Your Money & You

February 2013

New Educational Resources Online!

We are pleased to announce that three new sections have been to the website of the ADF Financial Services Consumer Council: Banking, Budgeting and Saving. These sections contain important and interesting information on topics such as switching bank accounts, how to deal with unauthorised transactions on your bank account, tips about contactless cards, simple ways to save money, managing on a low income, and saving for important life milestones.

You can find these resources under ‘Guides’ then ‘Managing My Money’ in the main menu on our website at

These excellent resources have been adapted for ADF readers from materials from the Australian Securities and Investments Commission’s MoneySmart resource. We are grateful to ASIC for its continual support of the ADF’s financial education and consumer programs. Its MoneySmart online resources can be accessed at

More interesting sections will be added to ‘Managing My Money’ this month.

Earning an Income From Your Investments

By Tony Negline

Most managed funds in Australia use a unit structure. That is, when you deposit money into a managed fund you purchase units. When you take money out you sell those units back to the fund manager.

The value of these units moves up and down with the market movement and investment earnings of the investments that the fund manager has selected for a particular managed fund.

Sometimes, some of the units you have in an investment will be sold to pay for expenses. In other cases, the value of units will be adjusted to factor in expenses.

The two main advantages of managed funds are that they allow inexperienced investors to benefit from the skill and knowledge of professional investors. They also potentially allow a small investor to have an interest in much larger assets that they ordinarily would never own.

Many retirees make the mistake of focusing on the total return from investments. Many retirees would find they may well have a better retirement if they focused on the income their investments earned.

A structural problem with some managed funds is that it’s difficult to see how much income the underlying assets have actually earned. For example an investor in an Australian equity managed fund will receive several distributions every year. Some of these distributions will represent income earned as well as any net capital gains.

The sad, and well known, reality is that some fund managers regularly turn their investment portfolios over. Their primary objective is to hunt capital gains not to earn investment income. This means that when markets are performing well the managed fund distributions will be high. Conversely the distributions will be lower when overall market performance struggles. From a practical perspective the net result is that the more measured progress of investment income – and dividend income from Australian companies, in particular – is hidden.

We can also add to this another problem which involves the way most funds report investment income. Often the income earned from investments will be shown on tax statements net of asset based fees. It’s only logical to falsely conclude from these numbers that dividends are as volatile as share prices because the net income shown on these reports has been made volatile by the deducted asset fees.

If your objective is to earn income from your investments over the medium to long term, look at the actual income paid (not the yield) which is the income divided by the current market value.

Dodgy Promoters and the Role of Investor Education

By Air Commodore Robert M.C. Brown AM

In late December 2012, an article appeared in the Australian Financial Review under the headline “Financial Literacy the root of many losing investments”. A number of financial services industry luminaries were quoted, most of them claiming that more regulation is not the answer to the avoidance of losses suffered by retail investors in recent collapses such as Storm Financial and Banksia.

The article went on to assert (without substantiation) “the fact that most people will fail to heed the basic principles of investment shows that there is an urgent need to improve investor education”. That is, there is a direct causal link between a lack of effective investor education and investors losing money. That’s quite a claim, especially when this quote also suggests that most people (that’s more than 50%) are either financially illiterate or worse still, are unable to control their tendency to committing the cardinal sins of greed and envy when faced with a deal that looks too good to be true.

I am certainly not suggesting that financial literacy education is a waste of time. On the contrary, I am enthusiastic about efforts to improve the knowledge and confidence of investors. However, the financial services industry must not be allowed to promote its support of education as a way of demonstrating good corporate leadership, thereby avoiding discussion of improved regulation and ethics by transferring the blame for losses onto ignorant or greedy investors who should know better than to fall for the representations of dodgy promoters.

Regrettably, like the poor, dodgy promoters will always be with us. Therefore, I agree with the view that the best regulations in the world will not stop the most blatant scams and rips-offs (such as Nigerian emails) which will continue to dupe unsuspecting members of the public. We must continue to do our best to warn and educate people about these criminal activities.

However, we must not put the likes of Storm Financial and Banksia (which rather uncomfortably involve some of the leading lights of the Australian financial services community) into the same category as extreme criminal scams, thereby reinforcing a convenient conclusion that because consumers are substantially at fault, more regulation of the industry as a whole is unnecessary and that the only feasible solution lies in redoubling our efforts in financial literacy education. If only the solution were that simple.

The reality is that we can take significant and workable steps as a community (by way of legislated regulation) and as an industry (by way of self-regulation) to improve the lot of consumers. My preference is always for self-regulation (at least as a first step). After all, self-regulation at a level above the minimum requirements of the law should always be the hallmark of an honest and ethical industry, especially when it is purporting to offer trustworthy professional advice to the public.

Unfortunately, the Australian financial services industry’s self-regulation record is not good. In order to demonstrate that point, we need go no further than the recently introduced Future of Financial Advice legislation. That legislation (which was introduced as a result of the excesses of margin lenders such as Storm Financial and Opes Prime) was avoidable if the financial services industry had been willing to introduce and enforce its own genuine professional and ethical standards.

Instead, the industry has suffered an own-goal caused by its unwillingness to address its eminently fixable shortcomings. Worse still, FOFA’s chances of improving the industry’s structurally-driven poor behaviour are quite limited. Of course, that is the precise outcome sought by many of the industry’s leaders who hide this truth by complaining about FOFA’s costly administrative complexities for which they are substantially responsible because of their insistence on workaround solutions and ethical compromises involving, for example, disclosure of conflicts rather than avoidance of them.

As a result, there are likely to be significant and intricate amendments to FOFA over the coming decades as the industry is dragged kicking and screaming to the position where it could have been in 2013 (and on its own terms) if it had voluntarily chosen the route of self-regulation in the public interest, not just the appearance and rhetoric of it.

Therefore, until the industry gets its act together (voluntarily or otherwise), financial literacy education should include an independent assessment of the industry’s conflicted and flawed structure and its potentially detrimental consequences for investors. That would be equally as useful as a discussion of the connection between risk, reward and Nigerian scams.