Accountants often recommend establishing a Self Managed Super Funds (SMSF) as the best way to gain full control over how your super is invested. But most people don’t want the responsibility and compliance headaches that a SMSF can create.
A wrap platform is an excellent alternative to a SMSF. In fact, they are simpler, don’t come with any compliance obligations and are often lower cost. But they still give investors a lot of control over where and how their super is invested.
Steer clear of retail super funds
In my 17 years of experience in reviewing super funds, I have found that retail funds (e.g. AMP, BT, Colonial, MLC, etc.) invariably charge high fees and deliver very poor investment returns. This was confirmed by the Productivity Commission’s recent report into super. Therefore, if you are in a retail super fund, it’s almost certain that you would be better off switching (but you must consider any ancillary benefits and/or insurance before you do).
Concerns with industry super funds
I have written about my concerns with industry super funds in the past. I summarise my main concerns below:
- Firstly, trade unions have a lot of control over the industry super funds, how they are operated and ultimately their lack of productivity. This ‘influence’ was highlighted during The Royal Commission into Trade Union Governance and Corruption.
- Secondly, I am concern but the amount of money paid to trade unions and I am concerned that there aren’t enough checks-and-balances. A report in 2017 highlighted that trade unions received over $18 million from industry super funds over a 4 year period. Here’s another article from January this year stating that KPMG calculated that Cbus paid over $7 million to unions over a four year period ending in 2014. The operation of (1) trade unions and (2) investing people’s retirement savings are two separate activities and should be completely independent.
- Thirdly, they lack a lot of transparency and accountability with respect to investment performance as I have written about here.
- And finally, given their scale, they should be reducing fees, not increasing them – a point which the Productivity Commission has made in its recent investigation.
Having said all that, industry funds are much better than retail funds. And if you are not going to use a wrap account (or SMSF), then they are the best solution for your super. Hostplus, Cbus and AustralianSuper tend to be the best performers in terms of investment returns. AustralianSuper has the lowest fees out of the three (by a reasonable margin) so its typically my preferred option.
What is a wrap platform?
A wrap platform is a portal (super account) that helps you invest your super. It provides you with access to an extensive list of managed funds, index funds and domestic and international listed securities. Good platforms will offer a list of over 600 managed investments plus all listed stocks (i.e. on the ASX and often NYSE/NASDAQ). Therefore, you have a very broad array of investment options.
The wrap platform will also take care of all administrative requirements including reporting of super contributions, payment of tax, provide you with annual statements and so on.
The wrap platform will also provide you with investment performance reporting so you can easily compare the performance of your super to relevant indexes – something that is more difficult to do in an industry fund environment.
In essence, a wrap platform is like an industry fund but with more transparency and flexibility.
Benefits of a wrap platform
There are a number of benefit a wrap platform provides compared to industry super funds:
- Full transparency which greatly improves accountability. You will be able to separately identify the fees you pay to the wrap provider for administration of your super. If a different wrap provider provides better service or lower fees, you can switch to it. You will also be able to identify fees paid to each fund manager – and hold each of them accountable for their performance. You have full control over who gets paid from your super and how much.
- Full control over your investment methodology – if you want to invest your super using a 100% passive methodology, you can do that using a wrap platform. See this blog for reasons why this would be beneficial.
- Full control over your asset allocation. This is an investors most important decision because investors cannot control markets (returns), but they can control which markets they invest in. If you want to reduce your exposure to the US market for example, you can easily do that with a wrap platform. See here for more about asset allocation.
Industry fund options
Some industry super funds offer an option to invest in direct shares including ETF’s – called ‘Member Direct’ (see here). This is similar to a wrap solution but with significantly fewer options. In my opinion, this is an inferior option compared to a wrap product as it does not allow you to invest in any managed investment such as Dimensional Fund Advisors – an alternative passive manager.
How much do wrap platforms charge?
For someone with a relatively modest amount of super (say a balance $100,000), the administration fee would be circa $720 and the investment management fees circa $290, so approximately 1.0% p.a. in total. This is approximately $100 p.a. more expensive than AustralianSuper (which costs $897 p.a.) – so it’s not the lowest cost option.
However, for larger account balances, say for $500,000, the wrap admin fee would be circa $2,300 p.a. plus investment costs of circa $1,500 p.a. – so total fees would be $3,800 p.a. or 0.76% p.a. This compares favourably to AustralianSuper as it would charge total fees of $4,217 p.a. (0.85% p.a.). Other industry funds charge much higher fees than AustralianSuper so the saving would be even greater.
Investment management fees depend on how you chose to invest your monies. They could be nil or 1-2% p.a. Typically, a well-constructed, diversified passively managed portfolio would cost circa 0.30-0.35% p.a.
The good news is that there is a lot of downward fee pressure on wrap platform providers at the moment. Fees in the US for example are a lot lower than in Australia. As such, I expect there will be a downward trend in fees over the next few years – meaning they will become even cheaper.
Macquarie is one of the largest independent wrap platform providers in Australia. This means it has the most scale and therefore is arguably in the best position to maintain competitive pricing. Other notable independent wrap platforms are Netwealth and Hub24.
Don’t bother unless you have a clear strategy
One of the problems with SMSF’s is that people have established them and subsequently done nothing with their monies since i.e. they have left their super invested in cash. In this case, they would have been better off investing their super in an industry fund.
Therefore, if you are considering setting up a wrap platform, make sure that you have a very clear strategy on how to invest your super – or you are being advised by an independent financial advisor. If you don’t have a robust, evidenced-based, low-cost investment strategy, then use an industry super fund.
Similarly, if you think you might be tempted to make silly investment decisions (e.g. invest in higher-risk, speculative stocks), then refrain from setting up a wrap product and stick with an industry super fund.
Wrap products are powerful and flexible product but in the wrong hands, they can do more damage than good.
Don’t automatically think that the only way to gain greater control over your super is to set up a SMSF. A wrap product deserves a lot of consideration and is often the best solution, particularly if you share my concerns with industry super funds. A SMSF is only a better option if you want to invest in direct property, unlisted investments or have complex estate planning needs.
If you need any help, don’t hesitate to reach out to us.