Grandmothers, perhaps try ducking for cover

OPINION

Got a call from a contact the other day; you’d better have a look at this, he said.

There it was: half a story we had penned two months before, all but cut and pasted onto a glossy website called The SMSF Club.

“Are management fees devouring your savings?” was the big bold headline.

Beneath it was the guts of our story, some research from a funds manager Chris Brycki who had looked at 497 managed funds and found that over the past five years investors had given away half their investment returns (which averaged 2.3 per cent) in fees (1.91 per cent).

Reading further in The SMSF Club rendition of the yarn was analysis from an economist, Jordan Eliseo, who concluded that a couple on an average salary, making average super contributions of $830,000 over a lifetime would leak $338,000 in fees.

Imitation may well be the sincerest form of flattery, as they say. But the irony here is that the managing director of The SMSF Club is one Justin Beeton.

Beeton is a fast-talking structured product spruiker who has run afoul of the Australian Securities and Investments Commission. (The regulator imposed licence conditions on his JB Global for inappropriate advice.)

Here is the text of a recording from one of Beeton’s investment seminars: ”What I’m talking about is just buying the one company … what I’m talking about is refinancing your properties.

Getting all the equity you can, putting your superannuation … set up a self-managed super fund, put it all in Berkshire Hathaway. Call up your grandma and say, ‘Look, I’m not going to wait for you to die before I want your inheritance. I want it now’.” And invest it all, all that money, in Berkshire Hathaway. Who’s confident to do that?”

We have some advice of our own here. If you are a grandmother, duck for cover.

The product which Beeton was touting was not an investment in Berkshire Hathaway but a “derivative squared”, that is, a derivative of a derivative, so byzantine in its complexity that not even Berkshire’s revered founder Warren Buffet could have got to the nub of it. In any case, the Sage of Omaha was the one who dubbed derivatives “financial weapons of mass destruction”.

Plain speaking

Prompted by victims of Beeton’s JB Global derivatives, we had written a couple of stories about the lad.

He had in turn flattered us with an amusing lawyer’s threat – though he has still never quite made it to the phone for a chat.

Beeton is clearly not an advocate of the ”let sleeping dogs lie” ethos.

We’ve got files on colourful operators a metre thick, and might not have got around to visiting Beeton, had we not been reminded by his SMSF Club spiel.

Though it is timely that Beeton has reminded us of his existence for he, like many others of his ilk, have now expanded into the SMSF property space. Grannies are now, to some extent, off the hook as grandsons and granddaughters are now being afforded the exciting opportunity of gearing up their superannuation and being empowered into leveraged property schemes.

Thanks to the reforms of the last government, their life savings rather than their granny’s residence can now be deployed for security. Another financial calamity is in the making.

So we thank Beeton for the heads-up. Indeed, we should repay the favour by tendering some English language services.

The mission statement on another of his websites proceeds thus: “Justin is a sort after (sic) member of the international financial speaking circuit due to his straight forward (sic) yet worldly approach to safe investing strategies geared to assist anyone goals (sic) for wealth creation and financial independence”.

Fee gravy train

When the SMSF leveraged property caper blows up, as it inevitably will, it will place further stress on the pensions system. So it was with the $20 billion obliterated in mortgage funds, the debentures debacle and other managed investment scheme collapses.

Beeton may not be the answer, but he poses the right question. The superannuation system, now vertically integrated and controlled by the big banks and AMP, is failing investors. The fees are simply too high. Rather than building wealth for their customers, the majors are preying on them, hence the flight to self-managed super.

Both the magnitude and the layers of fees are at issue. A Vanguard/Morningstar report details the average financial adviser fee at 75 basis points (0.75 per cent of a customer’s super), then there is the average platform fee of 50 basis points and the product management fees on top.

As evidenced here at the turn of the year, the big funds are also up-streaming their clients’ cash balances straight into the parent banks and questionably low rates, and with no pretence of shopping around for better rates. It’s cheap funding for the banks. This amounts to another fee in the guise of the cash performance forgone to the investor by the failure of the funds to shop around for better returns.

The big wrap platforms present an anti-competitive landscape for savers – only made worse by the government’s recent backflip on the Future of Financial Advice reforms. It’s back to the boiler room days, unless technology disrupts the hegemony of the banks by allowing consumers to buy funds cheaply and directly. Now, the wrap platforms can control pricing by controlling the product distribution channels. Hopefully technology will derail this great Australian gravy train.