- What we learned this week at the royal commission.
- How banks have to give up on percentage fees if they’re ever going to clean up their act.
- How boring it is to have a budget without leaks!
- The outlook for Blue Sky.
- What the RBA could do next.
- Listener questions: is the ATO out of control?
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.
Well, James, what a week It’s been in the Royal Commission, wow!
It’s been a screamer!
And today, this very morning they’re taking fees off dead people.
Yeah, can it get worse? And you know what the answer is, yes it can, it’s like what’s today’s scandal. Well, yesterday’s scandal was that they were – and I say they, I mean both banks and the AMP, they were charging fees to people who didn’t get any service which is bad, today’s screamer is from Commbank which I suppose we knew were going to be the bank that more than likely was going to look the worst and it has looked the worst so far. Basically, what happens is somebody dies and the planner keeps sending the family, or a widow I suppose or widower, the fees for maintaining the account.
Well, that’s right, but the problem is they don’t send them fees, there’s no bill, that’s the problem.
They don’t see it.
The clients of these financial advisers don’t see what they’re paying because it’s deducted from their account as a percentage.
Well, what happened to FOFA, what happened to all the rules that were supposed to come in to disclose fees? That’s exactly what it’s supposed to do.
Sure, there’s a disclosure, it’s 100 pages long, it’s small print, people don’t read it.
No one reads it.
And really all that happens is the financial adviser says my fee is only 1% or 1.1%, that’s really what they generally charge, people don’t know what that means really, they don’t understand the percentage.
It’s 1% of the amount they have of their portfolio.
That’s right, but this is for the advice because on top of that is the investment funds fee which is another 1.5% and then there’s the platform fee which is half a percent. So, everyone is taking a clip and so if you focus on the advice what do you get because if you’ve got a million bucks, which most people kind of have now because they’re forced to save into super.
Well, if they sold their house or something, yeah.
No, but if you saved with super all your life you’ll end up with a million bucks for sure. So, you give that to a financial adviser, they take 1% and say it’s only 1%, it’s not very much, actually that’s $10,000 a year, that’s nearly $1,000 a month, right. So, if that adviser…
And what are they doing for it?
And what are they doing for it? The answer is what they do is you get an annual review. So, the services that CBA and AMP are not providing for their fees is an annual review, that’s it, and it’s two or three hours work.
And they’re not doing that, they’re not even doing that?
No, but the point is that when they do it you’re paying $10,000 for two or three hours work, right, and if you got a bill for that, an invoice that you had to pay on B Pay you wouldn’t pay it.
You’d be screaming. You’d be on the phone immediately but you don’t because not that it’s taken secretly but it’s an invisible fee.
So, this has to be reformed again, doesn’t it?
So, the problem is that I’ve been composing my column for The Australian on this matter last night and my view is, and I’ve written it many times before but it’s worth saying again, percentage fees have to be abolished, they have to make financial advisers send us an invoice.
Yeah, every year, every time, every year at least.
Yeah, and say okay, we’ve spent three hours reviewing your fund, here’s our invoice for $500. It won’t be an invoice for $10,000, that’s for sure, which is what they’re getting.
Because everywhere else you do, if you go and get your car fixed the guy comes out and he shows an itemised bill and he says this is what I did and you say okay, and it’s a couple hundred dollars, and at least you have an approximation in your mind as to what they did.
A couple hundred dollars, you’re joking, at the mechanic? Come on.
But, you know the point I’m making.
Yeah, that’s right.
So, here we go, here’s this inquiry, it’s even worse than we thought it was in financial services, consumer finance really bad, wealth advice worse, I think, really because we’re getting absolutely sort of surreal events like dead people being charged fees but what’s going to happen, right. So, Hayne is going to go away for a few months at the end and he’s going to make recommendations, will this finally mean that there’s a clean-up? I mean an effective clean-up.
Well, in my view it won’t be a clean-up unless they abolish percentage fees. The problem is the percentage fees. The amount of money that these financial advisers are getting for minimal services is corrupting, it’s too much money and it just corrupts the whole place.
And it encourages all the worst behaviours as we can see from the inquiry.
Of course, because they’re just raking in this money, huge amounts of money, for not doing much.
Also, it seems to me that whether you’re a good adviser or a bad adviser you’re going to get that money anyway because it’s a percentage.
You’re getting a percentage of the total amount so even if you have a bad year there’s still total amount there that you’re getting money off, you’re not even getting a percentage of the return.
And just one other point on that which is really worth knowing, folks, if you don’t know this already if the adviser encourages you to borrow then your total becomes bigger but the percentage is off your total.
Which actually brings us to Blue Sky because that’s the thing that Glaucus is accusing Blue Sky of, that they are borrowing against their assets and they’re charging fees.
And they’re counting the asset plus the borrowings basically and they’re scraping a fee off the total.
Off the total including the debt, and so that’s the essential thing, and Blue Sky’s response is well everyone does it which is true, actually.
Yeah, but they say it’s industry standard but as we said last week there is no industry standard because there’s no one quite like them, they’re a hybrid.
It’s the industry standard in property, they’re half a property fund and that’s their problem.
So, it’s fallen again, even since we talked it’s now down 65%, it has actually fallen again in the week intervening since the last podcast. Where are we now on that, do you think it’s anywhere near over?
I don’t know, I think the price is around $3.80 now. It was interesting because they put out a big market update the other day about how they’re going to have an independent report and all that stuff.
And they peeled back all their projections a little bit.
And the thing fell another 20% just on the back of the report that was meant to defend themselves and so that was terrible. So, now the thing is $3.80, I was asked today are they getting close to good value now so I looked at it, $3.80 is twice their NTA, I mean obviously when they were $11 or $12 there was multiple times NTA and a ridiculous price but now they’re twice NTA, they’re on a yield of 5.6% and they’re a PE of 12 so that on the face of it looks a reasonable value, right, just on those metrics. The trouble is the assets are now under question, the value of the assets.
So, to be precise the NTA is under question.
The NTA, is it really $1.90.
Is it really $1.90, so are your numbers right because if inside numbers are wrong or exaggerated then that’s exaggerated.
Glaucus is saying that the $1.90 is exaggerated and so therefore they reckon it’s worth $2.60 or something.
So, that’s rock bottom, is it, is $2.60 rock bottom? If that’s what Glaucus says it’s worth…
Glaucus has always said that’s all rubbish and we’re worth much more than that so the question is, is $3.80 rock bottom?
But Glaucus never said they were worth nothing, they said they were worth $2.60, isn’t that right?
They did say that but they said or it could be less, we’re not sure.
I see, right. So, okay, well that’s the update on that story.
We have a question on that subject so we might as well ask the question now, do you think?
Yeah, what was it?
Question from Charles regarding BAF which is the other listed Blue Sky entity, BLA is the company, BAF is the listed investment company called the Blue Sky Access fund and that gives you access to the unlisted funds that Blue Sky runs and so you can invest in the listed investment company which gives you access to those unlisted funds. So, BAF is that thing and Charles wants to know in the event of a company wind up of BLA, which is the company, what would happen to the listed investment company?
He is worried if he’s asking about wind ups.
Well, me too because I’ve got some BAF shares which I still own, I’m kind of riding them down like a bloody roller coaster, as far as I’m aware the assets in the LIC are quarantined from the parent company. Well, Charles, I actually rang them up and they didn’t want to talk about it.
I see, that’s bad isn’t it? Because you’ve always had an open line to them so far haven’t you? I mean they came and talked to you for three quarters of an hour two weeks ago.
Yeah, well I go through the PR, I don’t have the MD’s mobile number.
So, you went back to the PR and the PR said sorry, they don’t want to talk any more, they’re not available.
What they don’t want to talk about is the possibility of wind ups.
Yeah, I suppose it is a loaded question but still it’s a sincere question from Charles and I suppose we don’t know the answer, is that…?
Well, the thing is that I don’t think the assets in the LIC are quarantined from the parent company because it actually invests, the only thing the LIC invest in are the funds that are run by BLA so it’s actually far from quarantined. Mind you if a fund manager such as BLA goes into administration then the contract for managing those funds is sold as a business as a growing concern. So presumably if BLA was wound up the business of managing those funds would be sold to somebody.
They’d be passed on to someone, yeah, because they’ll be trying to manage them as going concerns.
And presumably BAF would continue on as a listed investment company investing in those funds.
Okay, well one thing is we look at Blue Sky and we look at troubles at all these companies, GetSwift, Big Un and Afterpay of late but the funny thing is behind it all and even behind the inquiry signals are actually quite strong at the moment if you can sort of strip out that sort of current affairs aspect like I looked today and there’s three different surveys all showing record confidence like business confidence, general business confidence at a six year high. Confidence in the property sector was at a high and then the sort of key Bank of America fund manager survey, which is one of the really important surveys in the US about the sort of sentiment of fund managers in the US stock market and it was also at a new high.
Time to sell?
Well, I was going to say not time to sell, time to consider the wider world that if you’re an investor you could get a little bit pre-occupied with these various scandals, crimes and misdemeanours that are dominating coverage at the moment and justifiably so, but as an investor you keep your eye on the big picture too.
Let’s call this the BT Financial Services Mega Trend because what we’re seeing is the market is impervious in general.
The global market.
The global markets are impervious, and the Australian markets are impervious to – well, the AMP share price is not impervious.
What would seem to be bad news.
Bad news. I mean, as you say the confidence is sky high.
Confidence is high.
And so everyone is kind of flying along and not worried about things including bombs on Syria.
Made no difference to the markets.
No, it went up.
Well, there’s the thing, you see, if the global market stays strong, and if the US market stays strong, the ASX will actually recover even if there are all these horror stories coming out. I suppose the difference with the banks is that they’re really important, they’re 35% of the market, so you do wonder about the individual stocks, about Commbank for instance, reputation risk. I mean it’s as bad as I can ever recall just now.
Did you look at the IMF’s growth forecast?
No, but they upgraded.
Well, I think so, I was going to ask you, you wrote it in your list here, IMF Growth.
You’re killing me again.
I assumed you’d looked at it, heavens above.
Well I was actually concentrating on the confidence surveys which I thought were really interesting, so as an investor…
The IMF is always wrong anyway.
Yeah, well the IMF is always so slow, by the time the whole thing gets to Europe and comes back out again they’re so off the pace they are really slow. Okay, was there anything else we wanted to do before the questions?
The questions, there is a question here.
There’s several actually but are we finished our topics? We are, yeah.
No, we haven’t, we have to talk about the budget and we have to talk about the RBA.
The RBA minutes, right, came out this week…
And got somewhat buried in the coverage of the inquiry.
It did and really, it’s somewhat understandable because the RBA basically confirmed that or said it again that the next move in interest rates would be up but the question is when, right, and it’s because they don’t say when. So, I rang Bill Evans of Westpac this morning to see and he says there’ll be no rate rise this year or next year.
I have the greatest respect for Bill Evans, I think he’s one of the top operators, but how can he say that, how can he sit here and…
What do you mean, that’s his job? He’s had to say something.
Well he shouldn’t, he shouldn’t opine on what’s going to happen at the end of next year, even Bill Evans can’t tell us that.
I said well so what are you saying, that there’ll be a rate rise in 2020? And he said no, I’m not predicting anything about 2020, only about 2019. But the point is, okay, yes forecasts like this are meaningless however he reckons the economy is going to soften next year in Australia which is an interesting point of view. I think there’s a case for that.
Well, how come the RBA are saying rates are going to go up then?
All they’re saying is the next move is up, they don’t say when, it could be in five years.
Yes, it’s a nuanced interpretation there.
It’s already been the record time for no change in interest rates, imagine if we get to the end of next year with no change in interest rates?
Well, I suppose we can’t rule it out but also, I think really, I know they’re paid to make long term forecasts.
Phil Lowe, the Governor, will come and go with having done nothing, imagine that.
Never change the rate up or down, that would be really interesting in a strange sort of way. Well, the other observation I was going to make about the budget is here we are with three weeks to go and there’s almost no leaks. I must say under previous administrations gee they used to be leaking like a sieve this time of the year. You spotted that thing where McCormick, the new NATs leader, Acting Deputy PM, he came out and said it’s going to be a very exciting budget, the Treasurer has lots of exciting things to say and Morrison came in and said I have nothing exciting to say, I’m not Santa, did you see that?
McCormick called him Santa Claus and Morrison was terribly upset about that, he rang him up, Scott Morrison rang him up and balled him out for calling him Santa Claus.
Yeah, but I wonder does he have something up his sleeve of a positive nature.
Well, he’s got tax cuts, they’ve already said they’re going to have tax cuts, personal tax cuts.
Yeah, but anything more than that because all anyone is assuming is the usual things are middle band tax bracket anti-bracket creep stuff which is just at the very middle bands, but I wonder has he got anything more substantial.
Well, you can absolutely predict that the band will be playing, there’ll be a brass band going on behind him at the press conference in the budget lockout.
We should tell everyone that we’re going to do our podcast live inside the lockup.
Well, not quite live because we’ll be locked up.
Well, we’ll be live but we won’t be able to broadcast it to you until after the lockup ends which is 7:30 on the night but look out for that, folks. Okay, question, I’ve got some more questions here, Alan.
Well, here’s a question to you, a question from Adam. I read in the press that in Shorten’s revised policy statement a couple of weeks ago after the initial announcement there was talk of concession for low-income folks, pensioners and part pensioners, and SMSFs with the members on a government pension. If that is the case can I include my autistic daughter as a member of our SMSF and start an account for her, then with the member in our SMSF on a disability pension, my daughter in this case, will our SMSF qualify for the exemption as announced in that revised statement?
Okay, I’m going to guess here but I imagine I’m on the right track. Strictly what they said was if you’re on a pension and if a member of the SMSF is on a pension on March 28th this year they are excluded, it’s as simple as that. Now, reading between the lines you haven’t started an account for your daughter and so she isn’t in the SMSF on March 28th this year so she would be exempt on a strict reading, a kind of headline reading of the policy. Now, whether there was variations on disability pensions I don’t know, I didn’t see anything to that effect. So, that’s just proving we’re live in a café there, by the way, the broken glass.
It’s hit the deck, it’s shattered and it’s gone everywhere.
It’s not a fight, it’s just an accident. But, so there you go, Adam, sorry about that. I would say you could double check with the tax office but I would say that you were excluded because you weren’t in on March 28 this year which is where they drew the line and they announced it, which is what they tend to do, they announce a policy and they say it starts today. Okay, there was another question. You can take this one, Alan. It’s a very simple question, is the ATO out of control?
Well, that was the start of a two-page rant by Donald, and Donald is terribly upset but the first bit, which is what we’ve taken here, is is the ATO out of control? And our mate Bob Gottliebsen reckons they are and so does our friend Adele Ferguson.
Yeah, and she has stacked up some pretty compelling – I mean, I thought that show was scary. I didn’t know – to be honest with you, garnishee notices, I didn’t quite know what they were but if you’re having a fight with the tax office you get up one morning and they’ve taken money out of your bank account, that’s extraordinary. There isn’t really a court of appeal.
I mean, it’s too much, it’s too much power.
I agree. So, I think, Donald, we reckon the ATO is out of control. We do.
Yes, and it needs a strong appellate court of some sort.
Because power corrupts and absolute power corrupts absolutely.
As we noted earlier in the financial planning game. Okay, last question, now this is from last week but we promised we’d go back and answer it. It was from Saad and he says as I understand if we buy US stocks through an international fund such as Vanguard International we pay dividend tax three times, is this correct? First the US company makes a profit and pays tax, it must pay 15% tax to the USA and lastly when the dividend gets paid to you you must pay Australian government tax. Compared to that Australian funds are much better. Am I right about international ETF being taxed three times? Well, Saad, we went to the horse’s mouth, so to speak, we went to Robin Bowerman who’s the head of strategy at Vanguard and he very kindly answered your question under pressure from me this afternoon in time.
He says we don’t and are not licensed to provide any tax advice, he has to say that, this is what he says. Our international share fund is domiciled in Australian Dollars and so investors are not liable to pay US tax on their dividends. For funds that are domiciled in the US, as is the case with one of our ETFs, you can fill out a form, it’s called the WABEN form, you can get that on any site or from a tax adviser from the tax office and it reduces the tax paid on the dividends from 30% to 15%. So, there you are. I suppose the main answer is if it’s listed on the ASX don’t worry about it, just treat it as an Australian entity.
Yes, but presumably the companies that they invest in pay tax.
Yes, they do.
So, they pay tax and then you pay tax on your income on it.
Yeah, so it’s twice not three times, yeah that’s true. You’re outside the franking kind of dividend imputation world once you go overseas. Okay that’s terrific, well I think we leave it there for today, Alan.
We will, and is it my turn to say goodbye?
Do the sign off and say goodbye to everybody.
Don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice and while you’re there please leave us a rating or review because it helps the listeners find the show and also send your question in and we’ll answer it as we did today. You can tweet us your thoughts, just use the hashtag #themoneycafe, all one word, or e-mail us on email@example.com. Until next week, I’m Alan Kohler, Publisher of The Constant Investor.
And I’m James Kirby, Wealth Editor at The Australian.