Should you set up a Self-Managed Super Fund (SMSF)—or are the direct investment options now offered by super funds a smarter alternative?

In this episode, Mark and Shani compare the two, breaking down the costs, admin burden, flexibility and control so you can decide which approach suits your retirement goals.From real investor experiences (including those who wound up their SMSFs) to new features in industry funds like AustralianSuper’s Member Direct and Superhero’s Super Control, they show how direct options can give you control without all the paperwork

You can find the full article here.

You can find the transcript for the episode below:

Mark LaMonica: So, Shani, I feel like this happens to us a lot where once again we are two ships passing in the night as I was on leave and I got back.

Shani Jayamanne: You were on leave for a while.

LaMonica: I was on leave for two weeks and now you are going on leave. What are we talking about today?

Jayamanne: Well, we’re putting this episode together in the midst of earnings season and HUB24 released their earnings and their after-tax profit has doubled.

LaMonica: Which seems impressive.

Jayamanne: It does and they attribute it to one main reason that more people are opening SMSFs or self-managed super funds.

LaMonica: And we’ve seen a lot of other data showing that SMSFs are increasing in popularity. Not with you though, Shani. You wrote an article in Firstlinks, so our sister publication, saying why an SMSF is not right for you.

Jayamanne: I did and I definitely think that SMSFs are right for some investors, but they’re not the right choice for me at the moment. And one of the main reasons is the fixed costs compared to the size of my super balance.

LaMonica: And so, one of the nice things about writing for Firstlinks and also not nice things about writing for Firstlinks is people can of course comment on the article and your article received a lot of comments. It was a bit of a conversation going on back and forth for people. And we saw of course some of the reasons why people say that SMSFs gave them the control that they’re looking for and why they love being able to pick the exact securities that are in their retirement accounts. But others said it was more of a headache than they expected. So, a lot of paperwork, ongoing compliance and just a large time commitment that never really goes away. So, there was even one person who chose an SMSF and then wound it up and went back to an industry super fund because it was just more work than expected.

Jayamanne: And that really highlights the core issue with SMSFs. They give you freedom and this freedom means that you can invest flexibly and in the assets that you want, including options that aren’t available to you through regulated industry and retail funds. Options like direct property, collectibles, private investments, but that freedom does come with obligations, heavy regulation, record keeping and costs.

LaMonica: And we’re going to try to do something rare today, Shani, just in the world and that’s to try to find a middle ground. And your article was about this. So, you wrote, I guess, more of a follow-up article in that SMSF not right for you. You tried to look at what are the different options that investors could explore that represented the middle ground between the two.

Jayamanne: And what we’ve seen is that industry and retail super funds have been paying attention to how popular SMSFs are, especially with higher-balance investors. And these super funds definitely have it in their interest to retain these clients as their balances grow and SMSFs become more feasible from a cost perspective. So, the funds have been innovating to offer an investment product that has some of the benefits of an SMSF without the administrative burden, and that’s direct investment options. So why don’t we start by going through what direct investment options are?

LaMonica: Well, they come with lots of different names. So, if you’re with AustralianSuper, you might have seen the Member Direct option. CareSuper calls it their Direct Investment option. Superhero calls it Super Control. So, more and more funds are adding these features.

So, what does this actually mean? Well, traditionally, if you’re with a retailer industry super fund, you would choose from a pre-mixed portfolio like balanced or growth or high growth. You get diversification, but you have no control over the underlying securities. Direct investment options sit between that and a full self-managed super fund. They allow you to directly allocate part of your super into ASX 300 shares, ETFs, or listed investment companies.

Jayamanne: So instead of just saying I want 40% in Australian equities, you could say I want 3% in CBA, 4% in BHP, and 30% in the NASDAQ 100 ETF. It’s a way of giving investors more choice without burdening them with the full SMSF-style administration.

LaMonica: And it’s also interesting to see how people are using these different options because it seems like a lot of people are not going all in.

Jayamanne: That’s right. A lot of investors are using it as a core satellite approach. So, Mark, do you want to explain what that is?

LaMonica: I do. And we did an episode on this at some point.

Jayamanne: We did.

LaMonica: So, core satellite is an investment strategy that we’ve of course spoken about before, but it’s when investors have the core of their portfolio that’s invested in passive index funds or ETFs, and then they have a satellite portion of their portfolio. And the satellite is the smaller portion, and it’s invested in individual stocks, active funds or ETFs. They’re basically directional bets that are tactical allocations where you try to push up the overall performance of your portfolio.

Jayamanne: So, these direct investment options are being used to create core satellite portfolios. And although this data is a little bit dated, Tom Garcia from AustralianSuper said back in 2018 that members typically allocate about 30% of their balance to the direct option. So, they keep most of their money in the core professionally-managed portfolios. That’s a diversification and stability. And then they carve out a portion for satellites where they can take more concentrated positions in companies or ETFs that they really believe in.

LaMonica: And when we look at the superannuation providers that provide this direct investment option, some of them actually mandate that it is a core satellite strategy that investors have to take. So, for example, Superhero only allows up to 75% of your investment in direct investments. And this in a way forces investors to maintain some diversification.

Jayamanne: So, we started this podcast out by talking about SMSFs because that is what most investors are familiar with. Let’s talk about how this direct investment option that’s now offered by industry and retail funds compares with SMSFs.

The first point of comparison is that with an SMSF, you get complete control. There’s no limits on what percentage you allocate where. With some legal limits, of course, there’s also no restriction on investment type. That compares to direct investment options where you only have access to listed assets. So, ETFs, exchange-traded funds, direct shares and LICs, or listed investment companies.

LaMonica: Okay. But of course, this comes with a trade-off. And we did talk about regulation before. And so, you get all of this control, but SMSFs are heavily regulated. You need to have an investment strategy document. You need to keep buy and sell records. You need meeting minutes. You need to stay on top of all the changing superannuation regulations. And they do change more often than most people realize.

Jayamanne: So, the question here for investors is how important is control for you? Is it worth the paperwork, the admin, the time commitment and the flat fees? And are you going to invest the majority of your funds in listed investments anyway?

LaMonica: And we referred to HUB24’s earnings at the beginning of the podcast. And they specifically called out that it’s younger investors that are getting involved earlier with self-managed super funds. And this is an important point. Younger investors have typically accumulated less of a balance and self-managed super fund costs are flat. So, whether you’ve got $200,000 in there or $2 million, the cost is broadly the same outside of the investment fees. That means SMSFs only really make sense once your balance is big enough to justify paying those flat fees. So according to the ATO, the median SMSF cost in 2020 to 2021, which is the last year we have data, was $8,611 a year.

Jayamanne: So, let’s compare that with some of the direct investment options in super funds. So AustralianSuper charges $30 to $180 per year, depending on the asset type, plus brokerage of $13 per trade. CareSuper charges $264 a year with brokerage starting at $11.99 per trade. And Superhero charges $52 per year and brokerage is the greater of $2 or 0.1% of the trade value.

LaMonica: So, depending on your balance, these costs can be significantly different for you. And they can, of course, costs will make a big difference in the retirement outcomes that you actually achieve.

Jayamanne: But cost isn’t the only consideration. So why don’t we go through what this means for investors and who these options might suit? So, if you’re an investor who wants some control, maybe you want to tilt your portfolio towards certain shares or ETFs, but you don’t want to spend your weekends writing meeting minutes, then a direct investment option could suit you.

LaMonica: But if you want to invest in direct property, you want to hold unusual assets, or if you’re pooling money with multiple family members to reduce fees, then a self-managed super fund may be more appropriate.

Jayamanne: And that’s a key difference. Direct investment options usually only cover listed investments. SMSFs open the door to everything else, as we’ve mentioned. And SMSFs do allow you to have multiple members, so those flat fees can become more palatable when they’re spread across multiple people.

LaMonica: And another consideration is insurance. In most industry or retail funds, you can access group insurance policies, which are usually cheaper. Self-managed super fund trustees have to buy individual retail policies, which can be more expensive.

Jayamanne: And of course, administration is very different. In a direct investment option, the fund handles the reporting and the compliance. With an SMSF, you either do it yourself or pay someone to do it for you, which does add to the cost. With super funds and investing in general, there is a spectrum of how involved you want to or have to be. On one end, you have set-and-forget investors who are happy with pre-mixed portfolios. So, when I say pre-mixed portfolios, I mean the funds that are named balanced, aggressive, conservative, and so on. And on the other hand, you have full DIY investors with SMSFs.

LaMonica: And as we’ve been saying, direct investment options sit in the middle. They give you more transparency and control, but without all the responsibility. And importantly, like most choices in investing, you don’t have to choose one or the other. You can mix approaches like what the majority of investors are using these direct options with.

Jayamanne: But if you’re taking this approach, there are a few things to keep in mind. The first is fees. If you’re mixing pre-mixed options and direct investments, you need to make sure you’re not doubling up on costs. Over the long term, two sets of fees could really drag on your returns. The second is brokerage. If you’re contributing regularly to your super and you’re buying shares frequently, the small brokerage costs can add up. Third is simplicity. Sometimes simpler really is better. It’s tempting to think more control equals better outcomes, but that’s not always the case, especially after fees. Finally, think about your balance. Is it large enough to justify the admin fees of an SMSF, or would a direct investment option give you the control you want at a fraction of the cost?

LaMonica: As we always say in this podcast, the most important thing is to be intentional with your super as it is your retirement savings. The vehicle that you choose should align with how much you want to invest and how much responsibility you’re prepared to take on. And ultimately, those costs really do matter. Thank you guys very much for listening. We really appreciate it, and we will be back next week with a new episode.

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