The Australian super system is a bit of a double-edged sword for all of us. Specifically, retail super funds make the member admin passive, but trading active, while self-managed super funds do the opposite. So, unless a member enjoys administration, there is no obvious path to low turnover / buy and hold superannuation. But this situation may not be a bad thing. Allow me to explain….

Retail – admin passive

When someone joins a plain vanilla balanced investment option in one of the big retail funds, which pretty much everyone does at some point in time, they don’t have to do much at all. It’s a similar process to opening a bank account. Just fill in the forms on some website, get your ID verified and sit back and wait for the paperwork to start rolling in. Quarterly statements, monthly newsletters, annual tax summaries – these are all prepared for the retail member without that person ever having to do anything at all. As far as the retail member knows, their balance is being diligently and carefully managed by a highly qualified (but costless) professional investment team every member of which is scrupulously focused with lazer like precision on minimizing costs, and maximising returns. They agonize over every decision, toiling after hours with the clients best interests always at very front of heart & mind! At least, that’s the necessary illusion.

Retail – trading active

Behind the curtain, the reality is less inspiring. Office towers full of well-paid employees endlessly shuffle paper to justify their jobs. Compliance alone is a massive cost for big funds. These are tasks which subtract significant value from the clients’ portfolio but are required by massive amounts of law & regulation. Actual investment managers who work for the retail funds furiously trade various shares, bonds and other alternatives in a highly pressurized but ultimately futile attempt to outperform whatever market they profess specialised expertise in. This clan then trumpet their purported “superiority” in various ways – mainly via the marketing machine which is the primary megaphone used to amplify the good and minimise the bad. Those glossy full-page ads & middle of the cricket TV commercials all have to be thought up and produced usually by expensive spin agencies. The unwitting member pays (dearly) for this corporate bureaucracy that grinds along like an iceberg shaping the landscape.

Self-managed – admin active

The above retail super situation can be starkly contrasted with the self-managed super realm. Opening a SMSF is kinda tricky. Which structure for the trustee? Which bank for the cash management platform? Which broker for the shares account? How do I roll my existing super balance into my SMSF? Will the ATO even let me open a SMSF? These are just a few of the questions which have to be grappled with. On top of that, most self managed members will need to appoint an accountant to assist with both the setup and the ongoing administration of the fund. Then, every year, the member will need to provide data to said accountant and/or upload information to a client portal sufficient to discharge all the duties that are hidden from view in the retail sphere. Suffice to say, the actual administration of a SMSF forces the members to actively engage with the compliance workload even if they refuse to invest the cash itself.

Self-managed – trading passive

Putting all the setup stuff to one side, the newly minted SMSF trustee member must then make the biggest decision of all; how do I invest this cash I now directly control and am responsible for? Without a firm grasp of the investment basics and the income tax laws that apply to both superfunds and ASX listed companies, its practically impossible to proceed with confidence here. It’s usually a process of trial and error which involves sliding down the scale from active trading in the early days/years, to buy and hold as youth gives way to wisdom.

The fact is that most people lack the practical logic, equanimity & patience which is required to invest successfully over the long term. Much of the time, people start out investing  their own super thinking that they can trade their way to riches playing musical chairs with other like-minded players. Those with high investment IQ may be smart enough to pick a workable strategy and stick to it. There are also certain “God level” people who recognize their limitations here and simply buy and hold the market via low cost, broad based index funds. These people tend to focus on the vastly reduced costs of self management and also often simply track a market or 2, periodically buying more and fully reinvesting all distributions. While this is arguably the end game, we must also recognize that no one can rightly lay claim to the ultimate truth and we must proceed with an open mind, always willing to learn and adapt/adjust. Wherever an individual lies on the spectrum, the fact is that self management tends to reduce portfolio turnover over time simply because individuals lack the energy to make 20+ decisions per week or month or year.

Conclusion / Observation

The Australian super system has options for everyone, and, the people who are most truthful with themselves about their own investment strengths and weaknesses will perform best. Self-deception is a bad thing which is what makes our system a good thing. It forces people to confront themselves and make a choice thereby cleansing the population of financial self-deception (to some extent). Specifically, telling yourself that you have what it takes to run a SMSF when you don’t is just as bad as staying in retail super when you do. Figuring out who you are is the key.

To discover yourself, Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au