Can term investments beat the banks?

By Lucy Dean

December 22 2017
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An investment manager has argued that term investments can offer an alternative for sophisticated investors "fed up" with banks favouring retail investors.

businessman wearing boxing gloves ready to fight term investments bank favor retail investors

Speaking to Nest Egg recently, IPO Wealth's director, James Mawhinney said IPO Wealth had last year seen an opportunity to cater to investors dissatisfied with the service they were getting from the banks and the rate of return they are getting.

Continuing, he said high-net-worth Australians are “fed up” with banks.

“Banks inherently are set up to focus on retail investors, which is typically those that have smaller amounts of money to park. [At IPO Wealth] We're talking generally in the thousands or tens of thousands.

“So we saw an opportunity to set up IPO Wealth and the IPO Wealth Fund, which is targeted towards high-net-worth individuals.

“Most investors with us typically will park hundreds of thousands of dollars, in some instances millions of dollars, with us.”

In fact, with a minimum investment of $100,000, he says the appeal for the client base is a tailored approach.

“Because we're generally dealing with larger investors, it means we're able to provide a much more tailored service, and importantly, pay a higher rate of return. Now, we do fully disclose to our investors, we are not a bank, we're not an Australian deposit-taking institution. This is an alternative to a banking product.”

Mr Mawhinney’s comments arrive at a tricky period for Australia’s banks. On Wednesday, the Australian Bankers’ Association released a new code of practice that means customers will be informed about transaction services immediately prior to incurring them and will be able to receive a list of their direct debits and recurring payments upon request.

However, the announcement comes just weeks after the federal government announced it would launch an inquiry into the banking sector.

The IPO Wealth director also took issue with the government guarantee, arguing that the structure of it puts high-net-worth individuals' wealth at risk.

He explained: “The government guarantee was established largely off the financial crisis, and it was put in place by the government to really shore up the banking sector in Australia.

“The government guarantee is limited to $250,000 per account per financial institution. What it actually means if you read the fine print, which most investors aren't aware, is that there is actually a cap on that per financial institution of $20 billion.”

Noting that there’s around $500 billion in Australian savings accounts and term deposits, Mr Mawhinney said the top four banks are “sitting on easily a couple of hundred billion dollars of that, which means again if, worst-case scenario, there was a financial crisis in Australia where the banks, or even one of the banks for that matter, went through what some of the banks certainly went through in the US in recent years, the reality is that the investors would only get X cents in the dollar.”

Continuing, he said this information isn’t disclosed by the banks.

“To add to that, given that our clients that we work with… are typically high-net-worth individuals, that often have hundreds of thousands, if not millions of dollars, parked in typically traditional banking institutions, the reality is there's only X per cent of their money protected anyway.

“So in some ways the larger the bank you're with, because they've got more term deposits, the less protected your money is ironically.”

“[This] should be something that gets factored into an investor's decision as to where they park their money.”

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