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Advice that’s costing investors billions

October 19, 2011
18 people like this post.

Statistics indicate that super fund members paid $1 in every $8 from managed superfund investments throughout 2010-2011. Little wonder more and more Australians continue to take control of their own financial management.

Research conducted by Rainmaker Group throughout the 2010-2011 year found that superfund members were being slogged a massive $2.4 billion in fees or nearly 10% of the $25.9 billion invested in retail super.

Rainmaker found that a huge slice of the average Australian’s tax break, their contribution to super, is consumed by commissions paid to financial advisers. The slice increases to about $1 in every $8 if personal insurance cover is also paid through the super fund.

If you take into consideration that these fees are deducted year on year for the life of an average policy which could be up to 40 years, the numbers become staggering simply because of the compounding effect of time.

Research conducted within the financial services industry also indicates that approximately 1 in 5 Australians (20%) will have used up the money in their super funds by the time they turn 70 – so much for a long and enjoyable retirement.

What does this mean for DIY investors?

Making the decision to manage your own super should not be taken lightly. The costs involved with establishing a self managed super fund, having it audited each year and the annual accountancy fees can be costly. But for those that do make the decision to manage their own super, there are potentially better returns on offer over the long term.

I have been known to get on my soapbox and campaign for individual Australians to take control of their financial future and consider how they manage their own money. The stats above may help you to understand why!

I also recognise that the share market has been a difficult place to be as an investor over the past 12 – 18 months and that many investors have seen little or no growth and many are even in drawdown. The positive though is that those investing in their skills will be in a position to capitalise on future market trends.

For those prepared to do some work and maintain a professional approach to their share trading and investing activities, the long term rewards and monetary gains can be significant and you can never move onto retirement planning too early.

It’s no surprise the Self Managed Super Fund industry continues to gain popularity as it grows from strength to strength. Last financial year there were 33,000 new DIY funds established on top of the 460,000 existing individual funds for over 870,000 member trustees.

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18 people like this post.

Comments

  • wakefield Sykes says:

    thanks for that Gary
    it certainly echos my views over a considerable period and I have long managed my own super fund
    I have through some experience developed a poor view of Australia’s financial industry and their advisors
    keep these columns coming as they are always interesting

  • Paul Robinson says:

    Appreciate your thoughts, Gary, but isn’t this a case of “Lies, damn lies and statistics”?

    10 percent fees paid to advisers? Sounds like another industry super fund commissioned report that fails to differentiate between administration costs, fund manager costs and all the other costs (including commissions) that are part and parcel of operating a retail fund.

    I don’t know where Rainmaker took this data from, but it seems to be a repeat from previous years where the reports were criticised for a lack of specifics and clarity.

    And with the amount of disclosure provided today, if a member of a fund gets a statement that says 10% fees paid to a financial adviser and does nothing about it, maybe they deserve to lose their money? Unfortunately you can’t legislate against stupidity, but it will be my taxes that will pay for these people to be on an Age Pension and that REALLY BUGS ME!

    Yes, I am a financial adviser. 10 percent in fees? NO WAY. Try less than 1% including the $3,500 to $4,000 charged by accountants for about 8 hours work to prepare an annual return, member statements and audit. And that bugs me too.

    Even the retail funds that have come across my desk have nowhere near that level (10%) of fees, so maybe you need to check with Rainmaker and the industry funds before you quote these figures.

    I still listen to what you have to say, though (obviously). Paul

  • Gary Stone says:

    Hi Paul,

    Thank you for your detailed post which adds wonderful value to readers.

    You will have to take it up with Rainmaker regarding the lies. While I will always take responsibility for my own posts, I have not personally undertaken the research myself thus the reason for quoting Rainmaker.

    I will amend my first sentence to read “Statistics indicate that super fund members paid $1 in every $8 from managed superfund investments throughout 2010-2011” rather than “Statistics indicate that financial advisors were paid $1 in every $8 from managed superfund investments throughout 2010-2011”.

    After re-reading my post, I can see the imbalance and I am happy to make this correction.

    The report outlined that commissions were split between super investment and group and personal insurance paid for from super.

    The amount is equivalent to around $1 in every $8 of retail fund member and employer contributions, and almost completely wipes out the estimated $3.75 billion in contribution tax concessions extended to retail super fund members.

    The report also estimates that between 2008 – 2010 inclusive, $1.9 billion has been paid in commissions to financial planners on employees’ compulsory super contributions.

    If a super fund has a Management Fee, if they pay financial planners fees, if they deduct direct costs related to the running of the fund (which they’re entitled too) such as audit fees, preparation of tax reporting and bank fees – fees add up.

    People think about what house they’re going to buy and how much mortgage they’re going to pay because it’s worth potentially hundreds of thousands of dollars to them. But for whatever reason, rarely do investors think the same way about their super.

    I believe investors don’t often look at the super because it’s too difficult to work out. Funds don’t talk to their clients often and it just ends up way too hard.

    By not taking an interest in what could be an investor’s most important asset, investors generally come to the conclusion too late and suffer in retirement.

  • brian says:

    i also have managed my own for sometime now,and i decided that if anyone was going to be responsible for gains or losses in my fund then it would be me, not some robber in a suit,
    unfortunately not everyone is educated enough to be confident of taking care of their own money and self education on the subject,but hopefully there will be more that take their own destiny into their own control,

  • John T says:

    I concur I now have a SMSF which my original advisor talked me out of sadly he lost $500k of my money notwithstanding the exhorbitant kick backs I have since learnt about – there is a saying – Sadly and slowly we learn only from experience – and another friend once said to me – you have been a succesful small business owner – why would you let someone else manage your funds – albeit a little too late

  • fastbucks says:

    Gary – an excellent post. A thought though – my kids are finishing high school and their curriculum contains nothing about how to manage your money. I took it up with the principal and received a nebulous answer about it being covered – its not! (I even offered to do a sharemarket presentation…)Thus most leaving school will do as I did – leave it up to the “experts” and more often than not see a mediocre result at best. We need to do something to change this bad situation! (I am helping my kids, unlike my parents who simply introduced me to their planner who promptly lost me 30% in the 1987 crash…)

  • Greg says:

    In January 1998 at the age of 29 I gave a well respected fund manager $50k of my super. As at the middle of this month I had given them another $60k through contributions and my account balance was $140k. Like a lot of people in their 30’s I really hadn’t given my super much thought. Boy has that changed.

    Today I deposited my first rollover cheque into the SMSF my wife and I have just setup. I have spent the last 2 years actively trading the market and learning all about risk management and market timing. I made some really bad trades in the early days almost as a right of passage but am now moderately profitable and improving all the time.

    I am excited about managing our SMSF and other investments and I don’t fear the market anymore. I have learned and continue to learn the skills that will hopefully see my wife and I retire with a nice nest egg in 15 or 20 years. I know I can’t control the markets but at least with a SMSF I am totally in control of how I respond to the markets.

    Thanks for your great posts Gary

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