April 20, 2015

esuperfund review – Wow! It’s expensive!

By Kris Kitto

Have I lost my mind? It’s $999 p.a. all inclusive (when it is not free).

Looks good on the surface right? Seems a little too good to be true? esuperfund review.

There is no such thing as a free lunch. Esuperfund, like any business exists for one reason and one reason only: To make a profit and provide a return to the owners. 

My esuperfund review

There are four main things that esuperfund does as part of its business model to ensure profitability:

  1. Restrict and control the accounts you can use
  2. Negotiate sometimes sizable commissions on accounts and products
  3. Outsource work back to you
  4. Comparatively lower service levels

Please understand that I don’t have a problem with esuperfund, its owners or any of the above four things. When looked at in isolation they make sense.

What I do personally have a problem with is the combination of all four together. This article aims to provide the facts surrounding the esuperfund service and provide some context and perspective, not to discredit the business in any way.

To put it another way this article / review is not really about esuperfund at all.  It is about enlightening current or potential SMSF trustees to the practicalities of running a fund and working with your service providers.

Control the accounts you use

man-chains-closeup-focus-hands-12674934

Controlling accounts that can be used makes good business sense – control and restrict the inputs and you can streamline processes for efficiency enabling cheaper service delivery.  However this does fly in the face of the one of the major reasons people establish an SMSF in the first place: Choice.

Choice is critical with SMSFs.  This is not just about choice of investments (e.g. property, shares, managed funds etc.), but of bank accounts, brokers, platforms and service providers.

What potential SMSF trustees need to research is whether the providers they may be forced to use are suitable for them.  Over the last 7-8 years since I’ve been running my own SMSF I’ve trialled a number of banks, brokers and other investment providers – so I personally have a pretty decent idea on what providers work extremely well with SMSFs.

The challenge for many people – whether you’ve already established an SMSF or not – is determining what accounts actually have the features and usability you need.  You don’t know what you don’t know!

I recommend potential trustees speak to an experienced SMSF service provider and get their opinions – they will know what accounts will work well for their clients.

 

Commissions on recommended accounts

Cash-SMSF

The following information is take from the “How we are paid” section of the Mar 2015 version of the Financial Services Guide (FSG) located on the esuperfund website. ASIC recommends that you read the FSG of any potential service provider when considering using their product or service.

There is more than one way to catch a rabbit – i.e. a business can generate revenue for the provision of their services. Traditionally most SMSF work has been done by accountants, who either charge an hourly rate based on the time it takes to complete the work or a fixed fee basis. This is changing as more SMSF trustees utilise specialist SMSF administration providers who only offer fixed-fee packages.

Esuperfund works on a hybrid model – they charge a low annual fixed fee ($699 which is often discounted for a number of years) combined with commissions they’ve negotiated on the products used by their clients. They also happen to restrict the use to these same products. This is all disclosed in their FSG.

This method of revenue generation unfortunately has been common practice across the Australian financial services industry for a long time. Large financial institutions are often accused of restricting the products their financial advisers can recommend to products they own and derive revenue from. It is great to see however that there is a strong movement away from institutionally backed advice towards independence.

Based on the FSG document I reviewed, esuperfund collects commission on the following types of products and transactions:

  • Share trades
  • Bank accounts
  • Insurance products
  • SMSF limited recourse loans
  • Precious metals investments
  • Options and other derivatives trades

The follow is taken from the esuperfund FSG and outlines the commissions esuperfund earns on various products:

esuperfund-commissions

The share trading fees you pay via esuperfund are generally not higher than what you would pay if you went directly to Commsec, however who actually receives what revenue does change.

Assuming esuperfund gets the maximum of “up to $16.75 via their ebroking” per trade, if your SMSF makes 20 trades per annum, then they receive 20 x $16.75 = $335.

Similarly, commissions potentially earned on cash are also a good earner for esuperfund.  If you have an average cash account balance of $35,000 (10% of $350,000) in a CBA Accelerator Cash Account, they will earn $402.50 per annum from your account.

Likewise with term deposits.  If your SMSF holds a 12 month term deposit (TD) of $70,000 esuperfund would generate another $140 per annum.  Although not disclosed, with these type of arrangements some or all of the commission paid on the cash and TD products reduces your return.

I’ve used an SMSF with a $350,000 balance as the average balance of a first year SMSF is $345,860 (ATO annual statistics 2013).  On average 30.34% is allocated to cash and term deposits which I’ve split up to 10% cash and 20% term deposits.  Please note that these figures are purely for illustration purposes only.

So although esuperfund may only charge $699 in admin fees, on an average first year SMSF with 30% in cash and TDs with 20 share trades, the amount of income they are actually generating is more than double:

  • Admin fee $699
  • Commissions
    • Shares $335
    • Cash $403
    • TDs $140
  • Total $1,577

Once again, the issue is not so much that they are earning these commissions, but the fact that to utilise their service you are effectively forced to use providers that generate significant revenue for them. Of course, it may be argued that the end SMSF trustee is no worse off as the brokerage they are paying or the interest they can earn on the cash and TD products via esuperfund is not too different from what they could get if they used another provider – however the point is more about comparing apples with applies and understanding where and how esuperfund generates revenue.  It’s all about transparency.

As an aside, it also shows that incredible margins businesses like CBA / Commsec are making on cash, loans and share trading products if they are able to pay such significant commissions to intermediaries like esuperfund.

Outsourcing back to you

jumping-through-hoops

 

I’ve had a number of clients and colleagues use the esuperfund service and they’ve relayed some interesting information about how it works. One comment that sticks in my mind was that “using esuperfund is like using the self-service check out at Woolies – you’re buying from them, but it’s you doing the all work”.

Once again this is something that by itself is not a problem. The more work that you as a client or customer does, the quicker and easier it becomes for the service provider, and this reduces the cost of providing the service.  Fairly simply concept.

What I don’t like about it however is the lack of incentive to make things easier on the SMSF trustee – it’s all about making it easier on them as a business.  Although the fees paid to any accountant or administration business that looks after SMSFs is for completion of annual accounts and tax returns, what you are really paying for is the administrative burden being lifted from you onto someone else.

In my opinion esuperfund does not lift any burdens from clients.  Some people actually like the hands on approach – true DIYers!  However most people who’ve been running an SMSF for a number of years understand that the less time spent paper chasing on behalf of your service provider the better.

I’ve personally been looking after hundreds of SMSF clients for more than 10 years and I am now happy to say that for many of these clients, their ongoing compliance obligations can be looked after with virtually no paperwork and no effort from them.  Their time is better spent on either managing their investment portfolios, or just living their lives – not jumping through hoops for their SMSF service provider!

 

When considering a service provider, find out exactly the level or paperwork you need to organise – it’s definitely a case of “less is more”!

Comparatively lower service levels

 

A great quote from the last few years from Bryan Kramer that sticks with me is:

human-to-human

Can you pick up the phone and speak to a human who knows you, knows your SMSF and can provide you the info and advice you need when you want it? Or are you forced to crawl through pages and pages of web content and FAQs?

Personalised service should be becoming easier with technology, though many companies are guilty of letting it make their service cold and impersonal – similar to the struggles of large industry and retail superfunds where you are known as a member account number and balance – not an individual.

Esuperfund is geared up to provide an annual compliance service. This means they only touch your SMSF once a year. This is not dissimilar to the wider accounting community which is also geared towards an annual in arrears type of service. The 2014 Future of SMSF survey conducted by Aaron Dunn of The SMSF Academy showed that approximately 2/3rds of providers do the work annually:

AnnualSMSFServiceDelivery

Although this approach was acceptable for most SMSF trustees and their advisers in the past, the trend is now moving towards more frequent and up to date reporting for SMSFs.

I’m not talking about the ATO and audit obligations which are annual, but the ability to jump online 24/7 and see a consolidated up to date view of your SMSF portfolio – cash, TDs, shares, managed funds and property – all in one place. Being able to easily view and track things like contributions against the contribution caps and pension drawdowns are essential for SMSF trustees.

Up to date information is also is critical for the provision of timely and accurate advice.  I regularly see how my team delivers small pieces of timely advice to our clients, and the significant positive impact it has on our clients’ situations.

For example one of my administrators last week brought to my attention a large contribution made by a client (picked up as part of our regular ongoing administration).

As this client was of pension age, by establishing a new pension account from those contributions, we are able to keep the SMSF 100% tax exempt, which will mean approximately $5,000 additional refundable franking credits for the year.

This type of responsive service and advice is something in my opinion that esuperfund is not geared up to do.  Yes – what my team may be say 2-3 times more expensive, but we are all focussed on delivering value to our clients.

SMSF trustees need to think about the difference between price (what you pay) and value (what you get).  In case of esuperfund it’s both low price and in my opinion low service.

Summary

Some people may read this article and totally disagree with me on my opinions – I’m OK with that.  Hopefully it will enlighten others about the practicalities of running an SMSF and what to look for with a potential service provider.

In the case of esuperfund it is my personal opinion that for most people there are simply too many compromises and conflicts of interest for the offering to be attractive to anyone but a small niche of SMSF trustees.  And this is probably the biggest compliment I can provide esuperfund: They’ve determined their niche and they are successfully working it.

The Australia Financial Review also published an interesting article on esuperfund titled: “How discounted SMSF players are clipping your ticket” (PDF version) on 15 July 2015 which may assist you.

Please note that this article has not been updated in some time, and you should always check the providers website for up to date information.