This article was published on 2 April 2011. Some information may be out of date.

Q&As

  • Executives of failed finance companies can’t get away with wearing the dunce’s hat
  • Beware “investment houses” offering 20-per-cent-plus returns
  • Why did long-term investment go backwards?

QYour response to last Saturday’s question asking “where did the money go?” was very detailed and comprehensive, but it overlooks the fact that money and wealth can simply evaporate, particularly in times of recession. So it doesn’t necessarily go anywhere.

In such cases the key people involved can be unfairly maligned when in fact they were just plain stupid. And as we all know it is not hard to be stupid when investing.

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.

QI am 43 and married. We have a freehold house worth $1.5million and about the same in Australian and NZ shares (all blue chip stock) and cash (50/50 ratio and note no investment property). We save around $400,000 annually.

I am contacted regularly by “investment houses” offering 20-per-cent-plus returns, but with high fee structures. My accountant simply advises my wife and me to ignore them and to continue to just buy high quality stocks, Australian in the main. The returns seem lower than what a number of investment houses are able to “achieve”.

Am I being naïve to think that a non-business person can achieve reasonable returns, or do I need the help of these “experts”?

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!

QI’d be very interested in your view on this scenario, which played out recently for my husband and myself.

Sixteen years ago we committed a small payment monthly to an Asteron retirement plan, as it was the trend at the time to provide when you are in your forties for retirement in late sixties etc. We paid $109 per month initially, inflation adjusted yearly.

As the pay-in was relatively small we’ve tended to ignore the fund, believing we would have a reasonable amount accumulating to help fund retirement. We received annually a summary of the unit price, number of units and value of our investment. This was on the reverse side of the notification of the inflation-adjusted increase in monthly payment. So once again we did not pay too much attention to this.

At our peril I discovered when we contacted our advisor recently and looked into what our investment was worth. I suspected that we had paid in more than the current 2010 value, and this was in fact the case.

We had paid in more than $27,000 over the 16 years and the payout was just under $25,000. I’m at a loss to understand how this can happen. I accept that we have been in exceptional recessionary times for the last two years. But surely in the boom years 2000–2006 — when interest rates were higher and the share market strong — there would have been enough gains from then and the years prior to cover the large drop in the last two years.

If we had put the money into the bank in 1994 we would have been much better off.

Our advisor’s response was that’s all history and gone — no point in going there, and you’d be crazy to pull out now when the unit price is low. He had substantially more invested than we did.

I totally disagreed, and we have taken the money and run. I would rather have control over my own money than rely on these unit-based funds to obviously make bad decisions.

So a lesson to others — do the calculations. Monitor your investment funds and don’t assume as we did that they are accumulating. I would accept a short-term loss, but over a 16-year time frame, I don’t think so!

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.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.