Journey to DiY Super: Part 1 – Why DiY?
Since passing 30 y.o., I've been reflecting on my first three decades. I've also started thinking more about the future - in particular, my financial future.
Unlike most people, I don't plan to retire - EVER. I really enjoy working. I am lucky to do something that I love. However, I would like the luxury to work less when I get old. This means I need to build a good amount of wealth through my Super.
This made me look into my Super. I flipped out! I was giving away a Porsche to AMP. I have been paying too much for insurance (I didn't know I had). When I dug deeper, I discovered how bad my Super was being managed.
So I decided to take control of my Super. I ended up moving my Super to a Do It Yourself (DiY) / direct shares option managed by an existing fund. In this blog series, I will walk you through my journey to DiY Super. I will cover:
- What is wrong with my Super?
- Options for DiY Super - it's not just Self Managed Super Funds (SMSF)
- Deciding which DiY Super option to go for
- Making it happen - how to start DiY Super
- On-going management of my DiY Super.
What is wrong with my Super?
Multiple Funds = More Fees
I was a violating two basic principles of effective Super investments. Firstly, I had more than one Super fund. There is no reason for having more than one fund. I've just been too lazy to consolidate all my Super money together. I have an AMP fund from my days at Macquarie Bank. I also have a BT fund from my time at Rabobank Bank.
The issue of having two funds is that I'm paying two lots of admin fee. The AMP fund was charging me $89 per year for admin, and BT charged $84 per year.
Super = Super High Management Fees
Apart from Admin Fees, Super funds charge you for the services of investing your money for you. This layer of fees is called the Management Fee.
For my AMP fund, I was charged 1.71% of the funds under management (FUM). My BT fund charged 2.04% of FUM. With recent changes to MySuper, Management Fees have come down. I've been put into MySuper 1980s LifeStage, but that still has fees of 0.96% of FUM.
The fees described above is pretty standard with retail Super funds. This fees pays for two layers of "services". First, the fund company (AMP and BT) for selecting the Fund Managers. Secondly, the Fund Managers for executing the investments for you.
Fund Managers use your money to actively trade stocks. They try to beat the market, so they can make a Performance Fee (you pay for that too).
All the research shows that Fund Managers do NOT beat the market. In fact, S&P research shows 78% of Australian large cap Fund Managers are beaten by the market (5 year average, after fees).
To sum it up ... I'm paying BT to select Fund Managers to invest my money. But more likely than not, I will get returns lower than the market.
The "market" is the AVERAGE return. So, I'm paying for "professionals" to invest my money, to get less than the average return!
It doesn't make sense. That's why I've got to change things up.
Replicating my Super fund
What's the alternative? I know my BT fund's Asset Allocation.
Maybe I can replicate my BT fund with low cost indexed Exchange Traded Funds (ETFs)?
With the ETFs available in Australia, I can't totally recreate my BT Super fund. There are no ETFs in Australia that replicate Alternatives and International Fixed Income. These two Asset Classes account for 20% of my fund's allocation.
I can stick to the 85% Growth: 15% Defensive allocation and create a similar portfolio using ETFs:
- Australian Equities of 36.2% with VAS
- International Equities of 35.6% with UBW
- Domestic Listed Property of 3.6% with VAP
- International Listed Property of 9.6% with DJRE
- Domestic Fixed Income of 13.5% with IAF
- Cash of 1.5% in any bank
The Management Fee of this ETF portfolio is 0.27%. This is a difference of 1.71% with my BT funds (combining my old BT and new MySuper).
My BT funds have a target return of around 8% p.a. (after fees). If I can save 1.71% in fees, my returns after fees would be 9.71%. Over 35 years until I reach 65 y.o., the difference in my Super would be 73%.
A $50,000 balance now would be worth $1.28 million with the ETF portfolio or $739,000 with my BT fund. A $541,000 difference!
Are higher Management Fees worth it?
It's no good saving on fees, if my gross returns is worse off in the ETF portfolio. It is important to compare performance (after fees).
This part gets even more alarming. Looking at the last 5 years, this simple ETF portfolio massively outperformed my BT fund by 4.4% p.a. Just within the last 5 years, I would be 18.3% worse off in my end balance.
Options for change?
My current Super strategy is clearly failing me. I need to change. I started exploring my options and found three:
- Switch to a better performing Super fund;
- Start a Self Managed Super Fund (SMSF);
- Switch to a Super fund offering DiY options.
I eventually decided to switch to the third option. In the next post in this series, I will talk about how I made that decision.