There’s a right way and a wrong way to change funds. To make more money you need to get it right.
In the euphoria of a marriage celebration, many of us have uttered the words ‘for better or worse’. Without exception, on that happy day we would have been thinking more about the ‘better’ and less about ‘worse’ - if we considered it at all. We envisaged many years of bliss, in which our love grew stronger, we enjoyed great health and shared many wonderful experiences with our life partners.
Well, think of your relationship with your super fund as a marriage. If you married in the early 90s, you enjoyed a decade of bliss. You would have watched with satisfaction as your selected funds invested your money cleverly and your super balances grew and grew. You probably became so accustomed to these years of healthy growth that you might have forgotten the historical trend of a negative year for every six or seven positive years.
And then, quite surprisingly, things turned sour. Super fund members have now had 3 negative years and one blah year in the past 10. And that’s prompted many fund members to wonder if it’s time to rethink the relationship.
Recent surveys revealed that many Australians question the value of super as an investment and a large number of super fund members lack faith in their funds, read Half Full or Half Empty Story.
Emails and phone calls to Savvy, as well as articles in newspapers and magazine, reveal fund member dissatisfaction, confusion and anger. Many members want to swap super funds. Others wonder if it’s time to change to a different super investment option. Many determine that they could do better than their super fund and decide to set up their own self managed super funds. The really disenfranchised are thinking that it’s time to look at alternatives to super.
Before you end your marriage, you need to think seriously about all your options.
Let’s look at the least drastic option first - sticking with your current fund, but changing to a different investment option.
Let’s say you are in your fund’s default product and that this is a Balanced option. If you happened to find yourself in one of the worst performing funds, you could have lost maybe 30% of your portfolio’s value during the GFC. Even as funds started to recover over the past year, the worst Balanced option remained static - which is effectively a loss when viewed against inflation.
So you want to get into an option other than a Balanced option. What looks good? The best Australian shares option delivered a return of 37% in 12 months. That’s remarkable. Better still, the best Property option returned a staggering 49% in the same period. It would be awfully tempting to move your super into one of these. Should you? We’ll answer that in a moment.
Let’s look at the second option. You could change to a different super fund. The reason that you might want to do this because your current fund hasn’t performed well. So you start looking around for a fund that is out-performing your current fund. Should you move? In a moment.
Your third option is to create an SMSF. There’s plenty of appeal to self managed funds - the freedom to control investment strategy and the lure of lower fees, for example. Would an SMSF be right for you? Maybe. Maybe not. Let’s look at this in a moment.
Your final option is to give up on super and turn to property or shares to secure your wealth. There are frequent stories about the rising value of property around Australia. And the local share market has been bubbling along nicely post GFC (one or two glitches aside).
OPTION 1
STICK WITH YOUR FUND BUT CHANGE OPTION
How do you decide what option to move to? One place you can get help in making this decision is from your super fund. Funds can provide limited advice to members and this includes advice on selecting the right investment option. The problem is that if you’re one of the 40% of fund members who don’t have faith in their fund, then you’re not likely to trust your fund to give you the best advice on investment options.
If you use the services of a financial adviser, you might consider asking them. However, many financial advisers are criticised for being tied to a specific fund manager or bank. The fact that an adviser will push you into products offered by the institution with which he has a relationship isn’t an issue if your are happy with that fund.
The other way to decide the option into which you move is to use the tools available in Savvy.
The Savvy Supermarket lets you see hundred of fund products. You can see all of the investment options offered by your fund and see how we rate them.
SEE YOUR OPTIONS. VISIT THE SAVVY SUPERMARKET
There are a few things to consider. No fund is equally strong across every one of its products. Your current fund might have a well-rated Balanced option, but a poor Australian shares option. Or none at all. There’s no guarantee that an investment option that has done well in the recent past will do as well in the future. As we’ve said before, by the time it’s news, it is probably already history.
When people tell you it’s a good time to get into Australian share options, for example, the market could have already peaked. The final thing to consider is fees. If two funds deliver identical returns, the fees each charges can have a dramatic impact on the final outcome.
SAVVY GOLD MEMBERS CAN CHECK OUT THE TOP TEN FUNDS WITH THE LOWEST FEES!
OPTION 2
MOVE TO A NEW FUND
Let’s say you’re not happy with your current fund’s performance? During the GFC, there would have been millions of fund members who felt this way.
Should all of them have moved their super to a new fund? No. Funds lost value during the GFC due to events outside of the control of funds. If you moved from one fund to another, there’s a good chance that all you would have done is add some extra costs to your super (if your current fund charges exit fees or your new fund charges entry fees).
So when should you move to a new fund and how should you go about it?
First stop should be RateMySuper. Every fund listed in the Savvy Supermarket has been subjected to rigorous scrutiny. We know what’s good and bad about every fund out there. RateMySuper will give you the honest appraisal of your current fund.
HOW GOOD IS YOUR CURRENT FUND?
Say we don’t think much of your current fund. What next? Before you move to a new fund you need to be confident that you have identified a fund that has demonstrated it can outperform your current fund over at least 5 years. Not how it did last month. You’ll find this information in the Top 10 Performance charts.
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CHECK OUT THE TOP TEN FUNDS
Another good tip is to look at the Savvy ratings. See how we rate a fund and how it has rated over 5 years. SuperRatings introduced a Platinum 5 Year award for funds that have shone year after year.
If, as a result of these searches, you have identified one or more funds that interest you, compare them to your current fund by going back to RateMySuper. You can compare up to 20 funds.
If you are happy that you’ve found the fund of your dreams, we can take care of all the messy paperwork involved in moving to the new fund. You can download a Product Disclosure Statement and the Rollover Form. Once completed, we can do the rest.
OPTION 3
ESTABLISH A SELF MANAGED SUPER FUND
Lots of people do it. Some of them do it for the right reason. Many don’t. An SMSF is right if you are confident in your investment skills, if you are comfortable with meeting the many legal requirements associated with SMSFs and if you have the time to devote to managing your fund. The reality is that most SMSF owners fail at least one of these tests - but they go ahead and set up their own funds nevertheless.
There is no point in establishing a DIY fund if you plan to put all your money into cash.
There is no point establishing a DIY fund if you don’t have the skill or time to find the shares offering the best dividends, for example, or the regions in which property values are most likely to rise. These are skills honed with years of practice. Too many people make investment decisions on a whim or with their hearts - buying an investment property in their home town, for example.
At the moment there is nobody offering a complete service for SMSF owners. A few companies provide administration services. Accountants can help with the setting up (and dismantling) of DIY funds. Some real estate agents specialise in investment properties. Several people offer advice on investing in shares. They all cost money and at the end of the day it is still up to the SMSF owner to coordinate all of these.
One day someone will bring all this together into a neat service. One day.
OPTION 4
GET OUT OF SUPER
This is the extreme action of an completely disillusioned super fund member. It is also a foolish action.
When super hasn’t performed it’s mighty tempting to abandon it altogether and look at other investments to build your nest egg.
Maybe you are at this stage. So, should you jump?
In a word, no.
What might you put your money into if not into your super? Property? Go back to the figure quoted above. The best fund’s Property option grew 49% in value in a single year. Can you think of a town where property values grew by this much?
The best fund’s Australian share option grew 37% in a year. How many of the shares you own did that? Super funds employ the services of many specialists to analyse and manage their investment strategies. These specialists live or die by the results they deliver.
Then there’s the issue of tax. Super is taxed at a rate that’s much lower than personal or company tax rates. Investments made through super put a lot more in your pocket than the same investments made outside of super.
WHEN ALL ELSE FAILS, GET ADVICE
Not sure which of these routes is right for you? Here’s an idea. Get advice. It’s there to be had. All you need to do is ensure that the advice you get is independent of any super fund or bank, that it is based on thorough research by experts, that it isn’t biased toward one investment class at the expense of others and that it’s based on your needs, not a one-size-fits-all offering.
We can think of one place you can get this.
GET UNBIASED OPINION & ADVICE
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