Written by Choon Kwa, Interworx Wealth Management

The last two years have seen huge volatility in our Superannuation balances. With the global economy now showing signs of recovery, this is a good time to be reviewing your superannuation policies. Particularly, it is important to know the risks in your fund, as well as the total fee story.

FEES, FEES, FEES

Over the years, we have seen a huge variety of fee structures in the market. Examples include Entry fees of up to 6% each time a client makes a contribution, and Exit fees of up to 25% of a clients balance if they want to make a withdrawal or rollover prior to retirement. Other fees include: expense recovery fees, switching fees to move your portfolio, performance fees if the manager has beaten a target. Many funds fail to report some of these hidden costs and it is vital that you have the full picture.

Do not be fooled by some funds claiming they are run only to profit members. Executive salaries, fund manager performance bonuses, and endless television commercials have to come from someones pockets.

A good financial planner should be able to identify all the costs of your fund including any hidden fees by asking the right questions to the super fund administrator. A good financial planner should be able to discuss any ongoing commissions and review fees they are receiving. It is important that they can explain the value, strategies and services that are being provided in exchange for any payment received from your super fund.

We believe that ongoing Entry fees are a thing of the past. How can an adviser receive payment when they have not done any work? If you are being charged an entry fee, or if your adviser is receiving ongoing commission, yet never calls you or writes to you, complain about it, or get yourself a new adviser.

INVESTMENT RISKS

The biggest mistake clients make is the lack of diversification in their portfolio. Some take huge bets investing in one company and go crying to A Current Affair when they have lost everything: Westpoint, Firepower, MFS, Bridgecorp to name a few.

It is so important that you do not have all your eggs in one basket. Spread your money between Property, Australian Shares, International Shares, Cash and Fixed Interest. This is very easy to do in your super fund.

Sometimes a default super fund may take on this type of over-exposure risk without your knowledge. They may invest too much in direct property, private equity, farming, subprime mortgages. These types of investments often have very little liquidity (your ability to make a withdrawal) and may quickly become worthless because of unforeseen circumstances like uncontrollable debt or acts of nature (drought, flooding etc).

Clients often call us interested in investing in 'ABC company' offering 10% per annum interest. They say 'it is 5% more than a bank term deposit, where do I sign up?' Anything that offers a premium above the banks rate has to have some risk. You need to fully understand your downside risk if the investment fails – can you lose everything?

Diversification is the key to successful long term returns while managing the downside risk. For some time now, we have been strong advocates of using Index funds in a portfolio. Whether in Australian shares, International shares, Property or Fixed Interest, Index funds give you Market exposure to a very well spread number of securities at a low price. Active investment managers still have a place in a portfolio to add value and to give you exposure to assets where Index funds may not cover. However, by using Index funds as the core of your portfolio, this leads to significant ongoing cost savings, as well as lower investment risks by having a diversified portfolio.

In summary, Superannuation continues to be a very tax effective structure for your retirement nest egg. Talk to your adviser today about your fee structure and investment risks. It is crucial that you are getting the most out of your fund. Feel free to contact myself, Choon Kwa, or Sam Pizzata on 9440-1377 if you would like to discuss your super options.

'This editorial provides general information only. Before making any financial or investment decisions we recommend you consult a financial planner to take into account your particular investment objectives, financial situation and individual needs. Charter Financial Planning and its Authorised Representatives do not accept any liability for any errors or omissions of information supplied in this editorial.'