As you probably know by now I do a fair amount of educational webinars and workshops educating interested investors on share trading. One of the things usually coming up as a question in a webinar / workshop is how to come up with the money to trade shares. This is particularly an issue for younger investors who have not had the time to accumulate sufficient cash funds. If there isn’t sufficient cash available to fund a trading account the logical place to look is at the investor’s super fund.
Just about all employees these days fall under the superannuation guarantee and their employer must submit currently 9.5 % of their gross salary into a super fund. This is usually a retail super fund (think AMP) or an industry super fund (think Australian Super). Most investors just go for default option (I call this ‘just a little bit pregnant’) diversifying broadly over fixed interest, domestic and international equities and REITs. This broad diversification has the advantage of reduced downside and the disadvantage of reduced upside with an average performance over the long term often being around 6 % p.a. Nothing to write home about! The total fees (not only published management fees) tend to be often around the 2 % mark. The fees as percentage of the total average return tend to be quite high. Wanting to take control of your super often makes sense – but only if the investor has a clear cut strategy and knows what he is doing, after some kind of education through self-education or relying on an share market educator.
But how do we take control of our super and trade individual shares according to a thought out investment strategy shooting for higher upside and still strictly limiting our downside?
The ATO as regulator of Self Managed Super Funds is of the opinion that the minimum balance where SMSFs tend to be cheaper than retail / industry funds should be around $200,000. I think this threshold is a bit high and I believe more often than not an SMSF could be cheaper to run than the fees paid to a retail / industry fund at a $100,000 threshold (ignoring once off set up costs).
If you use an accountant to do the compliance work for your SMSF he will usually charge for a simple SMSF around $1,000 p.a. in accounting / tax return costs and the SMSF auditor will charge around $500 p.a. for the compulsory audit. On top of that there is the ATO supervisory level of $259. Let’s round it all up to around $2,000 total cost p.a. (not charging for your time as an investor). If we presume that the total costs as percent of the fund balance in an industry / retail fund is around 2 % (it could be a little bit less but also quite a bit more) than we have a breakeven point of $100,000 super fund balance. Obviously this breakeven point is variable depending your own personal circumstances but I think this would be a rough guideline.
What can you do if your super fund balance is less and you still want to have your own SMSF? Or what are the alternatives to your own SMSF?
If your fund balance is less than the minimum threshold, let’s say $100.000 for the sake of the argument, you could combine the funds of friends or family into one super fund. If you only have a $50 k balance and your partner / brother / sister (just somebody you can trust) has the same balance you could combine them to get to the minimum balance or add more members to increase the fund balance. Costs will be pretty much fixed so the higher the balance the lower the percentage costs. If you add other members (friends and family) to your SMSF you would need to also make them trustees. In order to make life easy you should consider a corporate trustee (e.g. Sole Purpose trustee company at reduced ASIC fees) where every member is a shareholder, director and trustee. If and when circumstances change, members can easily resign as directors from the trustee company without requiring a redrafting of the trust deed and they could then easily roll over their balance into another fund.
As an alternative to your own SMSF you could use companies like eSuperfund. See www.esuperfund.com.au . This is a company that can administer your own SMSF for your, set it up, do the accounts, tax and audit. Currently there is no set up costs (you save easily $1,500) and the cost for the first year is also waived with the fees for subsequent years currently at a mere $800 p.a. This is probably as cheap as it gets and all is done pretty much automatically for you. I haven’t used their service so I don’t know how good they are but I believe it is at least worthwhile researching further. The downside of this arrangement is that e-superfund limits your choices and requires you to have a cash management trust account with CBA, a broking account for Aussie shares with ComSec and a broking account of international shares with Saxo Capital Markets. The ComSec brokerage fees are somewhat on the high side and although Saxo Capital Markets is quite competitive in their fees there are other cheaper providers for international shares. So you will save on set up costs and yearly fees but spend more on brokerage so you will have to calculate the total costs p.a. to decide if this is still a good deal.
Alternatively you could just stay with your current super provider be it a retail or an industry fund. Most funds (but not all) will allow you to trade shares through their platform. The selection is limited usually to the ASX 300 constituents and to major companies in major international markets but this may well be sufficient for you when you start out taking control of your super. Not all funds have this capability, though, so you should check with you provider if this is possible in their fund. You should also check terms & conditions and fees. The brokerage charged tends to be on the high side so if you trade more frequently the total brokerage costs could well be higher than in option 1. or 2. It’s worthwhile to know that this possibility exists. Option 3. Would be the easiest to do in your current super fund with no set up requirements. If your current fund does not offer this option you could always easily roll over your fund balance into a fund that has this capability.
Well, here you have. You have choices and choice is good. Having your own SMSF with your accountant looking after accounts, tax and audit gives you the greatest choice and costs are usually fixed and not a percentage of funds under management. Option 2 is appealing for small funds that trade relatively infrequently and still have a fairly wide investment choice. Option 3 is the easiest way to ‘get your feet wet’ trading your own investment ideas. As your super fund balance grows you will most likely finish up with your own SMSF and the costs as percentage of funds under management will decrease over time. You’ll then have the best of both worlds: Total control and lowest cost.