Wealth Managers Find New Ways to Avoid Large Loss of Funds

The Financial Planning industry has a problem. They want to avoid a large loss of money from their funds under management as Baby Boomers move into retirement and become risk averse, especially in this economic climate.

I read with interest this weekend that in Australia where interest rates are as high as 8.25% on term deposits a whole bunch of fund mangers are now marketing a series of term deposit accounts through their investment platforms.

According to Leng Yeow of the Financial Review the fees for these “deposit account funds” can be as high as 1.55%. Why on earth would you pay a fund 1.55% to have them put your money into a term deposit account? And why would you allow some of that money to be paid as commission to a financial planner supposedly to advise you on your term deposit. In my often to be repeated phrase – it makes no sense to me.

ING Australia has a 7.6% or 7.3% term deposit account fund with a management fee of 0.75%. Yet Leng points out ING Direct has an 8.2% term deposit account with no fees whatsoever. It seems putting the word “fund” on the end of the account entitles them to charge an on-going fee. Go figure…

The main reason cited is because by having all your money in one account it will be integrated into their investment platform or wrap account. This they say will give you consolidated tax reporting, integrated portfolio management and an easy method to move that money into their other funds like equities when the market turns.

Let’s analyze the statements above.

  • First I believe you should not have your risk-based assets mixed with your safe assets. This is sold as diversification by the financial industry, but to me it is a means of hiding stock market volatility so you don’t make rational decisions before stock market losses become too great. To them it means you won’t take your money out of their fund and reduce their commissions.
  • I believe all safe assets should be under your direct control. Most people today understand term deposits and can set up an income ladder where money is released from term deposits over time or new terms taken out so you can live off it. Why pay up to 1.55% for someone to do this for you? We’re all adults aren’t we?
  • If you are in transition to retirement in Australia and your funds are in a transition account then no tax is paid on the interest accruing in those deposit accounts. So why pay for the tax consolidation service for the term deposit funds? If you need to find an accountant to manage your tax liabilities because they charge a fee for service.
  • It is likely you may be paying a front-end fee for any new money you deposit in the WRAP account even if it is put into a term deposit fund. You may also be paying a trailing commission too. Yet more hits on your hard earned money before it has even earned any income for you. Again ask yourself would you go to your local bank and say to the teller, “Please deduct 0.5% of my money deposited with you for yourself each year for the term of the deposit?

I’ll say it again, I believe you would be far better off taking your fixed interest and cash out of a WRAP account and putting it in term deposits yourself. It will reduce your fees and you will have direct control over those funds. If you can withdraw money from equity and property funds without taking large losses that also makes sense in this market.

The real reason for these new term deposit accounts is simply this. The financial industry need to maintain the size of the funds at all costs. They get very concerned about high redemptions at times like these. Redemptions reduce the size of a fund. The funds may already be down 20% due to the stock market. Their high salaries, commissions and bonuses depend on keeping and growing the size of the fund. So as we Baby Boomers (and others) become more risk averse and move our nest egg into cash and fixed assets they have come up with new products that make it easy for you to keep your money with them. They emphasise the convenience and de-emphasize the real cost.

Unfortunately many Baby Boomers in retirement will be guided by their financial planner into keeping all their money in the one investment account and will pay a high price in fees and charges when now more than ever before they need to reduce those fees and charges.

Just be aware that if you decide you want to sell any of your equity investments because you can’t take the pain of the losses anymore, your financial planner may offer you a new and exciting option of selling them and putting that money into a high interest term deposit account. Just sign here they’ll say and we’ll do the rest. This is how they will avoid large losses to the funds under management and maintain their high fees. Gotcha!

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