Part 2: Pros and cons of using a wrap to invest your super    

In Part 1 of this blog topic, I discussed the various options for investing your superannuation including industry super funds, retail super funds and SMSF.  

Now, in Part 2, I want to focus on wrap accounts. These accounts offer a similar level of transparency, control and flexibility as an SMSF, but they come with lower costs and eliminate all compliance and administrative obligations and hassles. 

What is a wrap product?  

Last week, I used an analogy to explain wrap products:  

Think of investing your super with a wrap as akin to visiting a buffet restaurant. You have a wide selection of food items to choose from all-in-one place – you can select what you like and skip what you don’t want. The restaurant takes care of everything from cooking to serving and cleaning up. When you’re done, you simply pay a single bill, regardless of how much you’ve eaten. 

A wrap platform operates in a similar way. It sets up a super account in your name, and the provider manages all compliance, tax, returns reporting and administration. Wrap providers usually offer an extensive investment menu that includes shares, most ETFs and typically between 300 to 600 managed funds – allowing you to decide what to invest in. This setup provides full transparency and control over your investments and fees, without any of the administrative headaches of a SMSF. 

Consider a super wrap product as being like an online share trading account, like CommSec, that allows you to invest your super in shares, ETFs and managed funds.  

Wrap accounts can only be in one individual’s name – you cannot have a joint account, unlike an SMSF.  

Some industry super funds provide options that resemble wrap accounts, such as AustralianSuper’s Members Direct. However, these typically offer a limited selection of investment choices. 

Key advantages that a wrap offers  

Wrap products offer several advantages:  

A broad array of investment options  

All wrap platforms provide a wide array of investment options, including all ASX-listed securities, ETFs, international securities, term deposits and several hundred managed funds, including wholesale funds.  

This extensive menu empowers you to build a diversified portfolio using different investment strategies and exposures. You also gain complete control over the investment fees you incur, enabling you to evaluate the performance and costs of each individual investment. Additionally, wrap platforms allow you to avoid investments or exposures that don’t align with your values, often referred to as ESG investing (which stands for Environmental, Social and Governance). 

From our firm’s perspective, a wrap platform enables us to construct an investment portfolio using various low-cost, rules-based indexing strategies tailored to specific geographical markets, as discussed here.  

Returns reporting  

Wrap platforms provide comprehensive reporting, including historical investment returns, updated daily. This feature is important because you can’t manage what you don’t measure. I believe that you must benchmark your investment performance against other super options, like industry funds to ensure a wrap product is advantageous.  

The significance of returns reporting cannot be overstated. While it’s relatively straightforward to assess the performance of your current investments, it’s equally important to track the performance of past investments that you’ve bought and sold. This ongoing analysis helps you make more informed decisions for your portfolio and its performance.  

Tax compliance  

Wrap platforms manage all taxation obligations, including tax on concessional contributions, investment income and any capital gains or losses. One of the key advantages of a wrap platform is that you have more control over your tax liabilities. For example, you can avoid selling investments to prevent realising capital gains tax liabilities.  

This tax treatment is quite different from industry super funds, which operate as pooled, unitised products. In industry funds, an allowance for tax on unrealised gains is deducted from your balance each day. As a result, wrap platforms tend to be significantly more tax-efficient. 

Potentially, nil capital gains tax over your lifetime  

When you invest your super in a wrap product over many years and decades, you are likely to accumulate significant unrealised capital gains as your investments hopefully increase in value, especially since the goal with investing is to minimise investment turnover. Upon retirement, you can switch your wrap product from accumulation to pension. This transition means that any tax liability on those unrealised gains disappears, provided your balance is below the Transfer Balance Cap which is currently $1.9 million.  

For instance, if you make an investment in super at age 30 and keep that same investment until you are 60, you won’t pay any capital gains tax throughout your lifetime. This could be a major benefit if your investments provide most of their return in the form of capital growth (and proportionately less income), which international share investments usually do.  

If this tax advantage appeals to you, it’s important to choose your wrap platform wisely, as you’ll need to remain with the same provider until retirement to fully avoid any capital gains tax. Moving to a new platform will trigger a capital gains tax liability.  

You can use a wrap for investments outside of super  

An ancillary advantage of using a wrap platform is that it enables you to hold investment accounts in your personal name, as well as in company or trust names. This allows you to manage all your investments on a single platform.  

Additionally, you can organise your investments into one tax-efficient portfolio by placing higher-return investments within your superannuation and keeping lower-return investments, like bonds, outside of super to minimise taxation.  

Disadvantages of a wrap 

Cost 

When using a wrap platform, there are two main costs to consider.  

The first is an administrative fee charged by the wrap platform provider for services like maintaining investment options, reporting, tax management, and superannuation compliance. These fees are typically tiered, meaning they decrease as your balance increases. Here’s an example of administration fees on various balances:  

• $700 p.a. on a balance of $250,000 

• $1,150 p.a. on a balance of $500,000 

• $1,575 p.a. on a balance of $1 million  

• $1,825 p.a. on a balance of $2 million 

Wrap platforms tend to offer family group discounts, which means your spouse’s super balance is included in these fee calculations to further minimise fees.  

In short, administrative fees generally range from 0.20% to 0.30% per year of your balance, which is significantly lower than the costs associated with managing an SMSF. 

The second cost you might incur is investment fees. If you invest in ETFs or managed funds, their fees typically range from 0.03% to 1.00% per year. For instance, the weighted average cost of our low-cost, index portfolios is usually around 0.30% p.a. 

In total, the overall cost to invest your super in a wrap platform typically falls between 0.50% and 0.60% per year, which is lower than most industry funds. 

Do you need to pay for financial advice?  

You should only consider using a wrap product if you’re confident in your ability to make informed investment decisions that are likely to yield returns comparable to, or better than, industry super funds.  

If you lack the skills and experience to manage your superannuation, it’s wise to engage a financial advisor to assist you. However, this will involve additional costs. As such, generally, it may not be cost-effective to engage a financial advisor for your super unless your total super balance exceeds $1 million.  

That said, if the advisor can assist you with a range of financial matters beyond super, it could still be beneficial to use a wrap platform even if your super balance is under $1 million. 

When to use a wrap account 

There are several scenarios in which using a wrap platform could be beneficial: 

• More than $1 million in super: Industry funds often charge percentage-based fees exceeding 0.50% p.a. In this case, a wrap platform can be much more cost-effective if you have more than $1 million in super. 

• DIY investor: If you’re confident in your ability to prudently manage your own super, a wrap platform provides a wide range of investment options and the necessary tools to do so effectively. 

• Part of an overall financial advisory service: If your financial advisor can assist you with various financial matters, including superannuation, a wrap platform may enable them to optimise your super investments. 

• Personal investment preference: If having full control and transparency over your investments is important to you, a wrap platform can be an excellent solution, for an investor who wants to implement a strict ESG (Environmental, Social and Governance) approach. 

Which platform?  

The two highest-rated platforms in Australia are Hub24 and Netwealth. However, most wrap platform providers only work with financial advisors. Netwealth is one of the few platforms that also deals with retail clients i.e., people that do not use a financial advisor.  

In summary 

I’ve highlighted the common scenarios above where a wrap product might be a good fit for your super.  

If you want to invest your super in unlisted assets like direct property, your only option will be an SMSF.  

Otherwise, an industry super fund, or potentially Vanguard Super pending my review next year, will likely be your best choice.