We’ve long made a point of saying the day to day movements of the markets are irrelevant to investment fortunes. It’s the time spent in the market that counts, not trying to second guess entries and exit points along the way. Doing so is impossible and it’s a drag on your wealth. Higher taxes, trading costs and forgone gains as the investor agonises over an entry or exit point.
However, there is a point when timing matters – when an investor wants to sell or change their strategy. When they’ve made a decision it’s important they can crystalise the amount of money they have invested at that moment in time.
Advisers make these sorts of changes on a regular basis. Investors move through life and change their strategies. No point investing like a 30-year-old at 60. Equities may have been raging for a year and a portfolio is overweight, to maintain balance some of that money needs to get back into bonds. Alternatively, life makes the decisions, a new roof on the house or a new car might mean a portfolio selldown.
We take action upon the request being made by an investor. The platform that holds an investor’s funds transacts as soon as we put the order through. Very simple process and the investor receives the unit price of the fund or market price of an ETF almost to the day.
The rise of industry super funds means we have more clients with industry super funds. Investors come in the door we analyse their circumstances and if the fund is doing a good job, we don’t change anything that’s working. They’ll hand over the admin of the account to us and when they want something done, we’ll do it on their behalf.
Lately though, as we’ve been dealing with more industry super accounts, we’ve been noticing something. The time to transact with some of the smaller funds has become ridiculous. Two weeks with one, three weeks with another.
At the moment there is obviously some benefit from these delays. A buoyant market means there might be a little extra cream on top if it’s a full-scale redemption. If it’s a partial sell down for a specific dollar amount, it won’t take as many units – meaning there’s more left in the account.
There’s always the flip side though. What happens when the market isn’t doing you any favours?
On the balance of probabilities and using history as a guide, an investor will make out for the better with the delay, but that’s certainly no comfort if you’re caught in a down month.
Since 1980, 36% of months were in the red on the ASX. 8.24% of months over the same time frame have had a fall greater than 5%. As we’ve always said, this isn’t an issue if you’re holding for the long term. It’s why an investor should remain in their seat and accept the good with the bad because history suggests the balance is always in favour of the good.
If you’re looking to get out of your seat, it’s a totally different story. If your super fund’s admin team hasn’t processed your request after 21 days, you might begin think low cost is a misnomer. If an investor’s fund gives up 2% because of transaction times, it’s a $2000 hit on $100k, $4000 on $200k, and so on.
By now most people understand that the less an investor pays the more benefit there is to their bottom line. More costs mean more drag on an investor’s portfolio. With investment funds themselves, paying extra has never guaranteed any higher performance.
But there’s also no such thing as a free lunch. And there are other less obvious costs hidden in a cheap lunch. Super funds crowing about having Australia’s lowest admin fees are inevitably giving up something along the way and in respect to administration, we may have found it. There is a point where you don’t do more with less. You do less with less.
Administration costs money and this isn’t a property settlement – liquid should mean liquid. If a fund can’t transact for a member within a day, their admin fees need to be looked at. No one wants to pay higher fees, but there’s a question if someone’s fund saves them $20 a year in admin fees, but that $20 saving has the potential to cost them $2000 or more down the line.
The cheap problem has raised its head in the superannuation market before.
A few years back ING came to the market with a new super product. For anyone who was comfortable managing their investments it looked a great alternative to a self-managed super fund. The real selling point was the extremely low costs. Fast forward a few years and whack! The fees suddenly skyrocketed with some members expected to pay triple! ING had been running a loss leader for a few years and it was time for their members to pay up.
ING Living Super members were not happy, but this is how cheap can sometimes work – it’s a fabulous deal right until you’re smacked in the face by the reason it’s cheap.
Then you’re handing back all those savings.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.