Superannuation
is a topic that needs to be debunked. I have put together this short document
with some observations;
I have
noticed throughout the years that people are misconceived and have the “OLD”
school mentality about investments and their superannuation. We are now in the
21st century and technology has made it for retail consumers to
easily manage their own superannuation account as well as to outperform their
current superannuation provider with having some market awareness.
The
Superannuation fund management businesses, are still based on OLD school
mentality, it’s over. People are too intelligent and have access to a lot of resources these days. Consumers can easily manage their own superannuation or investment money, and be
better off for it.
If you want
to put in a little effort, you can easily double the returns and half the risk
(draw-down, or risk of crash e.g. 2008) provided by your superannuation
provider. Read through my articles and you will quickly realize how this can be
achieved.
To go
through this methodically we need to start by looking at a couple of popular
superannuation providers;
SuperRatings
have noted that ANZ is the cheapest super account and just selected Australian
Super as a random popular account.
- Macquarie note in their Fees and costs table the following: “The investment fees range from 0% to 10.25% per annum of each managed investments asset value”. How is this possible and how can they get away with that?
- They all have noted additional fees may apply. Meaning there are extra fees you are being changed and they don’t need to show you.
- The calculations of returns are subjective, it depends if the fund uses average returns or Annualized returns.
- Note: The figures are complicated and I noticed depending on where on the various websites you were depends on the figures they provide. It might all make sense but if I cannot work it out in a relatively short period of time, what chance does most of the population have?
When
looking at the graph above, we can see that ANZ has only 3 years of data. There
are various reasons for this, but the main reason is that they have made the
ANZ Smart Choice available for only 3 years. Fund managers do this and change
names of products if the track record is not that great. This way there is no
long term track record and they accumulate FUM quickly because of high perceived
returns. You can see that Australian Super has 10 years of data. But their
returns are basically 1.5% lower than if a SMSF just went out and bought the
SPY ETF and did nothing.
Why? Well the
way it works is this, SPY exchange traded fund is a low cost ETF that is
exchange traded. Meaning it’s available for people to buy and sell stock on the
share market. SPY holds all the top US stocks, so any superannuation fund that
holds US stocks will hold the same stocks as the SPY. The only difference is
that your super fund has to charge you a fee to make money. So you the consumer
get the same holdings as the SPY minus the Super fund costs.
This is why most of
the time your super fund will UNDER perform the direct market ETF.
To take
this a step further, most big ETFs are liquid. This means that your SMSF can
easily buy and sell when you wish. For a managed superannuation fund this is harder
to do, as you need to go through your super fund, and they in turn then buy and sell
on the market, and then as you can see in ANZ case, will charge you 0.40% to do
this. Whilst you do get charged brokerage it is substantially lower than that
percentage, its instant and you’re in full control.
So what’s
all the fuss about?
- There is a lot about superannuation in its current format that most people are not aware. I don’t blame this on the superannuation firms but rather the lack of quality education from our school years to retirement. All education is skewed to what the educator agenda is, which most of the time is commercial.
- The ongoing fees have a major burden to your personal long term value of your fund and hence you will have a smaller balance in retirement.
- Within Superannuation you lose control of your investments and their returns. There are simple methods that can be used that will reduce your draw-down losses (like 2008-2009) and provide you a higher return. See my other blogs writings
- Getting someone else to manage your money means you can blame someone else for your poor returns. Why blame someone else? Take control of your own future!
Comparisons
Using an online
fee calculator with $50,000 initial investment and the annual fees set at 0.89
(This is the average of 1% - the annual cost of the SPY), over a 30 year time
frame with no other contributions there is a difference of $90,000 in fees based on a 7% return p.a.
This means instead of your superannuation account being $380,000 it will be
$290,000. This is because of the fees that your superannuation fund charges.
So now what
if you could manage your own superannuation or investments, and what if you
could consistently get 15% per annum from your investments? Over 30 years the
end value would be $3M not including taxes. What a massive difference.
The whole
point of all this is education. With some work, Education and commitment,
anyone can put aside some time and remain in their current job and also build a
nest egg for their retirement.
In some
cases you may not have the time to gain this education and to implement the
investment strategies. To get someone who is active in the markets to invest
for you is a valuable exercise if the manager knows how to outperform consistently
the market. Most managers charge 2%, the reality is if they can NET you 15% PA
in the hand with that manager, the outcome is very significant. You can clearly
see the difference in outcome in the calculation above.
Every business needs to make money, i get that and that is not the point i am trying to get across. My point is be aware of which business takes your money and charges you a fee, and which business charges you a fee but makes you money. You may easily be able to manage it yourself, or you can find someone who charges a bit more but significantly outperforms, this in turn will give you a significant better return over the long term.
My point is;
it’s not the manager’s fee, its the impact that fee is having on your financial future. You can easily outperform the super fund by self managing. Find the time to complete the work yourself
or finding a manager who can consistently outperform the market returns. It’s
not hard; it just needs to be done.
Calculator
used is from: http://www.buyupside.com/calculators/feesdec07.htm
