Home / Out of the frying pan and into the fire…

Comment by Greg Bright

While the SMSF market will bear the brunt of the proposed new effective cap for super, and even though it is unlikely the proposals will ever see their way to legislation under last week’s announcement from the Government, big super funds need to be paying much more attention to the paradigm shift to SMSFs which is happening among their more well-healed members.

Is it good enough, for instance, to stick the Macquarie Wrap on your new member-directed options list and expect members to believe this is as good, or almost as good, as having an SMSF, but with lower admin fees?

LegalSuper, which went with the Macquarie Wrap late last year for a member-directed option, disclosed last week that 184 members had invested about $6 million through the Direct Investment Option to date, which expanded an old investment choice option by allowing them more direct shares, plus ETFs and bank term deposits. The restriction on how much the members could invest was relaxed from 50 per cent of their balance to 95 per cent in total. The cost per member is $15 a month plus brokerage and such outgoings. No doubt the numbers going into the option will grow over the next few years.

LegalSuper has about $A1.5 billion under management. It has actively sought to build scale in the last 10 years through several mergers and acquisitions. It cannot afford to lose many high-account-balance members to the SMSF market.

The big issue for such funds is scale – in the minds of the trustees at least. Putting aside the discussion as to whether or not scale is helpful for overall investment performance, if funds want to offer a sophisticated member-directed option to compete with SMSFs, they need to either pay for a system to administer it, or give the space up to a white-labelled retail wrap.

My guess is that the establishment cost of a member-directed system such as that introduced by AustralianSuper last year (using the FNZ/UBS system) is at least $2-3 million upfront and various ongoing costs and charges.  This can be passed on to members for $300-400 per year on a cost-recovery basis, which is still a lot cheaper than having your own accountant to administer an SMSF. Macquarie will say to a fund, on the other hand, that it will provide its wrap for ‘free’, and a small administration charge to the member can be split between the fund and the bank.

There are other options, though. SuperIQ, which is 49 per cent owned by AMP, has a successful model that is appropriate for super funds although its clients to date have tended to be smaller commercial institutions rather than big super funds. There is no reason, also, that the BT Wrap, which at least tends to be a bit cheaper than Macquarie’s, could not also satisfy some members’ needs in this regard. Lonsec, now owned by SuperRatings, has also put up its hand to offer a similar service, as have several other big systems companies including DST International and GBST.

The next big fund to go down this route is likely to be the $A40 billion QSuper, which has coincidentally been pioneering a unique MySuper-exempt default option which has the most sophisticated age/sex/income factor matrix of any fund in the country.

I struggle with this. On the one hand, QSuper has built the best possible default system for members and on the other it is going to consider letting those with the most money go off and do their own thing, including shooting themselves in the foot if they so choose.

And by the way: don’t most trustees and even members know you need a QC and several PhDs in applied mathematics to work out what the fees actually are on a Macquarie product?