Can direct investment options stop the flow to SMSFs?

Thursday 17th April 2014 by Penny Pryor

Paul Watson and Andrew Proebstl

The big superannuation funds have been concerned about rollouts to self managed superannuation funds for some time now. And why shouldn't they be? SMSFs continue to be the fastest growing sector of the superannuation industry with almost a third of the $1.8 trillion in Australian superannuation assets.

Concerned by these outflows, a number of superannuation funds have been copying AustralianSuper’s lead and offering their own member-directed investment options, which allow members to chose their own selection of shares, term deposits and possibly other assets.

AustralianSuper has been offering a form of this kind of product since its predecessor funds – ARF and STA - merged in 2006.

And in mid March, group executive, membership, Paul Schroder, said that AustralianSuper had $1.7 billion worth of members’ assets in the option. That sounds like a lot, but considered in the context of AustralianSuper’s $75 billion in funds under management, is just 2.27 per cent.

“[the outflows to SMSFs] was around 20% of our rollouts…in member terms it was a fairly small percentage, but in funds under management terms, they were quite sizable balances." Paul Watson, HostPlus

HostPlus launched its member directed option – ChoicePlus – six months ago to try and stem some of its member outflows to SMSFs.

“When we analysed where and when we were leaking members to…there were a growing number going to SMSFs,” Paul Watson, HostPlus executive manager (pictured left), member and consumer choices, says.

“And that number was around 20% of our rollouts and what was interesting…in member terms it was a fairly small percentage, but in funds under management terms, they were quite sizable balances.”

ChoicePlus has already had 800 members sign up and has $23 million in funds under management. The average balance on ChoicePlus is $29,000 and Watson says they have been pleasantly surprised with its success.

There are limits around what members can and cannot do. They need to have a balance of at least $10,000 in the fund and a minimum investment of $2,000 in ChoicePlus.

Early numbers on member leakage since the product was launched are also good.

“During the quarter ended 31 December 2013 (the first three months of ChoicePlus being operative) the amount rolled-out to SMSFs decreased materially in percentage terms as compared to the percentage SMSFs represented in roll-outs for the 2012-13 financial year,” Watson says.

The $2 billion legalsuper launched its member-directed investment option nearly a decade ago and has been updating it with more investment choice over the past 18 months.

“Many of our members have a higher level of financial literacy…so there has always been a keen interest in having more control." Andrew Proebstl, legalsuper

“In 2012 we took it to the ASX300 and we added term deposits and also ETFS and more recently, through last year, we added listed investment companies,” chief executive officer, Andrew Proebstl (pictured right), says.

Proebstl says that deterring members starting up their own SMSFs was only part of the reason for the launch and redesign of the option.

“That's in the mix. I wouldn't put it as the sole reason for why we decided to offer it. We saw it as a logical extension of investment choice,” he says.

legalsuper has a highly engaged membership with a high response rate to member surveys. This research then leads to improvements and upgrades in product offerings, like the additions to the member-directed investment option.

“Many of our members have a higher level of financial literacy…so there has always been a keen interest in having more control. That's something with our membership we’ve always found,” Proebstl explains.

The jury is still out on whether member-directed investment options can, or will, stop the flow to SMSFs. But what is interesting is that most funds that have them, don’t expect them to stem SMSF rollouts completely. Rather, they hope to catch those in the middle who may not be ready for an SMSF but want more choice, and meet members demand for more control in the process.

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