactive|
|CFDs||No||Yes. CMC Markets, Halifax Brokers, Interactive Brokers||No|
|Options||No||Yes. Commsec, E-broking, Halifax Brokers, Interactive Brokers||No|
|Warrants||No||Yes. Commsec, E-broking||No|
|Forex||No||Yes. CMC Markets, Halifax Brokers, Interactive Brokers||No|
|Futures||No||Yes. Halifax Brokers, Interactive Brokers||No|
|Metals||No||Yes. CMC Markets, Halifax Brokers, Interactive Brokers (trading metals via derivatives)||Yes||Physical metals can be purchased from bullion brokers|
|Property||No||No||Yes||Property without borrowing (except overseas property) can be purchased normally|
|Property with borrowing||No||Yes. Residential property - must use St George loan. Commercial property - must use Westpac||No||$500 fee payable to E-superfund to set up property loan|
|Managed funds||No||Yes||Can be purchased directly from manager via prospectus, via Commsec managed fund platform or via third party broker (eg Investsmart)|
|Insurance||No||Yes. AIA Insurance||Yes||E-superfund (through AIA) offers life, total and permanent disability and income protection insurance|
Importantly, you are free to set up online savings accounts and term deposits with any bank you choose. E-superfund has term deposit arrangements with ING Direct, AMP, ANZ and Macquarie (current rates attached) and an online savings deal with ING Direct. This enables your information to be automatically uploaded. But, if you’re not happy with these rates, you can choose your own (and manually provide details for the accounts and tax return).
Since SMSFs often hold a significant proportion of cash and term deposits, this is an important consideration. Having to settle for a lower interest rate for lack of choice can be very expensive.
There is another point worth noting in relation to the services provided by Halifax and Interactive. According to E-superfund you don’t have legal title to your shares held in these accounts but, instead, rank as an unsecured creditor. This is of significant benefit to the broker (as it generally means they can lend out your shares and earn securities lending fees) but it means investors are taking a lot of additional risk for no extra return.
E-superfund doesn’t provide much detail on the arrangements. But this type of situation burnt many investors in the GFC – for instance, the clients of supposed margin lender Opes Prime. So beware!
E-superfund’s basic proposition is ‘fixed fees and lots of other little clips’ – for things like transaction fees, additional brokerage and a bit of added credit exposure. For many, this shouldn’t be a deal killer. Like credit cards, it’s a matter of understanding the costs and using the product accordingly.
What will be a deal killer for some is the ‘banned’ list. E-superfund doesn’t allow you to own any of the following investments:
- Investments in private companies or trusts
- Overseas property
- Loans to any person or entity
- Collectibles (eg art, jewellery, coins)
- WRAP accounts
If you do, you’re out (they reserve the right to terminate) and if your existing SMSF owns them they won’t have you as a client.
The other thing you won’t get is advice. Their website makes it clear this isn’t their gig and we’ve heard anecdotally they mean it. You won’t get so much as a ‘we can’t advise you but’.
If you’re not confident when it comes to starting a pension or understand the implications of a law change, you’ll need an adviser on top. Again, not a deal killer, just an extra cost to factor in.
We can’t comment on the customer service other than to point out that there’s a wide divergence of opinion on online forums. Ultimately, we suspect it often comes down to expectations. If you sign up expecting advice, or without realizing some of the restrictions, you’re bound to end up frustrated. But many seem aware of the product’s limitations and are just happy to have a SMSF for $699 a year.
Finally, if a SMSF only works for you because of the E-superfund product you’ve got a captivity problem, explained in SMSF investing: The hidden dangers. If E-superfund were to go out of business, you’d have to find someone else to administer your fund, at higher cost. A small investor might find an SMSF uneconomic, causing sub-optimal returns or the need to shut down the fund.
Fortunately this downside isn’t as scary as being captive to a lender. Sub-optimal returns are much less of an issue than being a forced seller of a significant investment. But it’s something to remember if you’re only setting up a SMSF because of E-superfund's low annual fee.
In a nutshell
The ‘one size’ approach of E-superfund isn’t going to work for some, such as art collectors and overseas property investors. And others – such as property fans, international share investors and active traders – are going to have to think long and hard about whether they can live with the limitations.
This product has been designed for the small investor who doesn’t trade often and mainly sticks to cash, term deposits and Australian shares. If that’s you, and you’re looking to lower your costs, it’s worth a look.