Should we worry about selling our gas network to Hong Kong? Here come the rate rises. How financial adviser Terry McMaster has made history.

This week in The Money Cafe, James Kirby and I discuss:

  • What should we be doing before the EOFY? Super caps, property changes.
    • If the ALP gets voted in next year, it’ll change everything with property taxation, so get in while you can.
  • Economic news, dot plots, US looks likely to raise rates again soon .
  • Casualisation of the workforce. Low wages growth changing our sense of shared prosperity: RBA gov.
  • Trump’s tarriffs: economics or politics?
  • The foreign takeover of Australia’s gas pipeline.
  • I’m not happy with this new model of takeover bids: it isn’t reasonable or fair.
  • Dover Financial Advisers goes bung. The man who collapsed in the royal commission makes history.
  • Which stocks get lifted by rising rates?
  • What’s a young and honest financial planner to do (some career advice for a troubled soul)?


Hello, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

And we are The Money Café.

The Money Café.

Now, James, it’s close to the end of the financial year coming up in a couple of weeks’ time. 

Yes, two weeks to go already.

So, what are the things we should be doing?

Where should we start, Alan?

Is this a question without notice?  Come on.

Not really, I’m well across it actually.

I should think so.

Yes, both personally and professionally.  It is worth putting this on the table because most years it’s sort of routine, you know what you should do, etcetera, but this year is really different because this is the first full financial year that all those big super changes came through, those caps for instance on how much you can have in super paying yourself a tax free income, how much you could contribute.  That all changed this year.  How you can contribute, you can contribute by yourself.  Forever your employer had to cooperate with you if you wanted to do some salary sacrifice and now you don’t, you can just do it by yourself.  You can just put in a cheque to your own super fund and make it a deduction.

But you don’t have a pre-tax cheque of your own, you only get pre-tax money.

Yeah, you’ll get a rebate.

You get a rebate?

You get a rebate.  They have that all worked out.  Also, just so anyone who is making plans about investment like property for instance the crackdown on travel to property kicks in.

Remind us what the non-concessionary cap is now.

The non-concessionary cap is 100,000 a year and the concessionary being the pre-tax one is 25,000 a year.

Yeah, so everyone can look at how much they’ve put in so far this year, this is out of their salary, they can look at that and they can top it up concessionary and then say okay and I’ve got some money elsewhere or whatever, and they can whack that in as well but it’s non-concessionary but it’s good for that money to be in super because it’s concessionary when it’s in there.  You don’t get a concessionary tax rate on the way in but it is concessionary when it’s in there.

That’s right, it is for all the controversy and headlines about super this year, it’s the best tax protected way to invest and you can invest in anything.  By the way you can invest in property and you can borrow from property and a point that was missed a bit in the productivity commission coverage was that one of their throwaway lines, if you like, is they had no problems with borrowing in super so hopefully that will be left alone.  Standing back from it the other thing is if you are planning tax or any big projects of your own to buy a property, sell a property, whatever you might be thinking do keep in mind there’s an election next year and if ALP get in, as they are expected to do, they are going to just turn things upside down in terms of what you can do and negative gearing will be gone on old properties for instance.  If you want to negatively gear a new property that isn’t a new house and you have that in mind you want to get started.

Because it’ll be grandfathered.

That’s right.

Existing negative gearing arrangements will be…

You’ll get in under the line and that goes for all these things, capital gains tax basically is going to lift and that’s on the agenda, and the franked dividends of course as well.  If you’re retired you get a cheque these days for your franked dividend rights, if you like, and that’s going to be scrapped.  For what it’s worth the ALP have reconfirmed all those in recent times.

We need to rely on grandfathering.

We do.

I’m a grandfather now, did you know that?

Yes, indeed you are, of one, isn’t that right?

Yeah.

What’s his name again?

Alfie, well it’s short for Alfred.

Alfred, very good.

And we love Alfred.

Very good, well you might have some plans for him, you might be thinking of a family trust or something.

He’s been grandfathered from birth by me.

There you go, he’s been grandfathered by you.  Hopefully financially you have some vague plan for him.  Okay, so that’s EOFY, end of financial year, you’ve got two weeks folks and make your charity contributions too.  We might as well say this once a year, Alan, make your charity contributions, go on, do it by June 30, tax deductible.

Indeed, that’s right.  There’s been a bit of economic news this week.  Interestingly none of it moved the markets, in fact there has been news this week there was the rate hike in the US last night.

Yes.

There was apparently a bit of a meeting in Singapore the other day between…

An allegedly historical summit.

These two characters, both of them have been in a good paddock it must be said.  Anyway, they had a meeting, that didn’t move markets.

Up or down, yeah.

It didn’t do a thing.

Yes that’s right, so what do you think, what do you draw from that?

And we had employment data this morning for Australia, it didn’t move markets so markets are unmoved.

I don’t mean to be flippant because of course the potential of the Singapore summit is immense in its potential but in terms of actual occurrences the one that matters to investors in the short term at least is the US rates lifting last night and continuing on their merry way.

Except that it was entirely priced in, everyone expected it.  All the focus was on the statements and the dot plot, the dot plot being the projections by the 17 members of the federal open market committee as to what they think interest rates will do for the rest of this year and next year. 

Why don’t you tell where we’re at and where they think they’re going?

Well the question is what’s the median and basically what happened was that the number of members of the FOMC who believe that there will be two more rate hikes this year went from 7 to 8.  What they call the median of the dot plots just went up a bit and basically everyone is now reporting that the federal reserve believes that interest rates will go up twice more this year so for a total of four times this year.

What are U.S. interest rates, ours are 1.5, what’s theirs?

I see, so they increased by a quarter of a percent to target – they actually have a range in the U.S. of 1.7% to 2%.  It was 1.5% to 1.75%.  Most people as a matter of shorthand just talk about the top of the range.

Yeah, they move them to two, that’s what’s going to happen.

They move the top of the range from 1.75% to 2%, our rate is at 1.5%, very rarely are our rates below Americas.  It hasn’t really happened for quite a long time.

Is it bad for us necessarily?

Well it’s basically a reflection of the relative strength of the economies.  It just shows what markets…

In an ideal world would you have Australian rates above American ones?

Well usually Australia rates have to be above American ones otherwise money would flow out of the country.  Interest rates here are below because our economy is so weak and the reserve bank here has to keep the interest rates down in order to try to keep the economy going and really the employment data that came out today was reflective of that.  The unemployment rate fell from 5.6% to 5.4% and that was entirely because of a fall in participation rate and so employment rose 12,000 against expectations of 19,000 but it was all part time work.

I saw last week the ABS said, and this is actually the first time in history, that less than half of all workers in Australia are now full time.

Is that right?  I didn’t see that.

Yeah, now that includes self-employed, remember, but less than half of all workers are now full time.  It’s a deep trend.

That explains why the underemployment rate remains so high and did not actually fall in the latest months.

Yeah, and I think it’s probably our BT Mega Trend sponsored by BT Financial Group, the Mega Trend moment this week has to be that issue of casualisation of the workforce and what it means for everyone, a worker, an employer and investor.

Related issues were raised yesterday by the Governor of the Reserve Bank, Phillip Lowe, in a speech where he was talking about how wages growth is so low in Australia and he’d actually said that the low wages growth is damaging our sense of shared prosperity as he put it, which is harming prospects for reform because everyone is so grumpy about it, don’t want to embrace or see any economic reform really.  He was saying that it would be good if wages growth went from 2% to 3% and he talked about how he believed a result of both technology and globalisation and it’s actually worth going onto their website and having a read of his speech.  It’s quite an interesting exposition on what the role of technology is playing.  Basically, he talked about how there’s a big dispersion between the winners from technology and the losers among companies.  What’s holding wages down in his view is the fact that the losers are really losing and they’re falling behind, and they are focussing on costs and holding wages down.  The winners aren’t paying high wages because they don’t have to.

Now, here’s the mystery, why don’t they have to?  Wouldn’t you think if you’re doing well in a company that’s doing well you’d be knocking on the door of the boss?

Well he said in the Q&A afterwards, somebody asked him about exactly that and I wasn’t there but I’d read later that he said that he often says to big companies, and winners and so on, why don’t you pay more wage rises because you can. 

Don’t tell me they’re going to say no one asks?

No, what he said was when he asks that they look at him as if he’s completely mad because they say well why on earth should we, we can’t, it’s too competitive.  We’re out there trying to compete, yes, we’re making money but…

It’s clearly not competitive enough on the talent.

It’s terribly competitive, it’s all terrible.

Yeah, but it can’t be competitive enough on the labour front or they would.

That’s true, yeah.

Interesting, isn’t it, but you’ve got to think behind it all is the casualisation of the workforce and the fact that less than half of all workers, as I say, are now full time because part time people don’t lobby for pay increases and don’t expect to get them. 

Just to cover off on the trade war Donald Trump thinks that the answer is tariffs and he’s completely wrong.

I don’t know if he thinks the answer is tariffs, he knows his economics.

He does, he wants whack tariffs on everything.

But the tariffs are political, they’re political, they’re not economic, they’re not an economic imperative.

How true, James.

There’s a [overtalking].

That is a penetrating observation if I may say.

This is what our listeners pay for.  Actually, they don’t pay for it it’s free, folks, but there you are.  Alan, tell me this, did you see the monster and underreported but absolutely monstrous $13 billion takeover yesterday which if it was of a department store would have been on the front of the news but barely got a line because no one is interested in gas pipelines it turns out except for Cheung Keung of Hong Kong, linked of course with Asia’s richest man Li Ka-shing.

They already own half of Australia’s gas pipelines already, they own Duet Infrastructure or Duet Pipelines I think it’s called as well as Envestra which is another pipeline company so they want more.

They’ve been accumulating the pipes which carry the gas in Australia.

But, if I may correct you, James, you said that they made a takeover offer, they did not.  What they did was they made an indicative non-binding proposal.

Yes.

And that’s what everyone makes these days, they put in an indicative non-binding proposal which I think is absolute rubbish and by way of preview of my column in The Australian this weekend I think that something ought to be done about it.

But they open the books to them all the same.

They do.

Are they legally bound to do that or is it friendly?

CK Infrastructure, this Hong Kong company that owns two pipeline businesses in Australia already, comes in and says well we’re going to make an indicative non-binding proposal, please open the books and give us due diligence of your most intimate secrets and the board says fine, in you come.

They said fine because they like the bidder.

Well, there’s no bid there’s an indicative non-binding proposal.

They like the indicative non-binding proposal, they must, they don’t have to open the books, they could have said take a hike.

They can say to Mr CK Infrastructure make a bid, thanks very much.

Yes.

The idea that CK Infrastructure needs to get inside the company to understand APA Group is rubbish because in my opinion they know everything about it already, they do not need due diligence is what I’m saying.  What it sets up is an information disparity between the buyer and the sellers.  The buyers get intimate details through due diligence of secret information, the people who are selling the stuff to them which is the shares, they don’t have that information.

They’ve handed their cards across the table.

We have an information inequality.

That’s interesting, worth a look.

Which I don’t think is reasonable or fair.

That’s a good point.  It’s true, they are becoming more and more but this is $13 billion and, I might add, I suppose you could say it has a national security dimension, it has an energy security dimension doesn’t it?

Everyone is carrying on about the fact that they’re foreign and they own all of our pipelines and isn’t that terrible. 

But it’s a fact.

It is a fact, exactly. 

And it is energy.

I think we’re all citizens of earth, now aren’t we?

I know we’re all citizens of earth but to add to the issue of playing it fair the fact that it’s a Hong Kong based unit is probably worth pointing out.

Tell me about Terry McMaster, Dover Financial Advising, or something…

Yeah, Dover Financial.

They’ve gone bung, right?

Yeah, there’s a couple of things we didn’t know.

What?

It turns out they’re among the biggest financial advisor groups in Australia and 400 advisors, which is a lot by the way.  This coming tomorrow actually I have done the cover story for the deal magazine, once a year we do the top 50 financial advisors and we name them tomorrow, very exciting day for us all.

I hope Dover wasn’t among them.

It wasn’t, I am relieved to tell you that it wasn’t there.  I did look with my teeth clinched.

I assume the magazine was printed a little while ago before Dover’s troubles emerged.

Yes, it was actually sent to print before they went and closed the doors last weekend but you see it’s such a good survey and such high quality that those sort of people didn’t get in.  I do want to tell people about this story.  Terry McMaster we might all know as the man who collapsed in the Royal Commission and was taken away in an ambulance, that was him.

I remember that picture.

Remember the picture with his tie askew.

But he was sitting up in the trolley, as bright as a button he was.  I remember, he clearly didn’t look that sick to me.

Things were only going to get worse for Terry, I’m afraid.  When he went back to the office he realised that his business was in deep trouble.  He closed it without notice last weekend and the thing is there’s 400 advisors and unless they get in and get a new job by July the second and get under another license they’re high and dry.  There’s an estimated 30,000 to 50,000 clients.

What happens to them?

What happens to them.

What happens to their money?

There’s no precedent, it’s unprecedented.

Really?

Never happened before.

You don’t know what happens to their money?

No one knows what happens to them.  Let’s say you have all your money advised by Jack and Jill of Dover Financial and they don’t get another job by July the 2nd, then they’re not going to advise you because you’re unadvised but you’re not advised and then if something goes really wrong what’s your position.  I tell you what, the regulators want to rush in there and sort that out actually, the regulatory framework.

It could be argued that given Dover Financial’s track record being unadvised by them is an improvement.

Very funny.  I take your point but the thing is you’re not covered by any of the legal safety things.

This is an amazing story, this bloke Terry McMaster has just closed the thing.

I know, first of all that he built such a big business and secondly that you can just close down like that.  You shouldn’t be able to but then he was going to be closed down is the strong sort of surmise, I suppose, from all that ASIC have been saying, that it was going to happen.

Do we know what happened, is he a victim of the Royal Commission in some way?

Well, he is clearly.

Was he having a crisis personally or something?

Well, he is clearly a victim of the Royal Commission, that’s for sure, absolutely.  I mean the business was not viable and while we’re talking about financial advisors another business that was not viable was Sam Henderson after he got completely hauled over the coals in the same commission in the same session.

Has he gone out of business too?

He quit personally, he personally quit financial advice.

He’s had to get a proper job now.

He’s not on the list either by the way.  I will say that we’re fortunate but also we do our research very thoroughly.  Will we look at the questions?

Yes, let’s look at the questions.

The first one is about the takeover that we were talking about.

So Nick says I note that the takeover offer for APA Group by CKI didn’t seem to hit the news much last night.  I think it did, Nick.

It didn’t hit the news as big as you might think.

Given the focus on gas prices I would have thought the sale of the majority of Australia’s gas transportation infrastructure to a foreign entity might have been more newsworthy outside of the financial sector.  As a shareholder it would be nice to see more infrastructure companies focussed on using profits for growth in conventional assets, gas, and alternative solar and wind available on the market for investment not less.  Any thoughts on the likelihood of this proposal making it passed that ACCC and FIRB hurdles and on the type of assets we should allow foreign owners of in general?  Very good question, Nick.  I read this morning that CK Infrastructure told APA Group when making the approach that they’d already spoken to FIRB and they thought it should get a tick.

They got an indicative…

But, you take that with an absolute grain of salt because they would say that, wouldn’t they?

Well they can get a thing called – I don’t know what it’s legally called but they can get an advance sort of.

They got a bit of a nod did they?

Yeah, you can get a nod.

I don’t know what the ACCC is going to say but as we mentioned before CKI would own tonnes of Australia’s pipelines.  I take Nick’s point that we don’t like all this stuff coming off the market and being made unavailable for investors.

Yeah, that’s a kind of slightly different question, the de-equitization.  There was a very good report a few months ago about this and actually the Australian stock market has shrunk, it has.

Yeah.

And this is going to shrink it $13 billion.

What?

This is a $13 billion shrinkage.

Yeah, I know, it’s a big shrinkage.

It’s a big one.

Yeah I think Nick is onto something there and I reckon the ACCC should knock it back, go Rod Simms.

I don’t have an issue with the shrinkage because I think it’s a market and the market will expand and contract and in natural fashion but I do have an unease about total foreign ownership of crucial assets such as energy, security.

Do you?

Yeah, let’s be realistic.

I tell you what, they’re going to keep Huawei out of the 5G, did you see that?

There you are, yeah they are, but Huawei is in a lot of trouble all around the world and especially in the US.

We all think they’re a bunch of spies.

Well, the US think they’re a bunch of spies, lots of people in the US congress do and they say it all the time.

They deny it, absolutely not, hand on heart.

As you would.

Question from another James from Melbourne.  Hi, Alan and James, love the podcast, keep up the good work, we will.  My question is what sectors of the stock market traditionally do well with rising interest rates?

Yes, good question James.  We have had a question like this before.  The textbook answer which I’m about to give is companies that retain, for one reason or another, floats of cash.  I’ll give you a good example, James.  Computershare.  You see where people are responding to rights issues and that sort of thing actually the cash goes through Computershare and they’re like a little bank.  If interest rates are going up that’s good for them.  Insurance companies that are mandated to hold fixed interest rate investments they did it hard in recent years when the rates were virtually zero around the world and so theoretically they should improve as rates go up.  Banks are a mix actually, it’s six of one half a dozen of the other on banks, rising rates can be used well so can falling rates.

Excellent answer.  The other thing to remember, James, is that interest rates are going up because the economy is doing better.  This is particularly in the U.S. not quite so in Australia at the moment but the whole idea with interest rates rising is that it’s because in general the economy is improving and therefore you want to own companies that benefit from an improving economy which is not quite everybody.

What you’re saying is as opposed to dividend payouts.

Yeah, as opposed to yield stocks.

Yeah, there’s a swing to growth, swing to growth companies.

Companies that are exposed to growth, exactly.

Yeah.

As opposed to companies that are just purchased for income purposes.

I’ll take this one, if you like, from Craig.  Love the money podcast, I have only recently started to listen to you guys but love the content.  This is my question, I hope to hear my question on the podcast.  Well, here it is, Craig.  I’m a young financial advisor, just hit 30, have been in the industry since 2012.  Isn’t this interesting, Alan, we had a finance broker last week.  As you have been discussing we have been going through damage control basically since I became a planner.  Yeah, imagine that’s true.  I was wondering what should I do, I love what I do, I like giving holistic advice, I don’t want to leave the industry and I’m with a large dealer group that has suffered some brand damage for want of a better phrase.  Gee, that’s a difficult issue.  Good for you, first of all, and of course there’s good financial advisors, there’s 23,000 financial advisors in Australia and most of them are trying to do the right thing.  Obviously, the best thing you can possibly do is to get into one of the independent outlets that dominate the top 50 advisors or take the long hard road of building your own practice, Craig.

I think that you need to think about future proofing yourself and your career, Craig, which is obviously what you’re trying to do.  I think the way to do that is to do two things.  One is to move yourself away from taking percentages whether it’s percentage of their funds under advice or whatever and start to move towards charging people dollars as opposed to…

Fee for service, per hour.

Well, fee for service can include percentages as opposed to dollars.  I think the Royal Commission process will move the industry towards fixed dollar fees and secondly, I think planners need to do much more and make sure their service is involved in much more than selling a product or at least putting people into financial products.  There has to be much more holistic helping people to manage their finances.

To be fair he actually says that, he says he enjoys the holistic advice.

Yes.

One other thing I might just say having just done this major exercise with Barron’s the second time around about the top advisors, some of the advisors that scored very highly on this list are specialists.  There’s a guy, for instance, who does nothing but doctors and I think that’s definitely a way that’s kind of forming where people take a line of inquiry and specialise in a group.  Okay, last question, do you want to roll that one out?

Charles, this is a question from Charles.  When the statisticians are measuring performance of various super funds are they measuring only those in growth accumulation phase?  I am guessing that they do not include those in pension phase as well where anything between 4% and 14% is compulsorily being withdrawn each year.  If so are there stats for these funds?

Good question, Charles.  I’ll tell you what, the benchmark study, which you can see on APRA, is the aggregated performance of the funds which means the entire fund and everything they do and all their various – which I assume includes both growth in accumulation and pension phase outcomes.  I don’t think there’d be any great deviation between the accumulation phase and the pension phase anyway for the funds.

In fact, you’d imagine that when they calculate the performance they’d adjust for withdrawals, they would have to.  Otherwise if they didn’t adjust for withdrawals it’d make nonsense of it.

Except everybody would be on different rates, wouldn’t they?  All their members would be on different…

That’s right, I understand what you’re saying.

In any event, Charles, I don’t think the best ones would deviate at whatever phase you or their members are in.  The numbers we look at are what they call aggregated so they throw everything in.  That’s one of the reasons that the industry funds – again it does help them because, of course, the vast majority of their people are in default funds and that reflects the large performance.  There you are, thank you for that, Charles.

I reckon that’s where we should leave it, today, JK.

Yes, indeed.

Don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice.  While you’re there it’s super helpful if you can leave a review or a rating, it helps listeners find the show and also send in a question and we’ll answer it on next week’s episode.  You can tweet us your thoughts, just use the hashtag #themoneycafe, all one word, or e-mail us at hello@theconstantinvestor.com.  Until next week, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

Talk to you next week.