NZ Herald 2 April 2011

AThe dunce’s hat doesn’t quite fit the people who ran failed finance companies — which was what the Q&A was about.

They took in other people’s money and then lent it out, presenting themselves to the world as having expertise. So I don’t think they can get away with claiming later to be merely stupid.

There are strategies to keep risk under control that work even in recessions. They include diversification, checking on would-be borrowers’ security and ability to repay, and matching the terms of money coming in with money going out. Finance company execs who didn’t adopt those strategies were — at best — negligent.

AI’m glad you put the word “experts” in quotes. You need these people about as much as a mouse needs a cat.

Remember Bernie Madoff, who is serving a 150-year prison term for probably the biggest fraud ever? He promised investors a consistent return of about 10 per cent a year. Even that should have raised suspicions.

The only way to average 10 per cent returns in recent decades has been to invest in risky assets, such as shares or geared property. And returns on them will never be steady. Some years they’ll earn way more than 10 per cent; other years they’ll plunge.

For someone to offer more than 20 per cent — especially if they imply that you’ll get that year after year — is just silly. They can’t do it. Your accountant’s advice is good.

Having said that, you might ask your accountant if you really need as much as 50 per cent of your savings in cash, and also whether bonds would be a better fixed interest choice.

P.S. I know this is cheeky, but you two are extremely well off. I hope you’ve read my article in the front section of today’s paper about the joys of giving away money!

ANor do I. And Angela Tiy, Asteron’s head of marketing and communications, also says the result is “below par, and we fully understand her disappointment.”

We should start by noting that your retirement plan included life insurance cover — which should be separated out from the investment — and you and Tiy disagree over how much of your inputs went towards that insurance.

Tiy says that after excluding insurance premiums, you contributed a total of about $25,800. You say about $27,300. But either way, your recent withdrawal of $24,774 was less than you put in — which is your main point.

So how does Tiy explain the terrible performance? She puts it down to two factors:

• The way the fees were structured.

“This type of product was very common in the market back in the mid-1990s, and typically tended to have an up-front fee structure as well as an ongoing service fee component,” says Tiy. “Generally speaking, the life insurance aspect combined with the fee structure meant that this product tended to be more expensive than investment products available today.

“Because of this, it was removed from the on-sale range after Asteron purchased the issuing company, Guardian Assurance, in 1998, although this obviously doesn’t help your reader in this case.”

So why, I asked Tiy, didn’t Asteron tell the people in these funds that they were not a good deal, and suggest they move to a better fund?

“While in hindsight the product outcomes are not attractive, this is based on a combination of market circumstances, and it is not necessarily true that they were not a good deal. Similar contracts over different time periods will have produced very attractive returns,” she replied.

She went on to say that the fees on yours and similar funds were high at the start and lower later. “Hence the longer the contract is in place the lower the effective reduction in return as a result of expenses. A low interest rate environment will result in expenses taking longer to recover, and thus impact on the apparent value for money. As a generalisation it would not be beneficial for clients to move to another product in these circumstances.”

In other words, by the time Asteron got involved, the worst of the fees were over. So how high were your fees? In total over the years, says Tiy, you paid $2989.

Of that, $953 was upfront payments. About a third of the $953 was commission paid to your adviser and the rest establishment costs.

Those establishment costs seem pretty high to me. Says Tiy, “While we were not involved in the setup of this particular product, we expect the $600 set-up fee established by Guardian Assurance would have reflected the average charge for this type of product at the time.” She adds that it would have included “overheads such as legal and regulatory and administrative costs.”

• Poor investment returns.

Tiy says your fund was expected to make 6 per cent a year, but instead made only 3.5 per cent, after fees and tax, over the period.

“This is, as your reader correctly points out, partly due to the effect of the recession but also partly due to the type of managed fund (strategic asset allocation with 60 per cent toward growth assets) that was selected at the start. As you know while the returns on these can be higher, they can also be lower depending on how the selected markets perform.”

I should say here that I think you rightly chose a fairly high proportion of growth assets — shares and property — given that you were investing for more than 10 years.

But then you withdrew all the money at once — when the unit price was low — despite your adviser’s advice. It’s not uncommon for people to panic at the bottom of slumps, but I hate to see it. As I’ve said many times: don’t invest in growth assets if you won’t cope when your balance plunges.

I agree that you couldn’t be expected to stay in the fund for long, once you’d looked into the situation. Despite Asteron’s assurances, I expect the ongoing fees were still pretty high. But it would have been much better if you had phased your exit, withdrawing say a quarter a year for four years. You would probably have got a better unit price on at least some of your money.

Anyway, you’re out now. And so, hopefully, are most other people in those types of investments. The combination of life insurance and savings fund is rare now — thank goodness. Its very complexity made it hard for people to see how much they were paying for the various components. Newer investment funds are a better deal.

What lessons can we all learn?

Firstly, as you say, keep an eye on your investment. Also, if you invest in a high-risk fund, don’t bail out in bad times. If you decide the investment is not for you, withdraw gradually.

Another important lesson is to check the fee level at the start.

The government is looking at ways to make fee comparisons easier — starting with KiwiSaver — which should help investors considerably. In the meantime, the KiwiSaver Fee Calculator on www.sorted.org.nz is a good source. While it deals only with KiwiSaver, the providers with lower KiwiSaver fees will tend to also have lower fees on their other investment funds.