WHY RANKING SUPER FUNDS ON PERFORMANCE DOESN’T MAKE A WHOLE LOT OF SENSE
Throughout my career in financial services, I have regularly been asked what the best super fund is. This question came out a lot when I used to work as an in-house lawyer for a super fund, except then the question was usually, is the company I work for the best super fund?
To understand which is the best super fund, you need to understand first what a super fund is. Because despite the common perception, a super fund does not outperform another super fund in investing. This may be a confusing statement, especially since super funds are regularly ranked on investment performance.
So what is a super fund? From a boring legal level, a super fund is a trust. A trust is where you have someone else hold your money, but it still remains your money. What you are doing with superannuation is letting a company hold your money until you can access it, once that happens, you can then spend the money.
If a super fund runs into financial troubles and can’t pay its staff, it can’t start using your money to do so. Such is the power of a trust. Now in this trust, you can direct the person who is holding the money for you to invest it. The options they allow you to choose depends on the super fund and can range from as little as 1 option to literally thousands.
In general, industry funds tend to have fewer investment options. These are the funds you see on TV where people are inexplicably doing an odd motion with their hands. Retail funds however tend to offer a lot more investment options.
So how are super funds rated on investment performance? Well if you enter a super fund and don’t make a choice, they’ll usually have a default option. It’s these default options that are usually ranked. Now if you are letting your super fund choose your investment option, you are making a big mistake. Whilst the people who work for super funds are genuinely passionate people who want to do the best by you, they don’t know nearly enough about you to make an appropriate investment decision.
Super funds have in some instances, millions of members that vary in many different ways including age, risk tolerance and intentions as to when they want to access their money. Because of this, they try to pick a ‘middle of the road’ investment where it won’t perform great but won’t perform badly. Some of the more advanced ones try to change your investments based on your age and balance but the outcomes of this in some instances can be really bad.
So a super fund shouldn’t be judged on its investment performance. It should be judged on its fees and access to investments. The best super funds offer access to investments that suit you at a reasonable cost. With access to the right investment options, you can choose your own investments. In many instances, many different superannuation funds can invest in the same investment making which super fund is ‘better’ simply come down to fees and ease of use.
So don’t get caught up in the hype you see in the papers, super funds shouldn’t be ranked on their default investment performance, particularly when you are choosing your own investments. When choosing a super fund, choose one that has low fees, ease of use and access to a number of good investment options. As part of our service at Bounce Financial, we will recommend a super fund and the investment options that suit you and regularly review this.
As always, if you have any questions, please get in touch.
This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.
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