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Super Structuring

Given that superannuation is now rounding the $2 trillion dollar mark it is unsurprising to see that there is a huge number of participants in the market. These companies and brands all appear to offer huge differentiations to each other, some with enormous marketing budgets to reach out to their members and prospective members offering care, fairness, personalisation and the idea that they are ‘better than the other guys’.

Layers of spin and emotion aside, let’s face it they all pretty much do the same thing.

Money from members / investors is put into structure of some sort and invested in some sort of market. That’s it. Depending on what has been promised and what is commercially allowable, additional resources may include basic financial advice, online portals and access and perhaps a statement a couple of times a year.

So let’s have a look at the 4 main structures that most superannuation offerings boil down to.

Superannuation Master Trusts

The predominant structure in mainstream superannuation is by far the Master Trust which entails a board of trustees and an appointed investment team. Good examples include anything from a bank, industry fund or other major offering on the market. They offer a fairly straight forward entrance to financial markets for people with lower balances (or just starting out) and can come with various levels of group insurance that can be cost effective and easily obtained.

Over time some managers will do well (through dumb luck and/or good management!) and perhaps be awarded higher allocations, whilst underperforming managers may be looking for new employment. One common frustration with investing in such a way is the ‘closed shop’ nature of how a client’s money is invested. For a number of reasons, examples being ‘preservation of intellectual property’ and the sheer time burden of complying with regular reporting to investors, you often find master trust super fund transparency sadly lacking with perhaps the best being a quarterly report that states top ten holdings etc and a run through of the numerous investment managers / analysts that are under employ. As always there will exceptions, but here lies the rule.

What does this mean? – Well for a disengaged accumulating superannuate, not much. At that’s why they are so popular. The less people know about where they are invested, the less questions and therefore the less resources needed to answer those questions. In my prior experience advising members within a large master trust, questions relating to individual holdings and finite breakdowns of returns where sadly met with limited answers as it was difficult getting responses from an interstate investment team looking after billions, for a client with a hundred or so thousand.

What this of course brings in consequence, is a lack of control. With limited levels of visibility and ones assets tied up in a unit price, your typical master trust investor is at the whim of the investment managers and control is generally relegated to choosing either investment mixes or for some funds with more options, broad asset categories. Thankfully adjusting is made simple, usually through an online portal and can be quite cheap (comparatively to broadly selling down shares for example) through a ‘spread’ or difference between the ‘buy’ price of an investment option unit, and a ‘sell’ price. These spreads cover transactional costs or are simply margin to the funds bottom line. A danger of selecting multiple investment options, especially within the same sector is that one may be ‘bullish’ whilst the other is ‘bearish’ leaving you with an average result that could have sought through a much cheaper index option!

The ‘new black’ of master trusts is to offer limited access to the ASX and perhaps some term deposits and bond funds, usually with limitations on the amount of one stock you can hold and other various checks and balances. These ‘choose your own adventure’ options offer the ability for investors to get a taste of the gritty (and time consuming) world of fund management at a granular level, but often in my experience I have found the trading mechanics to be quite basic and with the relevant fees added in, not hugely different to some of the other structures listed below.

So where does this leave you? – well simply put if you are happy with lower levels of visibility, a basic structure and limited control on who manages your money it’s pretty hard to go past a master trust for both cost and effort. If some component of this type of structure frustrates you (and believe me you are not alone) then read on!

Wraps / Platforms

Wraps and platforms are often the natural next step for people looking to take some control of their investments. Investors now have access to managed funds, individual shares, term deposits which they can either transact upon themselves or often, with the help of an adviser.

Investment decisions are generally made at ‘model portfolio’ level which depending on the research house and/or institution relationship with each stock in question, can be exposed to bias and conjecture.

Once again based on the individual, the amount of funds under management and the strength of the adviser relationship, use of these platforms can result in good, bad and indifferent outcomes for clients.

In comparison with Master Trusts, Wraps do bring some significant benefits. Individual ownership immediately jumps to mind. The ability for an investor to benefit directly from dividends and associated franking credits is a big difference to the fund model where these benefits are ‘washed’ through the pool. Furthering this the ability to demarcate and transact on certain investments for tax purposes can help to minimise tax liabilities and better a client’s position.

An investor also now has the ability to ‘in specie’ stock holdings in and out of the platform, allowing existing portfolios to be brought into the fold – although I can tell some horror stories about getting the stock out again. Transparency is high as investors now have a window into their entire portfolio however some control is still lost through needing to use either an adviser or failing that, a clunky interface to buy and sell.

Limitations that I often find with wrap platforms include the ability to choose ‘bank’ only term deposits (generally aligned with the platform provider, internal costs of managed funds are not taken into account and a big one, next to no international share capabilities outside of exchange traded indexed and managed funds. Depending on the provider, platform administration costs can also be significant, which is disappointing given it really is just a pumped up share trading platform which most major online brokerages offer for free.

Individually Managed Accounts (IMA) and Separately Managed Accounts (SMA)

I have grouped the last two together due to their similarities in structure. Whilst seeming relatively new on the block, IMA/SMA’s have been around for over a decade and are growing more popular as their feature sets and capabilities grow. Once typically the domain of boutique broking houses, as they have become more popular, larger institutions have brought them into the mainstream. Interestingly, most of the better IMA/SMA offerings have a major bank or investment house as the custodian so ‘taking off to the Bahamas’ risk is eliminated.

Both offer individual ownership like a wrap, have the ability to ‘in specie’ stock in and out and generally offer the highest level of transparency of where a client’s money is invested. The major difference now lies in the investment management and decision making of the portfolio and how both current and new money is invested.

The easiest way to think of both types of accounts is as a ‘managed investment’ tailored for a client and sharing both the ease of use and maintenance for the end user, with all the associated benefits of a wrap type product.

An IMA means the investment manager has ‘discretion’ to transact on a client’s account at will, with the client usually informed of trade activity through an email after the fact or through an online portal.

In the SMA scenario, the investment manager creates a model portfolio that then is replicated to each client’s account, with reweighting typically done automatically and new money from contributions also automatically assigned to either new or existing holdings.

IMA’s can be thought of as the ‘bells and whistles’ style account with an investment manager able to individually transact on each account, perform rebalancing (a later piece on this one) and depending on the broker, create individual ‘self-directed’ accounts that a client can have a play with. These accounts typically involve some sort of advice relationship that ensures that each portfolio is tuned to the individual’s circumstances. Trading costs are usually higher, meaning generally higher balances are required to ensure decent sized exposures to individual stocks are maintained and benefits like franking credits and currency plays are not eroded – A good example is a 5% weighting to Google (Alphabet) on a $25,000 AUD international portfolio would result in one share!

SMAs, on the other hand, typically suit smaller balances that can benefit from ‘group buying’ of stock to reduce trading costs and investors still retain direct ownership with the associated transparency and tax benefits.

So what sort of balances are we talking to differentiate between the two? – Well that can depend on the individual client. Depending on the risk allocations, an older client may have relatively less in say growth assets like International Shares to perhaps a younger client. This may dictate that either a larger balance is required overall, or we look to something like an SMA.

Likewise, some of the limitations of an SMA, such as the inability to tailor accounts individually to manage tax issues, moral, religious or ethical preferences, may dictate that we look to recommend a client the IMA style structure to yield maximum benefit.

As always, it depends. Personally, I have found the IMA/SMA structures offer the best solution for clients who value the transparency, individual ownership and tax benefits, if the money is invested properly.

For those who like numbers and tabulated information – here is a rough guide to the costings (in the super space) and breakdown of each structure option that I have found in my experience. I said rough!

Feature Master Trust Fund Wrap / Platform IMA (MDA)  SMA 
Super / Investment Yes / No Yes / Yes Yes (SMSF) / Yes Yes / Yes
Ease of Management *** * *** ***
Ownership Pooled Individual Individual Individual
Transparency * *** *** ***
Direct Asset Ownership No Yes Yes Yes
Starting Balance $5,000 $5,000 $50,000 $20,000
Trade costs (average) Spread (0.2%) $20 $30 $2
Ongoing Cost Range 0.5 – 1.5% 0 – 0.5% 0.2 – 0.7% 0.3 – 0.5%
Direct Franking Credits No Yes Yes Yes
Tax Efficiency * *** *** **
Asset transfer available No Yes Yes Yes
Advice Available Yes Yes Yes Yes
         

 

Ongoing Cost Comparison $100,000 $100,000 $100,000 $100,000
Management Fee $800 (0.8%) $1,000 (1%) $1,000 (1%) $600 (0.6%)
Platform / Admin Cost $200 $200 $350 $300
Trade costs (100 average) $0 $2,000 $3,000 $200
         
Sub Total $1,000 $3,200 $4,350 $1,100
Super costs $200 $200 $2,500 (SMSF) $100
Total $1,200 $3,400 $6,850 $1,200
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