It seems like a simple enough question. If you had a balance investment option in your super, would you choose a 7% or 12% return? Yet, before you decide it’s a no-brainer, it’s worth probing a little deeper into what could cause this 5% variance, as the reporting returns are not standardised.
Let me explain.
Using the mortgage industry as an example, when you consider look at taking out a home loan, the lender will normally quote two interest rates. The first is the principal interest rate, which might be around 4.86%. However, right next to it will be the ‘principal and interest comparison rate’, which might be around 5.25%.
You might reasonably ask, what do home loan interest rates have in common with superannuation?
Well, home loan providers have historically been really great at disguising the real cost of a mortgage. Even today, they might advertise a very cheap interest rate, but then they load up the product with fees throughout the life the loan, or top and tail it with some expensive loan application or exit fees. A comparison rate was introduced as a way for loan applicants to quickly determine the total costs of a loan, by factoring in most of the fees and charges incurred during the life of the loan. Essentially, it allows lenders to easily make an informed, like-for-like comparison of the true costs of this financial product.
The issue with superannuation is there is no standardised reporting or common ground. Personally, I believe that for the ‘Mysuper’ option, standardised reporting is well overdue. The government introduced these low-cost, default investment products were introduced into the superannuation industry to enable consumers to easily select which investment option might be best for them, given a range of variables.
So, getting back to the 7% or 12% question; it is important that you understand the drivers for such discrepancies. It’s probably time that government decided to introduce changes to avoid the barely disguised tricks of superannuation funds, such as calling a product a ‘balance fund’, but investing the assets at a growth asset allocation (refer to our recent article, Could Your Hostplus Index Balanced Fund be a disappointment?). They might also provide a great return, but then hike up the administrative fee structure and other costs that might not be reflected in the net return reported.
So, similar to the mortgage industry, super funds get up to a number of shenanigans. For financial professionals and expert investors, these are often easily spotted, but to the majority of average, day-to-day investors, it is a bit of a minefield.
I feel that the idea of a comparison rate return is a sensible approach, as if super funds are over-inflating an investment option with risky assets, they would be required to standardise the returns. ASIC and/or APRA could set strict formulas between growth-based assets and defensive assets.
In addition, all funds would be required to adjust their reported return as if the asset allocation was a true balanced investment, which would be 50/50 between growth-based asset to defensive assets. This would mean that investors would have a fairer way to assess the true merits of a super fund, and also be able to have a sensible discussion on their overall net return.
Until this occurs, however, investors will continue to be bamboozled by the returns offered by super funds.
Before selecting an investment option or super fund, it’s important that you seek suitable advice from a qualified, practising financial planner and, of course, I recommend AJ Financial Planning. Contact us today.
Around $2.5 billion has reportedly flowed into the industry super fund Hostplus in recent times. This influx of funds has largely been on the back of media commentators promoting Hostplus, in particular its Hostplus Index Balanced Fund.
My understanding is that the main thrust for this investment boost was on the back of lower fees and the merits of index investing.
We recently had a client who, after reading media commentary, wanted to move their funds from another industry super fund into the Hostplus Index Balanced Fund. Their existing fund’s fees were 0.19%, while the Hostplus Index Balanced Fund was reportedly charging a low-cost fee of 0.07%. But was switching funds the right decision?
Does the argument start and finish with fees and does index investing mean a better result? To get an overall picture, let’s compare the performance of the Hostplus Balanced Fund compared to the Hostplus Index Balanced Fund. As both are reportedly ‘balanced’ funds (refer to our article ‘Industry funds headed for an asset allocation disaster’ https://www.ajfp.com.au/2017/07/17/are-industry-super-funds-headed-for-an-asset-allocation-disaster/), if these products are true to label, then it should be a fair comparison.
At the time of writing this article, the Hostplus website reported the following performance returns, net of all investment and administration costs.
It is important to note that historical performance is no guarantee of future performance. However, over time it might given an indication of the level of competence of the fund’s managers and the soundness of their investment strategy. Unfortunately, 10-year figures were not available for the Indexed Balanced Fund and are therefore not included. But I believe seven years is a reasonable timeline to afford some sensible analysis.
If low fees are the only matrix for success, then why is this not reflected in the end result – net performance over the longer term for the investor?
In fact, over the shorter, three-year period the performance variance between the two funds was 2.71% p.a. So while investors saved 0.99% in fees, they potentially gave away 2.71% in returns. Assuming a super balance starting point of $100,000, if this variance continued at its present pace, over an investor’s working life it could result in a total loss of return of around $171,839.
In short, when considering investing in a superannuation fund, you need to factor in all the elements. At a minimum, these include the ongoing costs of the fund, and the net return on a like-for-like basis. There are plenty of low-cost super funds around, but very few actually produce a decent return. And while performance is difficult to gauge, competence and quality of management can sometimes be illustrated over the longer term.
Like all sound investment decisions, it is important to seek professional guidance from a practising financial planner. Contact AJ Financial Planning today for a chat.
In this 20th Episode of AJ Radio we challenge some paradigms of investing and retirement. As the financial world is no always logical, we raise some interesting questions when thinking of the amount of funding for your retirement and if higher returns for investments are better.
At AJ Financial Planning, we are often contacted by clients who are:
moving back to Australia after working abroad
about to move overseas to take up a job opportunity
relocating to retire in a country that has a lower cost of living, or
moving retirement benefits or investments either to Australia or elsewhere as part of their relocation strategy.
Moving a large amount of money between countries can be a nerve-wracking process. Often people use their local bank for this type of transaction. The main benefits of doing so are that it is a relatively simple process, and they are dealing with a financial institution they feel they can trust.
The reality, however, is that they may findthemselves being gouged anywhere between 1 to 10% on the cost of the foreign currency transfer.
Let’s start by asking why do banks charge so much? It comes down to what is known as the ‘interbank market’. Think of this as a ship that leaves port and the cargo on board is your cash. It is en route,say, to the UK and along the way it might stop at a number of ports in other countries before finally getting to Dover in the UK. Each time it stops at a port, it has to hand over some of your money. The interbank market is very similar in that it is a range of associated banks moving funds all around the world. Sometimes it goes directly from one bank to another; other times it might need to be routed via a number of banks to get to its final destination.
In some instances we have seen clients who were wanting to move a large amount of funds and their local bank or overseas bank indicates they will likely charge them up to 10% of the capital. In these situations,this could have cost our clients anywhere from $10,000 to $100,000, depending on the amount of the transfer.
So are there better, cheaper ways to move money? Over the years, the foreign currency (FX) market has evolved and today there are a number of alternatives available.
It does depend on how much you are trying to move, of course. The additional complexity may or may not be worth the headache, depending on your situation. sLet’s look at two soptions:
A number of intermediaries now provide specific FX services independent of banks. An example of this type of provider might be OFX. Essentially, OFX works as an intermediary. So you would push your AUD or nominated currency into this FX provider,and then the FX provider handles the exchange on your behalf at an agreed rate. These funds are then deposited into your nominated account.
If the transaction is large enough, you could consider establishing a stockbroker account through Interactive Brokers or another FX broker, andthen trade the FX over a period of time at the most opportune times for a cost-effective FX conversion to maximise the amount you ultimately receive.
If you are thinking about making an FX transfer, spare a thought to how much this might cost.
It is important before deciding on a provider to ensure that they are of sound backing and have a strong reputation in their field. The ones mentioned in this article are just illustrative in nature and we neither endorse nor recommend that the reader uses these providers.
Any FX transfer is complex in nature and would require substantial consideration before executing. We would recommend that you obtain advice from a suitably qualified financial planner and, of course, we recommend AJ Financial Planning.
In this 19th Episode of AJ Radio we crack open a segment of the investment market that was once thought perhaps to be a trivial area. Now, with a projected 2.3 billion people participating in this area of the market and a forecasted spend of $137.9 billion in 2018, this area of the market is no longer a niche player. This episode takes a closer look at what is transpiring in this exciting video game market and the opportunities it presents for investors.
When it comes to retirement most people believe more is best, but is this always the case? Have the Centrelink changes that came into effect last year distorted reality; has the $350k super fund become the new $900k – without all the extra effort of squirrelling away so much for retirement?
Let’s assume we know two couples who are about to retire. One couple has a balance of $350k; the other has $900k. Both couples want a modest living standard in retirement, with an income stream of around $50k p.a.
The first couple with a combined balance of $350k can expect to receive an income stream of around $21,000 p.a. Potentially, they might also receive the Age Pension if their combined assets – excluding their home – sits under the threshold of $380,500. The projected Age Pension is likely to pay them a combined income of $35,573. Thus, they will end up with a total combined income of $56,573. It is likely that at a 6% drawdown rate, their superannuation will not be eroded too fast, so it should be possible for them to keep pace with inflation during their remaining lifetime.
In addition to receiving the Aged Pension, this couple will also receive all the benefits and concessions that normally come with it, such as discounts on utilities, medicines, etc.
The second couple has a combined super balance of $900k. Like the first couple, they own their own home. But as their combined asset balance exceeds the maximum Centrelink threshold of $837,000, they are not eligible for the Age Pension.
This couple will commence an income stream from their superannuation balance and, assuming a similar 6% drawdown limit, they will be eligible to draw a combined retirement income of $54,000 p.a. If their super fund’s performance remains reasonable, this should also last them until life expectancy and keep pace with inflation.
However, being over the Centrelink threshold means that this couple is not eligible for any of the discounts and benefits that normally accompany the Age Pension, although they will also not be affected by any government changes that might occur in the future to Centrelink thresholds.
They could also draw down a higher income stream earlier in their retirement, to enjoy travel and entertainment, etc. Then as they age their need for cashflow might not be as great, so they can gradually ‘ease off the throttle’ and reduce their balance to the $350k mark, and be in a similar situation to the first couple.
So the next time you are feeling a little underwhelmed about your retirement picture, it’s important to give consideration to all options that might be available to you. Sometimes, bigger may not be better. Or, you might be better off sitting at the $900k balance, possibly spending the difference on home improvements, travel, a new car etc. Later you could drop to the Age Pension limit, and even if you receive just $1 from the Age Pension, it still means you qualify to enjoy the other benefits that come with this government offering.
Before delving into a retirement strategy, it’s important you take your personal situation into account and seek advice from a qualified financial planning professional. Of course, we recommend AJ Financial Planning.
In this 18th Episode of AJ Radio we look at inheritances – what are the changes that have occurred in this area, what are the common mistakes people make with giving and also receiving inheritances, and also how you can best optimise a potential inheritance.
In this 16th Episode of AJ Radio we discuss how to keep a level head when the markets go crazy. To understand this, we chat with Dr Frank Murtha, Managing Director of Marketpsych and a leading expert in investing psychology, who give us some fascinating insights to put yourself in the right investing mindset.
I often hear parents lament that their kids have no interest in investing, and they ask me how might they entice them to be more engaged. With all the distractions of social media, computer games and other interests competing for their time and attention, I can see why kids might not be jumping up and down at the thought of developing an investment portfolio.
The thought of having $100 in a bank account earning $2.50 interest over 12 months is not that inspiring. Even if they had one of the high-performing international tech shares that earns 37% on $1,000, this is still only $370 annually, which if earned evenly each month would only equate to about $30.
Little wonder those Instagram feeds seem far more interesting. How can these types of investment compete with the flashing lights and hot posts of social media and in reality, isn’t regular saving or a safe investment just snoozeville for a young person with a short attention span?
I was recently speaking with a client about one of their kids’ portfolios that we look after. It holds all the traditional types of investments: cash, high-quality blue chip shares, fixed interest etc., but at the request of the client’s kid, we placed a very tiny piece of exposure – less than 1% of the portfolio value – into crypto, with the understanding it might turn out to be worthless, or it might make something. This was the great unknown.
The interesting thing is, after about six months or so the crypto position was up around 600% – and the parents remarked how their kid had suddenly become totally engaged with her investment. She regularly received updates on what was going on with the price of the investment, so in effect the flashing lights of the crypto’s rapid moves was enough to capture her attention.
I found this profound, because regardless of your thoughts on crypto as an asset class, could this possibly be a useful learning tool? I surmised that crypto could assist by focussing the kid’s attention on the experience of investing, with the magnified movements providing a heightened investing experience in a short period of time. For example, bitcoin moved 24% in the last 24 hours – in a regular investment this would take at least 12 months. On the other side of the bitcoin, it has also dropped 50% within two days, a number of times over the past 12 months. Again, to see this type of movement you might have to wait six to 10 years’ in a normal share market cycle.
Now crypto might not give your kid an understanding of share valuations or other core principles of investing, but what it can provide is an appreciation of human emotions such as greed and fear; the concept of the volatility quotient of an investment; the notion of crashes and bubbles. The potential learnings of resilience and holding your nerve during large crashes could also be valuable. I hypothesise that the exciting fluctuations of crypto could be enough to capture the imagination and interest of a young person.
I was recently in Times Square attending a notable Wall Street conference on crypto investing. One of the key speakers at the event reported 83% of crypto investors check their investment portfolio daily and interestingly, 33% of them check it every hour. This definitely shows a level of engagement by people who participate in this sector, so it’s possibly enough to cut through and grab a young person’s attention too.
Now let’s face it, crypto might be in a bubble, but even if it is there’s nothing wrong with this; the biggest, nastiest bubbles are where the most money is made quickly – and if your kid misses the exit door, it’s the quickest way to lose a lot. But gosh, they’ll learn a hell of a lot. If you think about your kid’s education; at the end, you don’t ask for your money back if you were unhappy with what they learned. It’s the same with crypto investing: if your kid places a small amount of money into crypto, they need to be prepared to lose the lot. But the lessons that they might learn could actually be valuable ones that stand them in good stead for the rest of their life.
The other thing to remember is that while crypto might be the trigger to spark your kid’s interest, like the example I gave above, over time it might be enough to engage them in other elements of their portfolio. It’s the start of the journey, not the end. Down the track, they’ll learn about ‘sensible’ investing with diversification in solid, stable stocks. The crypto might just be the carrot that gets your young bunny through the door into the world of opportunity and investing.
When it comes to crypto, your kid must be prepared to lose every dollar they invest, and understand there are minimal regulations or consumer protections, so if it all goes up in smoke, they can’t complain that nobody told them this could happen.
Like most investment decisions, it’s always important to speak with a professional financial planner before diving in head first.