Super: Vita Palestrant
There’s a cost-effective, low-maintenance alternative to setting up a self-managed fund
Industry fund members itching to open a self-managed super fund (SMSF) should be aware there is a low-cost, hassle-free alternative right under their noses. About a quarter of industry funds now offer a direct investment option (DIO).
Large for-profit retail funds such as BT, AMP and Colonial First State have long offered direct investment through their existing wealth-management platforms and wraps. It put industry funds at a disadvantage until relatively recently.
Industry funds such as AustralianSuper, CareSuper, Hostplus, Legalsuper, NGS Super, Cbus and Media Super offer direct investment options for members who want greater control.
Options include Australian shares, exchange traded funds (ETFs), listed investment companies, term deposits and cash. The service comes with member education, market research, stock analysis, tools including stock watchlists, consolidated portfolio reporting and low administration and brokerage fees.
Kirby Rappell, research manager at SuperRatings, says industry funds have extended their DIO menu over the past few years. “The preference is for funds to offer access to securities on the ASX 300 rather than ASX 200. We have also seen a rise in the number of funds offering access to ETFs and model portfolios,” he says.
Some industry funds, for example Cbus, offer access to different asset classes that are not on their traditional menu, such as managed investment options including property and infrastructure.
Generally, DIOs tend to appeal to more seasoned investors with larger account balances. They want the look and feel of a SMSF but without all the demands that come with it. All the tax and compliance of the DIO is handled by the super fund. So how does it work?
It depends on the super fund. But, generally, if you have $10,000 or more in your account you are eligible to register. You can invest up to 95% of your total account balance as long as $3000 to $5000 remains in your previous account. You also need to have a minimum of $500 in your cash account at all times. It’s where transactions will be settled and any interest, dividends, distributions and tax liability paid.
There are measures to prevent people from taking large, speculative punts, says Rappell. “Members can’t have more than 20% to 25% invested in a single security. The exception is term deposits – people can invest their savings into a single term deposit.” Maturities on term deposits range from a few months to three years.
Rappell says DIO technology has also improved. “DIOs have become easier to use with single sign-on functionality. You can switch from normal member access to the DIO without having to enter passwords into another portal.”
But before taking the DIO route, consider whether you are up to it, have the time to commit to it and can justify the fees. How likely are you, for instance, to beat the returns of the low-cost default fund – a balanced option – which costs under 1%?
Rappell says the aim of the super funds in offering the service is to provide more SMSF-like functionality but at a lower cost, and with less administrative complexity.
“DIOs were designed to help people with more specific and complex investment requirements and to provide them with greater flexibility and control,” he says. “It’s like a scaled down SMSF but obviously without the ability to hold direct property.”
For those with the right skills, building a diversified portfolio could prove rewarding. But consider the risks first: you may not have the time to research, monitor and review your portfolio, have the skills to manage it or enough diversification to outperform those managed for you by your fund. “There is the risk that you will not outperform the fund’s core investment options because of your portfolio’s greater concentration and the challenges of accessing alternative investments,” he says.