Fees a thaw point for investors

FROZEN funds can scare and intimidate the elderly, writes Barefoot Investor, so help them avoid investment traps.

Need to turn on the taps in locked investment funds.

FROZEN funds can scare and intimidate the elderly so help them avoid investment traps.

I OPENED the handwritten letter and a $50 note fell out.

No, it wasn’t a letter from my grandmother. But it was written by someone’s grandmother.

Truth is, I get a lot of snail mail from old folks who read my column.

Often they include money to pay me for my time ... because they’re old-school, and they don’t expect to get something for nothing (though I always send the money back).

They also do it because they’re afraid and they need some advice.

As you read what happened next, think about an elderly person in your life that you could help.

THE FROZEN FUND

Barefoot: “Hello! It’s Scott Pape ... the Barefoot Investor ... from the newspaper.”

Mrs Jones: “I don’t want to buy anything!”

Barefoot: “Mrs Jones, you are mistaking me for an Indian telephone scammer. You wrote me a letter ... about your money.”

Mrs Jones: “Oh, yes!”

Seriously, most of my calls to elderly readers begin this way. Along with the $50 note, Mrs Jones (not her real name) sent me a copy of her latest statement from her financial adviser. It showed that she had 38,000 units in the ANZ OnePath Income Trust, with a dollar value of “zero”.

What happened? She had no idea. That’s why she wrote to me.

It turns out that at the height of the global financial crisis, when the government made the decision to guarantee bank deposits, most income funds — including Mrs Jones’s ANZ fund — were hit with a stampede of investors wanting to get their money out.

So the managers ”froze” the fund — and stopped investors from taking their money out so they didn’t have to liquidate their fund at fire-sale prices.

But here’s a key point: while the ANZ fund managers took the drastic, emergency action of freezing their fund ... they did not freeze their fees.

Which, according to a spokesman for the ANZ, amounted to 1.75 per cent a year. This includes the trailing commissions paid to the financial planners who put their clients into the fund.

Lock the money up — slowly drip it out over years — and continue flogging them with fees. Kerching!

GETTING HER

MONEY BACK

Now you may be wondering, dear reader, how long these guys can get away with such behaviour.

Well, eight years, and a whole lot of worry later, the last of poor old Mrs Jones’s frozen fund is still ... err ... thawing.

Drip. Drip. Drip.

I contacted ANZ on Mrs Jones’s behalf, and was told that the bank “made the decision to stop charging fees on the fund last year”. Which, strangely, coincided with 95 per cent of the fund (eventually) being paid out.

They also assured me that they’d put their best people on “making sure Mrs Jones receives her final 5 per cent, pronto”. (And that, strangely, coincided with a phone call from me.)

MRS JONES AND ME

So I called her back.

Barefoot: “Good news, Mrs Jones, I’m told you’ll get the last of your money.”

Mrs Jones: “That’s a relief. I wasn’t sure whether I was right or wrong.”

Barefoot: “Well, you were definitely in the right, and they were definitely in the wrong.”

Mrs Jones: “I knew you’d be able to do it.”

Barefoot: “Why?”

Mrs Jones: “Because you’re from the Mallee, like me!”

Barefoot: “Thanks Mrs Jones ... and I’ll be sending you back your $50.”

Mrs Jones: “Well, when you’re next in town, be sure to knock on my door and we’ll have a cup of tea. And I’ll make you some scones.”

Deal!

INVESTMENT TRAPS

FOR RETIREES

Make no mistake, what the Reserve Bank (and their central banking buddies around the world) are doing by driving interest rates to historic lows is an utter tragedy for retirees.

These people did the right thing: they saved their pennies, and now they want to live off the interest from their savings — but they can’t.

Instead, they’re guinea pigs in the world’s most dangerous financial experiment: cutting interest rates to the bone (time frame unknown) in the hope that it will motivate punters to take on even more debt.

Ultra-low interest rates aren’t a sign of prosperity — they’re a sign that something is out of whack.

Smart people know this will lead to ruin, eventually.

And sadly, it’ll take a lot of retirees’ savings when it does.

With that in mind here’s a couple of investment traps that retirees should steer well clear of.

BANK HYBRID SHARES

Australian banks have sold billions of dollars of so-called hybrid securities to income-seeking investors.

They’re incredibly complex financial instruments that are marketed as an alternative to term deposits.

Yet in terms of risk they’re closer to shares, mainly because there’s no guarantee you’ll get your money back, or get paid interest.

In Britain they’ve taken the practical step of banning retail investors from buying bank hybrids. Our regulator, the Australian Securities and Investments Commission, has repeatedly warned investors about the dangers of hybrids ... via multiple press releases on its website.

THE 10 PER CENT RETURN

This week I received a letter from an old bloke who sent me a ripped-out advertisement from the newspaper with the headline “Earn Up to 10%* p.a. with our Select 1st Registered Mortgage Security”.

There’s a special place in hell for finance managers who promote “safe” mortgage funds to retirees.

In many cases, these funds lend the retirees’ money out to builders and developers who’ve been knocked back by the big banks.

But if it’s too risky for a bank, why the hell should an 85-year-old retiree stump up his savings? He shouldn’t.

Tread Your Own Path!

Originally published as Fees a thaw point for investors