Member direct vs SMSFs

As large superannuation funds merge and form mega funds, many are using their combined resources to offer a variety of investment options to members. Some of these options mirror aspects of self-managed super funds, as large super funds look to the SMSF sector for ideas to attract and retain members.

The options today

A significantly large proportion of industry funds and some retail funds offer member direct options that enable members to choose shares from the S&P/ASX 200 or S&P/ASX 300, along with exchange traded funds, listed investment companies and trusts, and term deposits.

Members usually need to leave a small portion of their balance in one of the other investment options run by the super fund, mostly for insurance purposes, and need to have a certain minimum balance before they are allowed to invest in the option.

Australia’s largest super fund, AustralianSuper, launched a member direct option in 2011, and Hostplus Super and Cbus Super also have them. Cbus even calls theirs Cbus Self Managed.

Funds also assist with tax and investment reporting for these member direct options and many provide access to broker research or updates from research houses like Morningstar.

Cbus members need to keep at least $20,000 or more in their Cbus super account, or $40,000 or more in their Cbus Super Income Stream account.

AustralianSuper members must have a minimum balance of $10,000 in their super account and a minimum ongoing balance requirement of $5000 in Premixed or DIY Mix investment options (excluding Member Direct) and a $10,000 minimum balance across all investment options, including Member Direct.

Fees

Fees for a member direct option will most likely include brokerage fees, which are comparable to cheap online brokers, portfolio administration fees and possibly cash account fees.

The AustralianSuper Member Direct option, for example, has brokerage fees of $15 per trade for sums under $5000, scaling down to 0.12% for sums over $50,000. Its cash account fee for the shares, ETFs and LICs option is 0.12% and its portfolio administration fee is $395 per annum.

Hostplus’ Choiceplus has brokerage fees of $19.95 for sums up to $10,000, scaling down to 0.11% for sums between $27,500 to $250,000, and a portfolio administration fee of $180 a year.

SMSFs versus member direct

Member direct options allow members an increasing degree of control over their investment choice. Many options allow members to invest up to 80% of their entire balance directly, with a limit of 20% on any one stock.

That is a lot of control for a superannuation investor looking to exercise choice, but it doesn’t provide members with all the benefits of an SMSF, especially around being able to hold more bespoke investments.

Importantly, a member direct option does not enable the purchase of commercial real property, which is a real attraction for some business owners who decide to set up SMSFs, or residential investment property. Nor do they offer many of the retirement planning, tax planning or estate planning strategies that are available in SMSFs.

But they are becoming increasingly sophisticated and potentially a good way for superannuants to work out whether or not an SMSF may be right for them. Alternatively, they offer increased control over your investments with less of the paperwork and trustee responsibility that come with running your own SMSF.

New ideas

Member direct options are a good training ground for people wishing to experiment with more control over their investments. Those that like the choice available can graduate to SMSFs and those that don’t can keep with their industry or retail fund.

There is also now another option that enables SMSFs to invest in some industry fund investment options. Hostplus has launched Hostplus Self-Managed Invest (SMI) which enables SMSFs to invest in a number of Hostplus’ existing investment options, including its balanced option, the indexed balanced option, an infrastructure investment option and a property investment option.

Hostplus SMI gives SMSF investors access to asset classes they might find difficult to access on their own, such as unlisted commercial property, infrastructure and private equity. These ‘non-traditional’ type investments in office buildings and airports usually require initial investments in the millions of dollars. With $81 billion in funds under management, Hostplus is able to take advantage of its sheer size to invest in these asset classes.

‘Dual citizens’ of super

The SMSF segment and the rest of the super industry have a lot to gain from working together. Paul Watson, group executive of member engagement at Hostplus, refers to those members as having a foot in both camps as ‘dual citizens’ in super.

A ‘dual citizen’ might be an SMSF trustee who still keeps some funds in an industry super fund for insurance purposes.

Hostplus is also making it easier for financial advisers who work with SMSFs to engage with Hostplus SMI. It recently announced a partnership with Iress’ Xplan financial planning platform to enable financial advisers to use Xplan to lodge Hostplus SMI clients’ SMI applications directly from Xplan.

“We are continuously looking for ways to provide advisers with the products, tools and solutions to help them achieve greater efficiencies across their businesses and to strengthen their service and support for their SMSF clients,” Watson said when announcing the linkup.

In launching SMI, Hostplus also wanted to continue a dialogue with members who may have left the fund to establish an SMSF, in case they ever decided to rejoin the fund once the SMSF had served its purpose for them.

The bottom line

If you’re concerned that an SMSF might be too time consuming, it could be worth trialling a member direct option before you establish an SMSF.

However, if you’re considering an SMSF for other reasons – such as investing in your business’s commercial property or tailoring a unique retirement solution – then you might be better off going straight to the SMSF.

And if you do go down the SMSF pathway, and want access to non-traditional asset classes like infrastructure without the big upfront investment, there are always Hostplus SMI’s options.