Capital stable investing – the devil is in the detail
Promoted by Cashwerkz.
The need for capital stable investments, with a known rate of return within the Self-Managed Superannuation Fund (SMSF) environment is not new. Whether it be to set aside money for a defined period in order to fund a property purchase, manage the liquidity of a portfolio in order to fund income streams, or simply as a place to park money temporarily whilst entry points into growth assets are sought (especially where markets are considered fully valued), cash products have long been embraced by the SMSF sector.
The appetite for cash products has continued to remain strong, with data from the Australian Taxation Office (ATO) showing that as at the end of March 2018, over ~$150B of SMSF money was invested in that asset class.
There are four genuine contenders for Advisers to consider in this space: Exchange-Traded Funds (ETFs), cash or enhanced cash based managed funds, annuities and term deposits – each with their own nuances when assessed against metrics such as performance, fees, ease of access / administration and client specific customisation.
Some advisers may choose to manage their short to mid-term cash exposure via an ETF. These may be attractive from the standpoint of diversification as a small number of underlying bank exposures can be accessed from the one investment which can be purchased in much the same way as any other share.
However, in exchange for this simplicity, there are trade-offs that investors need to accept.
First and foremost, the rates available on term deposit / cash products held within an ETF tend to be lower than what is on offer to retail clients if they went direct to the bank themselves. This is because ETFs are often classified as financial institutions (with no ‘look through’ to the underlying retail investor) and will typically receive between ~40 and ~70bps less in interest due to the way that specific source of funding is classified by the Banks.
The proof point here is the most recent 12 month returns. As at the end of August 2018 cash ETF products were showing 12 month returns in the 1.7% - 2.1% range.
Then there’s the additional costs. ETFs still have ongoing expenses applied to them (typically 10bps – 20bps p.a.) as well as a bid / ask spread to consider, alongside the standard purchase / sale brokerage which further reduces returns.
Against this, it is important to note that ETFs do benefit from ASX liquidity (depending on the number of market makers and underlying investor demand), however given the timeframes associated with breaking term deposits and the structure of the actual ETF, it is always prudent to check the product documentation to see what actually would happen should a significant number of investors choose to sell out of their position around the same time.
Summary: These may seem straight forward but look for hidden fees and charges
Cash / Cash Enhanced Managed Funds
In order to generate enhanced returns compared to standard at call cash funds (and potentially as an alternative to term deposits), some investors may prefer enhanced cash products (sometimes referred to as money market funds).
Similar to any cash funds, enhanced cash funds are exposed to credit risk, term risk and liquidity risk. These generally imply the risk of losing capital from the default by security issuers, the changes in interest rates that adversely affect the price of the securities and the inability to convert the securities into cash without any loss of capital. Some of the riskier enhanced cash offerings even have exposure to mortgage backed securities, so even the definition of what belongs in an enhanced cash fund appears well and truly open for interpretation.
It pays to closely check what your underlying exposures are as the risk inherent within the portfolio could be very different to other alternatives.
Similarly to an EFT, and contributing to the lower returns that have historically characterised this investment class, advisers need to be aware of fees eroding an already low return (typically in the 0.2% p.a. range, with a buy/sell spread of ~0.5%). Another key thing to remember is these aren’t tailored to each individual investor. You’re pooled together so your specific investments needs are lost in a group.
Summary: if it seems too good to be true, it probably is.
Annuities give investors an income stream for a defined period of time (or in some cases for life), are backed by Australian Prudential Regulation Authority (APRA) statutory funds and can be customised in certain ways. Annuity like products can also be held via managed investment scheme structures in order to avoid some of the complexity of the annuity product and also be available on traditional investment platforms.
If held on a platform ongoing management fees will have an impact on the payments an investor receives from annuities. It is also important to highlight that the underlying asset allocation the investor is exposed to via the APRA statutory fund will be comprised of a combination of shares, property and fixed income securities, which begs the question, why not simply replicate the same asset allocation yourself (particularly if the allocation to this asset class is a permanent fixture in the portfolio)? If the annuity counter-party provider can guarantee a rate of return based on that asset allocation, as well as make a margin for themselves, what is the opportunity cost to the client over the long term?
Moreover, some annuity products can have penalties attached to them if the position is broken prior to term. This is a natural consequence of having more aggressive underlying exposures supporting the product compared to other more pure cash exposures.
Summary: They’re a stable option, but do you want to pay someone to allocate your money and reap the rewards?
Of all the cash options, term deposits are the most transparent. What you see is what you get, there are no hidden or additional fees, and the amount, the term and the return is all laid out on the table before you hit the ‘confirm’ button.
The spread of rates can be quite significant. This month alone, term deposit fintech Cashwerkz, saw rates ranging from 2.00% - 2.60% for 3 months, 2.00% - 2.75% for 6 months and 2.45 – 2.85% for 12 months. When looking at a $200,000 term deposit for 6 months, that’s a $1,200 difference.
Term deposits are also notorious for attracting investors with honeymoon rates, then dropping them back down to below market average after a certain period of time, meaning to really maximise returns, investors need to switching banks at maturity, rather than just letting them role over, which so many of us do. Advisers can also be turned off by the amount of administration work affiliated with the term deposit process as well. Traditionally the time taken to action cash investing, incremental costs together with laborious paperwork outweighed the effort by the adviser and the ability to enhance returns for the client.
Summary: They’re simple and transparent, but you need to keep on top of the maturity to maximise returns.
Cashwerkz, a leading-edge Fintech company has developed a platform for advisers who wish to maximise earnings on SMSF cash allocations, whilst simplifying the administration time to establish, transact and manage term deposits.
Cashwerkz Head of Advised Distribution, Rob Hay explains “The combination of low interest rates and an increased administrative burden have made it far more difficult for advisers to manage their client’s cash investments. Cashwerkz provides advisers with a streamlined digital solution where an adviser or an administrator can create a client account within minutes and thereafter focus solely on the needs of their client.”
Rob added, “Investing client’s cash is time consuming and frustrating for many advisory businesses. However with Cashwerkz, once the required consents are on the platform, the adviser can place cash investments and no longer requires direct action from the client. This removes the need to complete lengthy application forms and speeds up the investment process. In addition to the simplicity, Cashwerkz offers advisers a marketplace of trusted term deposit providers, enabling advisers a greater choice in the search for their client ‘s most suitable cash investment options.”
Cashwerkz overarching priority and focus is on making the adviser user experience more efficient by assisting with the management of maturities via alerts. This allows for maturity instructions to be revised on the platform at any time up to the day prior to maturity date. This ensures the adviser can attain the best possible outcome for their client. Rob notes, “Providing cash advice often runs outside the advice rhythm within advisory businesses, and sometimes it can be easier to retain the funds with the existing term deposit provider. With a tool like Cashwerkz, switching products and providers becomes just as easy as rolling over.”
There is no cost to the adviser or the client to place a cash investment on the platform. Cashwerkz facilitates the application process for the adviser with the term deposit provider and is remunerated directly by the provider. With transparency as a high priority, the interest rates displayed on the platform is the rate the client receives with no hidden fees or charges.