Wednesday 22 August 2007

SMSF - the Devil is in the Details

No wonder they call it "Self-managed". Even with the fund administration, auditing and tax returns out-sourced to eSuperFund there is a fair bit of "paper warfare" involved (at least initially).

Investing our SMSF money into the Vanguard fund is turning out to be less simple than I had initially thought. Just when I was about to apply to invest in the Vanguard Fund online through our SMSF's e*Trade account, I noticed in the fine print that e*Trade would be charging an annual 0.66% "portfolio fee" for managed fund investments. This makes a mockery of our attempt to minimise fees and charges using a SMSF, and would have come as a big shock at the end of the year if I had skimmed over that part of the "fine print". Managed fund investments made via e*Trade would be at the "wholesale" fund management rate, but this isn't a significant benefit when investing in the Vanguard Fund as the retail fees are quite low anyhow (not as low as in the US, but that's a whole other story).

For example;

Investing via e*Trade Managed Fund Service:
Amount Vanguard Fee e*Trade DOLLAR
Invested Wholesale Porfolio Fee COST pa
$50,000 0.37% 0.66% $515.00
$100,000 0.37% 0.66% $1,030.00
$200,000 0.37% 0.66%/0.55%* $1,950.00
$500,000 0.37% 0.66%/0.55%* $4,710.00
*e*trade fee is 0.66% on amounts up to $100,000
and 0.55% on amounts from 100-500K, then 0.5% on
amounts above $500K. Vanguard Wholesale fee via
e*Trade is 0.37% on all amounts invested.

Investing via direct application to Vanguard
(application lodged via eSuperFund):
Amount Vanguard Fee DOLLAR
Invested Retail COST pa
$50,000 0.90% $450.00
$100,000 0.775%** $775.00
$200,000 0.5625%** $1,125.00
$500,000 0.43%** $2,150.00
**Vanguard Retail fee is 0.90% on amounts
up to $50,000 and 0.60% on amounts from
$50-$100K, then 0.35% on amounts above $100K.

So we could have ended up paying a couple of thousand dollars in extra fees each year if I hadn't been paying attention.
The other problem with investing via e*Trade is that you can't choose automatic reinvestment of distributions, and any additional investments in the same fund have to be made through the same process.

Investing directly by sending an application to eSuperFund should allow the initial investment to be made direct from the SMSF via BPay. The automatic reinvestment of distributions is possible, and I should be able to 'set and forget' an automatic additional investment by BPay each month.

The other bonus of investing directly (via eSuperFund) is that eSuperFund will have electronic 'read only' access to the Vanguard account, so I won't have to forward a hardcopy of the annual fund report.

The other wrinkle I found out when I tried to transfer the $300,000 back from our SMSF investment sub-account into the main account was that the ANZ bank hadn't correctly setup the accounts. Our 100-pt ID check data was confirmed for the main V2 bank account, but hadn't been set for the investment sub-account. This meant that while I had been able to transfer funds INTO the investment account, I wasn't able to transfer the funds back OUT into the main account electronically! Luckily this won't matter until the Vanguard application form has been processed and I need to make the BPay funds transfer for the investment.

Finally, it also turns out that when eSuperFund said that the normal $5,000 account balance minimum for an ANZ V2 account was "waived" in actually just means that we get paid interest on balances below $5,000. The ANZ bank system is still setup so that the "available balance" is always $5,000 less than the account balance. This means that there will always be $5,000 sitting in the ANZ V2 account that can't be invested into the Vanguard Fund or other investments (such as direct share purchases through e*Trade). It's not a huge problem since the $5K will be earning interest, but it still means an extra 1.5% of our SMSF balance is unavoidably allocated to "CASH" on top of whatever allocation to cash exists within the Vanguard High-growth fund (around 4%).

Copyright Enough Wealth 2007

1 comment:

Peter said...

Please forgive my ignorance with all this, but I've been looking at so many different funds and fees that my head hurts (and that's obviously a deliberate strategy of the superannuation industry - baffle-em with bullshit and a percentage fee)

Yes, the devil is in the details. My question, is it a little devil or a big one? Would you do it again? Is eSuperFund worth while or just another hack? Any other suggestions?