Are you an employee of a government Health department who contributes the standard 11% of your income to your Super? Or are your a business owner or GP sole trader who makes ad hoc contributions? Understanding where and how your money is invested is crucial. This article aims to clarify how Superannuation funds utilize Index/ETFs (Exchange Traded Funds) for cost-effective super investments. While super costs are decreasing significantly, it's important to question where the value lies for you as an investor.

So, how do we break down this challenge? First, we'll examine the costs. Then, we'll delve into what you're truly investing in and how it has performed historically. In summary: there won't be a one-size-fits-all "perfect fund" conclusion. Each of us has distinct needs and objectives and this article serves as an educational exercise for you as the reader, and also me as the adviser in writing and researching it.

If you are already bored, please just look at the table at the end to compare returns after costs. Or book a meeting and we will tell you if there is value in seeking advice or if you are fine where you are.

“Low cost is always best!”

While this holds true when comparing identical items, it's seldom the case. As an advisor, I emphasise transparency and functionality. These aspects enable me to provide sound advice based on my experience and philosophy. If your aim is to invest in super and let it grow for decades without constant concern, the fundamental “cost versus return” equation becomes most significant overall.

However, understanding what your fund invests in adds another layer to this seemingly straightforward risk/return equation. Yet, as a doctor juggling young kids and countless responsibilities, this aspect is likely not your top priority. Keep in mind that Superannuation is well-regulated. Despite the common tricks and misconceptions employed by those vying for your investment in this competitive market, you'll likely encounter similar offerings across most providers you can access directly.

Naturally, there's the option of establishing a Self-Managed Super Fund (SMSF) and venturing into uncharted territory, which carries substantial risk. But that's a conversation for another occasion.

Balancing Pros and Cons

As with any multifaceted problem, there's a multitude of pros and cons within each solution. This understanding can help shed light on various aspects you might not have previously considered.

In summary, the pursuit of a low-cost solution is commendable, but it's important to discern whether the cost aligns with value. This article aims to equip you with the necessary insights to navigate this intricate landscape and make informed decisions.

There are many resources available on this including the Moneysmart guide developed by our regulator ASIC.

Let's take a closer look at three low-cost industry super funds. Each fund will be discussed in more detail, and links to their websites will be provided for further information. While complete transparency might be a challenge, these funds offer insights into their workings. It's important to note that we frequently collaborate with these funds to assist our clients, but we maintain an nonpartisan stance without any affiliations, payments, or incentives, either direct or indirectly.

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• Australian Super Diversified Index

  Australian Super is the largest fund by a decent margin with 1 in 10 workers in Australia as a member. This gives them significant clout to drive down price on outsourced investment management. They also tend to have a good sized portfolio of unlisted infrastructure, property and “alternative assets”. Personally, this lack of transparency doesn’t sit well but they have had a good track record and low costs.

  more info…

• Aware Super High Growth Index

  Aware has its roots in a NSW Public sector fund (govt employees). It has since merged with Health Super and more recently WA Super and Vic Super. This process was completed earlier this year and Aware have been actively engaging with advisers to provide their members with advice as required.
  
  more info…

• Hostplus Balanced Index

  This fund was made wildly popular by Barefoot Investor based on the simple reasoning of it being the lowest cost super fund. It is the lowest “risk” fund in this list. Hostplus offer many other investment options but none are as generously priced.
  

  more info…

• Retail platform (prescription only)

  Retail funds are primarily used by advisers and offer massive choice in terms of investment options and managed funds, often offering whole sale options. They also offer structures such as Separately Managed Accounts that increase transparency and flexibility significantly over industry options. Other than direct property and off brand assets such as crypto that you would need an SMSF to access this is the highest level of choice you will find.
  Unfortunately, I can’t tell you who this is as that would be too specific. Likewise I can’t say who the aggressive index manager is but they manage funds in the trillions so are larger than all other options put together.
  The Lonsec fund was chosen as its simply a typical example of an actively manged “model portfolio” or “fund of funds”.

Cost Comparison

Diversified Index Fund	Admin Fees	Investment Fee	Fee @100k bal	Fee @500k bal
Australian Super Diversified index	$52 + 0.21%**	0.14%	$292	$1,102
Aware High Growth Index	$52 + 0.15%	0.10%	$302	$1,302
Hostplus Balanced Index	$110.91 + 0.0165%	0.04%	$134.50	$360.50
Retail - Aggressive Index	$275 + 0.18%**	0.36%	$815	$2,975
Retail - Lonsec Active Growth	$275 + 0.18%**	1.1725%	$1,627.50	$7,037.50

• Fees are either in flat dollar fixed fees or a percentage of funds invested. No performance fees included.

• Admin fee can be made up of trustee fee, admin fee, expensive recovery etc etc.

  ** Sliding admin fee decreases as balance grows

Risk and Return - Stay true to label

When considering financial options, it's imperative to grasp the concepts of risk and return, as well as the distinction between passive and active investment styles. When considering any investment we start with what is the objective and the time frame. Are you building up savings for a house deposit in a year or so or are you investing for retirement in 30 plus years. Rather than go over old ground it’s worth reading this article from Vanguard on this subject.

Vanguard Asset allocation

Understanding "Balanced" Asset Allocation

The term "balanced" might seem straightforward, indicating a 50/50 split between growth assets (shares and property) and defensive assets (fixed interest and cash). However, super funds, particularly industry super funds, often employ the label "balanced" despite deviating significantly. In reality, a typical "balanced" fund can have an asset allocation of 70% or even 90% toward growth assets. Over the long haul, a higher allocation to growth assets yields greater returns, which becomes a distinguishing factor in fund selection.

This strategy also carries a psychological dimension. Less-informed investors often opt for the perceived safety of a "balanced" approach, even when young. This inclination to play it safe actually serves them well over the long term, as evidenced by the returns comparisons below.

Exploring MySuper Options

Upon joining a super fund, you'll often encounter MySuper options, which usually serve as the default choice. These options feature a dynamic asset allocation that adapts as you age. In your early years, when immediate access to super isn't required, the allocation leans heavily toward growth assets. As retirement approaches, this gradually shifts to more stable defensive assets. This strategy mitigates sequencing risk, preventing losses just before retirement withdrawals. While MySuper serves as a hands-off approach, we believe a more active role in super management is advisable, beyond checking it once a decade.

Risk (asset allocation) vs historical Return Comparison

Diversified Index Fund	Growth Range	Target	1 Month	3 Months	1 Year (p.a)	3 Years (p.a)	5 Years (p.a)
Australian Super Diversified index	40-100	80/20	1.37%	2.19%	11.56%	7.44%	6.44%
Aware High Growth Index	68-100	88/12	2.67%	4.33%	n/a	n/a	n/a
Hostplus Balanced Index	40-100	75/25	1.86%	3.18%	12.34%	8.0%	6.49%
Retail SMA Aggressive Index	80-90	85/15	1.5%	2.6%	13.2%	9.3%	6.8%
Retail - Lonsec Active Growth	75-85	80/20	0.71%	1.58%	8.27%	6.56%	4.63%

• Returns at June 30th 2023.

• Aware was restructured Nov 2022 so yearly historical returns are n/a.

• Returns are reported after investment fee but before admin fee

That’s a lot of numbers but what do they mean?

If you look the “Target” column you may agree that the allocation to growth assets is not wildly different from one fund to the next. Industry options may use different names, diversified, growth or balanced but none are really “true to label”. The key takeaway to note is that returns are similar across all options but the retail options have very tight ranges of asset allocation while still employing strategic asset allocation.

What is an Index Fund?

An Index Fund is typically an ETF (exchange traded fund) that allows an investor to buy and sell a parcel that tracks an index. So rather than buying shares in all the top 200 companies in Australia one by one you can simple buy an ASX200 index fund. These funds are available for every index imaginable and some examples might include the S&P 500 in the US or MSCI World that focuses on developed nations across the globe, the list goes on. These investment simply mimic these indexes and do not try to pick winners or losers, keeping costs low by using a passive investment approach.

There is always going to be cases where one particular company or market sector of an index will do better or worse than the index as a whole but I subscribe to the school of thought that the cost of chasing returns with active management offsets the gain. On average, this has proven to be correct for some years now. More detail on this in the SPIVA Report if you are interested.

In the interests of comparison i’ve used a common “model portfolio” developed by Lonsec which blends together active mangers. Lonsec are an Australian funds research house that is widely regarded as industry standard.

Diversified Index funds and Strategic Asset allocation

A diversified index fund bundles together multiple index funds to increase diversification even further. They might blend one more indexes to invest in Australian shares, international shares and even have some cash and fixed interest in there. The weighting in each will vary according to asset allocation as we discussed earlier so a high growth fund will have most funds in share indexes and multiple managers while have only one fixed interest ETF. A defensive option might have multiple fixed interest indexes and only one share index.

Diversified investment options often have ranges in each market sector that the manager may move between. Investment managers do start to play some part in active investment here where they might minimise their exposure to one index they don’t see good future prospects in and maximise another. Strategic asset allocation does still need to operate within the predetermined ranges regardless of market conditions and the process of changing this asset allocation is usually undertaken quarterly if not yearly. You can invest in sector specific options at low cost but they do not benefit from rebalancing through strategic asset allocation and will need to be done manually, also incurring trading costs. If left unchecked growth in one sector can leave a portfolio significantly misaligned with the original investment objective.

Is cost Equivalent to Value?

Before we delve into the world of costs, it's imperative to grasp the concepts of risk and return, as well as the distinction between passive and active investment styles. Furthermore, it's essential to recognize that identifying risks or costs might prove challenging when you lack the expertise. Spending 15 hours researching the right fund might leave you more confused than when you started and it's ultimately a sunk cost. Unseen risks can elude those without the necessary experience or knowledge to identify them.

The Unseen Costs

Accounting and audit fees for a Self-Managed Super Fund (SMSF) often remain hidden the same can be said for platform or trading fees. These fees might not be readily apparent to the untrained eye, which typically focuses on annual return on investment and the balance difference from start to finish. Similarly, adviser fees, whether a percentage of your investment or a flat fee, can accumulate over time without adding commensurate value. The intricacies of this complex issue yield both advantages and drawbacks to each solution.

Performance Comparison (after fees) of cheapest and most expensive index fund

Account balance	Hostplus Balanced Index	Retail Aggressive Index	Aggressive Wins By
$100,000	$12,212.59	$12,745	$532.41
$500,000	$61,506.59	$63,650	$2,143.41
$1,000,000	$123,124.09	$129,650	$6,525.91
$2,000,000	$246,359.09	$261,650	$15,290.91

So yes, the fund we have been using for the majority of our clients beat the lowest costs fund last financial year. We do charge a retainer of $110pm though so this needs to be considered as for lower balances this would mean you lose out as a straight comparison. Having an adviser who uses a retail platform has all kinds of tangible and intangible benefits and you just need to weigh up if those are of value to you. Hopefully this article has been helpful in breaking down this complex problem. This is not to be considered personal financial advice of course as to provide this we need to consider you as a unique snowflake and how these products might suit you and you alone.

At the start of 2022 bond rates started to rise again. Signalling the end of ultra high returns on share markets and low interest rates. The same as it did earlier this year….and last year, the road ahead of us seems uncertain and maybe even a little bleak but we know it won’t last forever. In recent times many succumbed to FOMO and bought the big house or jumped into a share portfolio while they were at record highs. We know the old saying “the right time to invest is now” as, over time, most assets increase in value but it’s been so easy to forget this is not normal. As the Fed raises rates only 0.25% and the market reacts strongly, I think its time to talk about fundamentals.

The Sky didn’t fall for the generations before us.

Many of us have become accustomed to thinking in shorter time frames. Thinking more than a couple of weeks into the future seems difficult. Making a solid plan or bookings even 12 months away, have become a fantasy we are afraid to allow ourselves to commit to, after constant disappointments. The same can be said for looking back at history, with even a few years ago seeming like a far distant memory.

Since the global financial crisis in 2007 share markets have had a few blips, but have been generally very strong. Interest rates have been almost nil and it has been very easy to borrow money, further fuelling growth. For many, it would appear that this is normal, when in reality we have been living through a period of unparalleled growth. While the pandemic may have hampered our daily lives it surprisingly did very little to slow global growth as the demand for goods, services and real estate continued to rise.

A few years ago now I wrote a short whitepaper that was designed to help medical professionals understand the financial planning process and how it fits with their careers. The world is feeling a little more chaotic than usual right now. As we come out of the pandemic it’s hard not to look at rising costs of living, staff shortages and volatile share markets and think to ourselves that we are facing unprecedented times. Sure, there have been some significant events but the fundamentals at play are still the same as they have always been. We just need to be careful to remember that change is the only constant and although growth is slowing and storm clouds are building, we will be back in the green at some point.

What can we learn from history?

In the late 1980s (when we last saw inflation rise to todays levels) interest rates peaked at around 17%. Though its difficult to imagine that we might get back to these kind of levels I think its more reasonable to look a little more recent history we can see that a neutral rate sits around 7% as it did in circa 2007. Even with this weeks rate rise we are still at less than half of that at 2.9% . This weeks rate rise of 0.25% breaks trend with the now expected 0.50% rise, which indicates that rates rises are having the desired affect and growth is slowing but we still have a way to go.

In recent times, property prices have increased significantly, with a 10 fold increase since the 1980s. The 17% rates in 1980 would have been difficult for home owners to manage, but they applied to an average $70,000 mortgage rather than a $1,000,000 mortgage. Since then wages have obviously increased from around $15kpa to around $60kpa. So while average income has increased 400%, property prices have increased 1,000%. This disconnect alone is good reason for rates to stay at historically low levels for some time. Even though they are starting to drop, household savings are higher than they have been since the 1980s meaning we all have a greater cushion to deal with financial setbacks but this is not limitless.

Cool numbers, what does this mean for me?

To put this in context, if you purchased a home recently it’s likely you have a mortgage of at least $1mil. Your monthly payments on a loan like this will have increased by $1,520pm since the start of the year. Still a long way from the $14,257pm total that you might be facing if the extremes of the 1980s came about and rates ended up at 17%.

If, like a large majority of home owners, you have fixed all or part of your mortgage at sub 2% rates you likely won’t have noticed any dramatic change. When these fixed terms come to an end, and your interest switches to the current variable rate, it likely will be quite a shock financially. This will be amplified by a higher cost of living in a high inflation environment. Property markets in many areas have already started to drop, as supply increases due to investors or owners offloading property that they know they wont be able to afford with higher repayments. All these elements create an expensive environment for property owners. What is key is looking carefully at your finances to budget for the inevitable.

Time to budget!

Here at NOR are aware that budgeting can be considered a pretty dry subject. Understanding where your money is being spent and ensuring that your budget can handle higher repayments is key to being able to continue your lifestyle. A simple solution is to calculate your repayments based on your minimum repayment using a 7% interest rate. While that might be an overkill for now it’s very likely that rates will return to this level at some point over a 30 year mortgage so paying more off your principal now could be simply considered a tax free investment. Plus the more you pay off your principal earlier the easier it will be to adjust your borrowing later.

There are many resources available to help you understand your budget WeMoney is a good example but there are many others. The Barefoot investor has a widely recognised budget plan which I think is good in principal, but doesn’t work well for higher income or even higher debt households in this environment. Like much of Pape’s work, this is dated and oversimplified but as a simple guide this is still one of the best.

An ex Adviser Glen James took this even further with his spending plan which is part of his book Sort Your Money Out and Get Invested. We sent a few copies of this out last year and it has been well received.

Once you understand where your income flows to you will then be empowered to know where you might be able to make adjustments. Then you can start to anticipate changes that can be made both now and over set time frames. This is a foundation of goals based advice, knowing what you want to achieve and creating a realistic plan to make those goals happen.

Sanity check

One of the first things they taught me in Senior First Aid (my highest level of medical qualification, now expired) was to first check for danger. If you are rushing into anything, be it buying a home or investment property we advise you to stop and ask why. Will it make my life better in the short or even medium term? Am I worried that I might miss out on massive financial gains? Am I trying to keep up with the Jones’ and others on social media?

The majority of our clients are doctors in training with young families and this means A LOT of pressure - at work, sitting exams and financially. Are you ready to commit to $X per month over the next 30 years for an investment property or is this going to drain your savings and you will need to draw on it in just a few months and then feel guilty for it? Do you need the big house (with the big mortgage) or will you struggle with repayments and should wait until post fellowship?? Are you using reasonable assumptions on interest rates and costs to furnish and renovate your house?

One thing I can say for sure is that when doctors finish training programs they usually have a very significant increase in income and decrease in expense. They also have far more spare time to spend money! One of the traps this cohort can fall into is a feeling that they have been putting things off during the last couple of years of their training and need to “catch up”. This can lead to lots of big decisions made quickly - often involving moving house or investment property purchase.

Work through your options, understand your tolerances

Whether it be through a financial adviser, mortgage broker or trusted business colleague, you need to work through your options with someone. Start by getting your budget air tight and including tolerances for various things such as holidays and maternity leave etc etc. Once you have sorted out your budget, you can start to look at what you really want in terms of property investments and how much you are prepared to pay for them. That might be the million dollar house in the perfect area, or potentially a less expensive home as a stepping stone/investment property with an investment home so you can retire earlier. It’s very often not an all or nothing approach and property ownership should be considered as part of an overall healthy financial portfolio.

As always, this is not to be considered personalised financial advice that takes into account your unique needs and circumstances. This has been written for education purposes only.

In honour of R U OK day we thought we might share some insight with you for Friday afternoon. The last few years has placed great strain on everyone and this has been especially pronounced in the healthcare system and the Doctors that work within it. Lets walk through how underwriters assess mental health when Doctors apply for Income Protection Insurance or other Life Insurance products.

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I was reading an article written by Dr John Cummins recently and thought to myself “Do my clients know that more than half of the insurance applications I do have some form of mental health disclosure?” is the stigma of mental health treatment as prevalent as it always was?
Let me make it clear that I am not medically trained and even though a did a couple of basic units of Psychology at University am am in no way qualified to understand the nuances of mental health conditions and their treatment.
I am however very experienced in how insurance underwriters assess risk and have taken a very keen interest in how mental health is assessed for many years now. This is very relevant to Doctors who, while their job may or may not be extremely demanding in a physical sense, often work under significant mental strain as they literally make life or death decisions on a daily basis and work in a very competitive environment.

Look after yourself first!!!

Occasionally I am asked “I’ve been thinking about seeing someone but I’m worried it will affect my insurance cover in the future”. I will respond to this in the same unequivocal manner every single time. If you feel like you are in poor health, physically or mentally, your ability to obtain insurance cover in the future should be the absolute last thing on your mind. Look after yourself first!!! The purpose of any type of Insurance is not to be profitable or a windfall. It is simply a safety net that protects you if something significant happens to you. The goal is always to live a healthy and productive life and no amount of cover is going to replace that. Early diagnosis and treatment of any condition decreases the likelihood this will become a significant problem that leads to any claim.

How do insurers assess mental health risk?

An insurance company operates under a pretty simple basis. They need to assess in advance how many claims they will have and ensure they have enough funding (clients paying premiums and return on capital pool) to meet this cost, with a reasonable profit margin. You can start with population risk (the probability that X number in 100 will get Y condition that would lead to a claim) and then create subsets based on each profession and age and gender. It might sound simple but there are gargantuan amounts of data that go into this process as the insurer is literally trying to predict the future. Ultimately, this is how the premiums are derived for “standard lives” that match the terms of the insurance contract in the PDS. The underwriting process assesses if the applicant is a standard life or if they are more risky. If it is determined that they are more risky the insurance can either add additional cost (known as a “loading”), exclude the specific condition or remove risk completely by declining cover entirely.

As medical professionals are trained to look for signs of ill health, mental or otherwise, and have easy access to diagnosis facilities they often go looking for things that most of the population would not even consider. This means they often have highly complex cases that need to be considered in the right context. As I said, I am not an underwriter and I am not medically trained. This is simply my interpretation of how an insurance company will assess risk the risk of a mental health claim in based on my own professional experience. I don’t get access to underwriting guidelines and databases but these themes are common.

1. There is no treatment without diagnosis

   If you are seeing a psychologist or taking medication prescribed to treat a condition it is assumed there is an underlying condition. Quite often a formal “diagnosis” has not been made but there is still a history of treatment this is where discretion and expertise comes in.
   Example: Workplace counselling is offered by your employer. You accept and have a few sessions with a psychologist and talk about your work and chat about your partner not packing the dishwasher correctly and you consequently yelling at them after a hard day. They discuss your support network and help you build your mental health toolkit. You wish each other well and off you go feeling better about getting a few things off your chest.

   Yes you have “ticked the box” that says you have seen a psychologist but does this mean you are a higher risk? Skilled underwriters look at each case and are always up for a discussion around context and often this is put aside.

2. Is this a reasonable reaction?

   If you have ever has the displeasure of losing a loved one or a relationship breakdown you will know that this isn’t something you shake off and head to work the next day fresh as a daisy. Reaching out for help from your GP or other avenues is not only reasonable but is a far healthier option than ignoring a problem until you are no longer able to function at all. The additional risk comes when there is no apparent external “trigger”. If you are seeking treatment with no know cause this could simply be a chemical imbalance or some other internal issue that means you appear to be higher risk than the population.

   Example: Your parent passes away unexpectedly and you take a couple weeks off work and see a psychologist for 6 months with no medication.

   This is clear trigger but the treatment is not a “one off” as it ran for 6 months. Typically speaking if this was more than 2 years ago its unlikely that an exclusion would apply.

3. Time frames and severity

   Was this condition a once off or has it occurred multiple times? Was this simply a low mood and a couple days off feeling stressed out or anxious? Do you need to seek professional help regularly?

   Example: You have been studying for years and even crammed for 9 months to study for your final exam. Half way through sitting the computer system crashes and they tell you all to go home and come back in 3 months for the next one. You’ve put your whole life on hold for this and you see your GP to discuss and they diagnose you with generalised anxiety and prescribe you with an antidepressant which you take for 6 months at low dosage. You pass your next exam and you’ve been a fellow now for 6 years with no further treatment.

   If it’s been some years since any treatment (5 as a guideline) and this was a short once off time frame, it’s unlikely that an exclusion would apply. The real discretion here is that even though the exam may appear as a trigger and the subsequent treatment a reasonable reaction reasonable this is actually related to the workplace which you operate and is not an external trigger as discussed in point 2 but more an inherent part of your job.

4. Is treatment effective and stable

   The brain is a very complex organ. It’s often very hard to say that one condition did or didn’t lead to another and stress and anxiety is the vast majority of cases that lead to an exclusion as the insurer simply doesn’t know what this might develop to so is assessed based on the first 3 points. However, there are some conditions that can be well treated as a chemical imbalance. ADHD for example can be well treated and with a long standing history showing this it has been possible to obtain cover for full cover for mental health conditions.

Results of an assessment

Once underwriting process is complete and the above points considered the insure will either issue a contract as “standard” or they will offer amended terms. It is very rare for an insurer to use a loading for mental health conditions but very common for them to exclude mental health claims entirely. Other than severe cases that might include suicide attempts or other significant risk factors it’s not often a case is fully declined based on a mental health issue alone.

As we specialise in providing advice on insurance for Doctors we take the time to carefully understand each case so we can frame a case for the insurance underwriter. If you are ticking boxes online or being sent to the insurer for a “tele-interview” it’s unlikely this will information will come to light until much later and this can slow the whole process down with a lot of back and forth. While we don’t relish the thought of discussing some of the hardest times in our clients lives this is relevant to your case and we are your advocate throughout this process. After all, when we set up insurance cover we are putting in a place a worst case scenario plan that, if done well, greatly reduces the burden at what may be one of the hardest times in your life.