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Mention a buy/sell spread and even the most interested super fund member will look confused, as these spreads are one of the least understood costs of being a fund member.
But buy/sell spread fees are something we’re all likely to see a lot more of thanks to ASIC’s new disclosure rules for annual fund member statements.
So just what are these mysterious charges and how do they work?
What is a buy/sell spread?
Every time you or your employer make a contribution to your super account – or you switch investment options or receive a super pension payment – it costs your super fund money to buy and sell investment assets (such as shares or listed property).
To help your super fund recover the transaction costs of buying and selling the investment assets in which your super savings are invested, they charge you a buy/sell spread.
Put simply, a buy/sell spread is the difference between the entry and exit price for an investment option in your super fund. (Buy/sell spreads are also charged when you enter or leave an investment product outside the super system such as a managed funds.)
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The buy/sell spread is charged to pay for the normal transaction costs incurred by your super fund when buying and selling investment assets. These costs include government tax, stamp duty and brokerage fees charged by share brokers.
For more about super fund fees, read SuperGuide article 10 key super fund fees: What are they and why am I paying them?
A buy/sell spread is applied each time you switch in or out of an investment option. So, you could be eating away at your super account balance if you switch investment options too frequently.
Always carefully weigh up both the benefits and costs before submitting an investment switching request.
How buy/sell spreads affect your super account
In most large super funds, different buy/sell spreads apply to each investment option, with the spreads usually expressed as a percentage.
Single asset class investment options like cash may have a 0.0% buy/sell spread, as there are only minor transaction costs involved in buying and selling cash assets.
Multi-asset choices like a MySuper Balanced investment option could have a buy/sell spread of 0.12%, while an Australian Shares investment option could have a buy/sell spread of 0.50%.
While buy/sell spreads vary significantly between different investment options (for example, between a Conservative and High Growth option), they also vary considerably among super funds.
Need to know
Switching your investment option can have significant implications for your super in the long-term, so it may be worth talking to your fund’s financial advice team or an independent financial adviser before lodging a switch request.
For more on switching investment options, read SuperGuide articles:
- 5-step guide to deciding if it’s time to change your investment option
- Annual super fund performance Reckoner: Annual returns for 5 investment categories
- How to change your investment option: 6 points to check before you switch
- How to choose an investment option for your pension
- How to find low cost (or free) financial advice
- What are the different types of financial advice available?
- Super advice: How to find a suitable financial adviser
How your fund calculates its buy/sell spreads
Most super funds use unit pricing to determine how much your super account is worth at any particular point in time. (These units are similar to the shares you buy and sell in a company.)
Each investment option in your super fund has a:
- Buy unit price – This is the price used when you select an investment option, or your employer makes a contribution to your account. The number of units you are allocated is based on this price.
- Sell unit price – This is the price used when money is withdrawn from an investment option for an invest switch, or to pay a direct fee or insurance premium. The sell price is also used to work out the current value of your account balance.
The buy unit price and sell unit price are normally calculated by your super fund on the day your transaction request is processed. The difference between these two prices forms the buy/sell spread.
For more on unit pricing, read SuperGuide article What are unit pricing and crediting rates and why do they matter?
How to find your super fund’s buy/sell spreads
In most large super funds, the buy/sell spreads for each investment option are listed in its product disclosure statement (PDS) and published on its website.
Buy/sell spreads are regularly reviewed (often annually), but may change if transaction costs increase unexpectedly, for example in bad investment market conditions when markets may not be as liquid.
Under new rules released by ASIC in November 2019, super funds will be required to provide simpler statements itemising their fees and charges. These changes are to help fund members better understand how much they are being charged.
The new rules will start in mid-2021 and will require super funds to adopt a universal template for disclosing their fees. From that date, the buy/sell spread you have been charged will be listed under the heading Member activity related fees and charges on your annual statement.
Are buy/sell spreads a fee in disguise?
The key point to understand about buy/sell spreads is that they are charged to ensure fund members joining or leaving the super fund – or joining or leaving an investment option – help pay for the transaction costs their decision generates.
Buy/sell spreads are also designed to ensure the members of an investment option who are not joining or leaving at that time are not disadvantaged by your decision.
Most super funds believe buy/sell spreads are a fair way of allocating the investment costs generated when you make an investment switch, contribution or withdrawal.
Buy/sell spreads are not paid to your super fund. Instead, the money is used to cover the external transaction costs undertaken on your behalf. That’s why they will now be labelled Member activity related fees on your annual member statement.
Need to know
If your super fund offers an investment option where you make direct investments into assets such as Australian shares or term deposits, buy/sell spreads are usually not applied. However, you will pay activity fees to recover the transaction costs involved of making those direct investments.
For more about super fund fees, read SuperGuide articles:
- 10 key super fund fees: What are they and why am I paying them?
- Super and pension funds with the lowest fees
- What are average super fund fees?