I am tossing up between a DIY super fund or opening a wrap account

I would like more control over my superannuation savings and am considering starting either a self-managed super fund or doing it via a super wrap account such as that offered by [ABC] Investment Management. I found out the fees for a [ABC] Direct Wrap and calculated it would be an average of 0.57% pa of funds in an account worth $750,000 or around $4275. This would be cheaper than the $4,995 pa that an SMSF of the same value administered by [XYZ] would cost.

I could not get a cost out of other financial planners I went to see on a first obligation-free appointment – one said it would come out of the fund so don’t worry about it. Or else I would be told once I had appointed them as an adviser and paid the $2,000 or so initial fee for an SOA. But how do i decide which adviser to choose when i can’t even compare such basic costs, since I don’t know how good they are.

I have found onlline super accounts offered by companies such as esuperfunds which seem really cheap (a few hundred dollars to set up an SMSF and much less than $2,000 a year to complete all the audit, tax returns etc for the fund), and I wonder if they are safe and comply fully with government and ATO regulations.

1. Is it better to use a wrap account or an SMSF? Should I go with a big name company to be secure?

2. Would you please advise if online SMSF accounts are reliable and safe to use, or else how do I find a reliable, reasonably priced firm that can help me set up an SMSF.

Response:

Whenever I hear “more control” I just can’t help thinking about those Motels lyrics (c’mon, sing it with me!):

And I’d sell my soul for

Total control

Yeah I’d sell my soul for

Total control

Ooh I’d sell my soul for

Total control over you

Yet when it comes to super, few of us actually really want to pay the price for total control – and I mean price in all its forms.

Then I get to thinking that it is interesting that a lot of investors use the expression “I would like more control over my superannuation savings”, but it is very difficult for them to annunciate with such (Motels) clarity, what, exactly they would like control over. The question above highlights this point.

At first glance and consideration the immediate conclusion is that control over investments is the concern. But then there are three paragraphs on fees and costs which relate to all of the potential trigger points – that is: advice, establishment, and ongoing administration – so is it fees that we are trying to control?

Then there are product and structural control considerations – retail vs wrap vs self managed super (SMSF) – all of which provide completely different levels of control and fee structure.

A big-name company is the next consideration – but does this really provide any certainty or control in terms of feeling secure? (Need I mention thinking through the ramifications if OneTel or HIH had offered these services, or Westpoint perhaps!!)

Ultimately and with complete sincerity, it will be a combination of all of these factors that ultimately leads you to determine which is the best course of action for you and exactly what you would like control over. Perhaps as it is my professional capacity, it may be appropriate to discuss the role of the adviser first.

A good adviser (who yes you will have to pay for – but hopefully not your soul!) will actually help you arrive at the best particular course of action for you. Using well-stgeloped questioning and listening techniques, the adviser will understand your goals and concerns and then ultimately recommend a particular strategy followed by the right suite of product (SMSF or other) solutions…they should not push or flog a particular course of action/product because it is what they do.

But you also have to understand who you are seeing – you don’t go to Coles to buy Woolworth’s brand products!! And even IGA or your local 100% independent corner store doesn’t stock every grocery item. To bring in some “independent” thinking, it could be a very good idea to also have a knowledgeable and pro-active accountant involved in this initial discussion to help you work out a suitable strategy.

You should go well prepared in order to discuss the areas that you would like control over. Once you explain this to the adviser and options are considered, then you can evaluate the different structures and products available and thereby consider the related fees and charges for each. At the end of the day, it is about the value you place on each aspect that will help you determine whether a fair price is paid. Look for an adviser you are comfortable with (perhaps one that has been recommended), that you feel understands your needs and that you feel you are getting value for the professional fees paid.

For example, if you’re expecting that your self managed super fund administrator will do all of the paperwork related to establishment, trust deed, ongoing compliance, investment strategy, minutes, tax returns, BAS, audit and online reporting – then this is going to be a more expensive offering than simply getting your self managed super fund tax return done.

Effectively, the more control you want, then ultimately the more you should be doing and therefore the less you should have to outsource to other service providers and therefore the less your cost will be. This goes for administration as well as the investment considerations. So:

    * If you want completely hands off, with no advice or frills, and very inexpensive (with limited control over investments and insurance) – try an industry fund.

    * If you just want control over investments but not the responsibility for administration or compliance and are prepared to pay a fee for advice through your product (if required) – try a retail fund or wrap account.

    * If you want ultimate control over investments and insurance options, gearing through super and a large input to administration, with responsibly for compliance – then SMSF might be right for you.

    * If you want total control over super – don’t sell your soul – go into politics!!!

There nothing wrong with ordering and establishing a self managed fund online – but again, you have to understand what you are purchasing. Does the deed contain within it everything you need to gain the control that you are after – especially in relation to investments, options for gearing, options for insurance and options for future benefits (including death)?

Bear in mind that if you decide to use a wrap, you still have to understand what that particular product allows, but at least you can be reasonably sure that the big name products are complying and appropriately legally structured to do most of the things you want. If you try to do something outside the box or that is illegal, then the wrap administrator will generally stop you due to product rules. Conversely with a self managed fund, you could unintentionally (or intentionally) attempt the same thing you were trying with the wrap but with no one to stop you. This could potentially lead to you losing the compliance status of your fund which has significant tax penalties. So control comes with a lot of responsibility and an onus on you to be knowledgeable or to regularly consult your adviser before undertaking something with your self managed fund.

Self Managed Super

A self-managed superannuation fund must meet all of the following requirements:

    * There are less than 5 members (that is, 4 members or less);

    * All members are trustees and there are no other trustees (except for a single member fund);

    * No member of the fund is an employee of another member of the fund, unless the members concerned are relatives; and

    * No trustee or director of a corporate trustee receives any remuneration in respect of duties or services as trustee of the fund.

To remain a complying superannuation fund (and be eligible for tax concessions), a SMSF must meet the requirements of an Australian superannuation fund for the entire year.

A potential problem may occur when SMSF trustees elect to temporarily work overseas. Generally, short-term temporary absences from Australia by SMSF trustees are not taken into account when determining a SMSF’s residency status. However, if SMSF trustees permanently depart Australia, the fund might not meet residency requirements. If your SMSF is faced with losing its residency status, you should consider appointing an approved trustee.

SMSFs must be maintained for the sole purpose of providing members with retirement benefits, or providing members’ beneficiaries with benefits if the member dies before retirement. Other ‘ancillary’ purposes are permitted, including payment of disability benefits for a member’s retirement due to ill health or in other limited circumstances.

SMSF trustees must ensure the sole purpose test is complied with at all times. If you breach the test, you are guilty of an offence and significant penalties may apply. Failure to comply with the sole purpose test may also result in the fund becoming a non-complying superannuation fund for taxation and superannuation guarantee purposes. This is why most people outsource their SMSF compliance and administration and retain the services of an adviser.

SMSFs provide for flexibility, control, the full knowledge of your investment strategy and investments held, and potential cost savings for larger account balances. On the down side are the obligations on you as a trustee, costs in relation to small balances, lack of knowledge and investment expertise by the trustees, lack of diversification and additional administration requirements versus managed alternatives.

Wrap Accounts

A wrap account is an administration facility enabling you to consolidate your retirement savings into a single and easy to manage structure. Generally it allows you to:

    * Build a flexible and diversified portfolio of managed investments, direct shares, cash and some also allow direct property.

    * Access your portfolio 24 hours a day, 7 days a week via online reporting service.

    * Receive consolidated reports of all your investments.

    * Provide competitive fee structures for larger accounts.

    * Insurance protection can be added to supplement your investment strategy and protect your dependants. Most offer a range of insurance options including: Salary Continuance; Life; and Total and Permanent Disablement cover. The premiums are automatically deducted from your account.

    * All of the compliance, administration, tax reporting and payments, audits and pension payments are managed for you as part of the fee.

You can choose how to operate your wrap account. Generally, the choices are:

    * Investor Directed Authority – you will need to sign all instructions

    * Authority to Operate – allowing your financial planner to use their discretion on your behalf (without the need to sign each transaction before submission) which speeds up implementation of investment decisions once they are made.

Ultimately, if you want total control, you will need an SMSF. Then depending on your level of ability or desired involvement, you will require the services of an adviser or administrator to help with the compliance. Cheapest is not always best so just make sure you are comfortable with your chosen path, the price paid and the value achieved.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.