Cutting out the middle man
14 December 2014
Diversifying investments in a SMSF without attracting high fees often proves difficult. Many superannuants find themselves using bank platforms, which not only charge a transaction fee, they also charge an ongoing annual fee, sometimes as high as 0.7%. Over time, that can have a signficant effect on returns.
It is also difficult to get true diversificiation into areas like international bonds or industry sectors in emerging markets. The platforms have the "shelf space" issue: they have a certain range of products on their shelf and they want clients to only take those.
The managing Director at OpenMarkets, Rick Klink, believes he has a way for SMSF investors to simplify their records, pay lower fees and have a wider range of options. Klink is looking to provide a multi-asset trading platform for self managed super or self directed investors. He has opened the service for local equities and unlisted managed funds and in the first quarter of next year will add international equities and fixed income products.
"The idea is that they can open up an account and trade all of those asset classes and there is one feed through to the accountant or SMSF administrator. If an accountant has a client who trades with us, it will automatically appear.
"Traditionally, a client will use an on line broker for equities, they will have a platform for managed funds and they will have someone else for international accounts. The problem is that it costs more money to administer that self managed super because the accountant needs to reconcile the three bank accounts and then the auditor needs to do the same thing.
"By aggregating off the same cash, the client doesn’t need three cash calls. They have the ability then hopefully to get a better price from the administrator of their self managed super fund because what we have done is combine it all into one data feed. All the assets, all the trades in the one spot. It makes it easier for the SMSF person and the accountant or planner. They can go back to doing what they should be doing which is giving valuable strategic advice to the client."
Ease of administration is not the only reason for taking this approach, according to Klink. It is a welcome way to reduce costs.
"The only place where you see it is all in the one spot today is via the (bank and insurance company) platforms. They provide that simplicity really well. The problem is that they charge anywhere from 40 to 70 basis points for the privilege (0.4-0.7%). The beauty of our model is that we don’t charge any administration fee. So once you have purchased the equity or managed fund we don’t charge that on-going fee on assets.
"If you buy it under the platform model you pay a transaction fee and you will fee per annum. I think the average for retail is 60-70 basis points a year purely to hold the asset. In our case, the equities are held by the ASX, there are no custody fees, the managed funds are held by the administrator for the managed funds. There are whole bunch of these guys who serve that purpose. What we have basically done is strip out the middle man who was charging these fees. Because in today’s world that sub-custody, or what used to be called an investor-directed portfolio service, we don’t need that function any more. It can be held by the appropriate administrator, such as the ASX. All we do is the transaction and reporting for the client. It is hugely different with what is going on in the industry today."
According to research by the Federal Treasury, the super industry fees are unsuually high. Treasury estimates that they are about three times what they should be. Klink says these high fees are not justificable in an era of advanced technology. Especially when they are taken as a percentage of funds rather than a flat fee.
"For people with large balances it really never made any sense. An SMSF person already has a legal structure. What they were doing is putting it into another legal vehicle, which is then buying the assets. Especially for superannuation you are essentially paying twice. You are paying for your own legal vehicle and the audit and administration, then you are paying for the platform, and its legal structure.
"The second problem is that even when they put it into a platform, they get the reporting around the managed fund, but the accountant doesn’t use that. The accountant takes the equities and the report and redoes them all to optimise the client’s tax position. Even the reporting that comes from a platform isn’t that important to an SMSF, because they have assets spread into different areas. It is great with industry funds where they manage all the funds, but the way it is done today with direct equities and the rest held in platforms for the remainder, it doesn’t make logical sense. It is a double payment and an area that needs to change. Although the platforms would love things to stay as they are.
"The new FOFA reforms what they are trying to do is get greater transparency. The difficulty in today’s market is that they have started by getting conflicted advice in all the trailing payments in the platform/adviser area. What we are doing accelerates that process, because it just removes all of that structure where fund manager rebates the dealer group who rebates the platform and advisor. For me a lot of that is just (unnecessary) overhead.
"So a lot of our core clients are non-aligned wealth management groups. You are not restricted in terms of the managed funds you can go into. It is widely opening the range of products that are available."