With banks "inherently" set up to cater to retail investors, an investment manager has said dissatisfied sophisticated investors should consider their options.
Speaking to the Nest Egg podcast team, IPO Wealth's director, James Mawhinney said there are options out there for investors "fed up" with the banks, and these alternatives could even boost returns. In this episode, James also tells us about:
- Modernising and discovering the alternatives to term deposits
- What the government guarantee means for investors
- New income streams for high-net-worth investors
Thanks, James, for joining the Nest Egg podcast. You can stay up-to-date with what he and IPO Wealth are up to here.
David: G'day, and welcome to the Nest Egg podcast. David here. Also joining me, managing editor for Nest Egg, Tim Neary. Tim, welcome to the show.
Tim Neary: Thank you, David. Thanks for having me on the show.
David: I think it's the first time, but first of many, I hope.
Tim Neary: It's my first, and look, I'm new in the title, so I'm really excited to be here, and I'm really pleased that you've had me in here.
David: All good.
Tim Neary: It's a big step for me, David, to be on your show.
David: It is. Actually, Tim, while we're here actually just very quickly... Before this you've got a wealth of experience in journalism and editorial as well, and that's gonna carry through towards Nest Egg, so we hope to see a lot from that side as well.
Tim Neary: Fantastic, David. Yeah, look, I've spent, it's about two years here at Momentum Media now. I've been writing across the real estate titles at REB and Smart Property Investment and just recently was promoted to managing editor across the Nest Egg and another My Business title. So yeah, really keen to be on board, really keen to bring some of that outside experience into the Nest Egg portfolio.
David: Yeah, big time. Look, Christmas just around the corner, I think for a lot of our listeners including myself, we haven't got our own shopping lists but there's also the investor list. So there's a thing that you want to look for next year, where you're gonna go, how you're gonna adapt to next year ... 2018 is on everyone's tongue at the moment.
Tim Neary: Too right.
David: So one of those things, we have also brought in James Mawhinney. James, welcome to the show.
James Mawhinney: Thank you, David. Thank you, Tim.
Tim Neary: Welcome, David.
David: We're gonna talk today about, I think more broadly, around one, investments that you can take on board, but a new thing, which is something which I only recently came across, was IPO Wealth. IPO Wealth essentially are running an alternative to a term deposit. I think a lot of people out there, especially in our industry, a lot of our investors will know a lot about term deposits. I think people have their own misconceptions, or at least their own opinions, on that as well. But this is a bit of a different turn to that, isn't it? It's something which is changing from your normal term deposit but something which is a bit more special on that side. James, I'll ask you to tell us a bit more about that.
James Mawhinney: We saw an opportunity last year where we found, in talking to a lot of investors, that they were largely dissatisfied with not just the level of service that they were getting with the banks, but particularly the rates of return that they were getting. Banks inherently are set up to focus on retail investors, which is typically those that have smaller amounts of money to park. 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. What that means, for some listeners, is those that are what's known as wholesale and sophisticated investors. Most investors with us typically will park hundreds of thousands of dollars, in some instances millions of dollars, with us.
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. But we're getting a great response from the audience and the market out there because most people are fed up with the banks.
David: Yeah, and I think that says it for myself as well. We had a conversation just before this podcast, but for me, I want to know the CEO of every company that I have a dealing with. I want to know exactly who ... If I'm gonna go sit down at a bar, I wanna know the guy that's gonna exactly take my investment and make it into something that I want. So for me to be part of that, and I think for a lot of our listeners as well, to be part of that process, is a huge, huge asset to have. I think that's also, in a lot of the space that we have today, some of those real nice shiny toys that you want and getting that in the market, they're kind of taken away because they haven't got the flexibility or even the time. I think time's a big thing as well to manage your portfolio.
James Mawhinney: Yeah, I think, just to add to that, a big thing is, with particularly a lot of traditional banking products in Australia, a lot of them actually struggle to do much better than inflation. Particularly for a lot of the listeners that have self-managed super funds or they're in a position where they're effectively a self-funded retiree, having somewhere that they're able to park effectively idle money and a regular return on that, and beat inflation, to us has always been an important component of the financial services industry, which to date has been largely untapped.
David: I hugely agree with that as well. I think the biggest thing when I look at a term deposit, the only thing keeping me away from that is I feel I can yield better results from somewhere else. And the fact that I can potentially look at this as a product which can do that as well and have a better result than I can get from the bank, that's a win. I think people were drawn away from it because they could find better opportunities across their way from the banks, so this is really coming in to say, do you know what, guys, this is a bit different, we're taking this away from them and we're bringing you a product which is a bit more tailored to the investor, by the sounds of it.
But you mentioned at the beginning, it's for the high net worth investors, so we're looking at a minimal investment of I think it's $500,000.
James Mawhinney: Yeah, look, from the corporations requirements, without boring you too much with the legal aspects of it, there is ... To be defined as a wholesale or sophisticated investor, you need to have net assets of at least two and a half million dollars. Either that, or display income of $250,000 a year for the last two years. Either that or if you can't prove either of those, if you do invest half a million dollars or more, you can actually bypass those two requirements. Our average investor is a fair bit higher than that, but at the same time we accept investment from as low as $100,000. I guess the key message with us and our team is at the end of the day, we are a relatively new brand in the marketplace, but certainly creating waves, and it's important therefore that as people come to know the brand more, develop more trust with what we're doing, the best way to do that is literally just to dip their toe in the water with an amount that they're comfortable with and see that we deliver on our promises.
David: Yeah, no, that's great. I think that the biggest thing for our listeners, and I think we're all along the same mentality, is, I'm a pretty risk-averse investor, I don't go running around asking for stock tips, I don't go running around doing things which I shouldn't. I'm very particular on where I go and where I actually invest, so risk-averse, low-risk is great for me because I'm a slow burner. I'm not looking for high yield. I think a lot of our ... If you're on Nest Egg and you read our articles, you'll get the gist that we publish content which is purely for a slow-burning, high-level investor, but wants to build wealth correct. I think that's a huge thing where if you want to become financially free by the time you're retired, which is a huge stress for some people to actually get to that point, you want to lock things away with the intention that they're gonna perform.
James Mawhinney: That's right. I think, just to add to that again, David, the situation that we're in where we're paying a regular rate of return to our investors and have been since the fund was established... The rates of return from our perspective are marginally higher than those of a term deposit. Obviously there is a different risk profile, which again in our disclosure document it covers all of that, but the important thing is that because we're not paying upwards of eight, ten, twelve percent on the money, it actually means we're not having to put the money out to work so much. It means that we're able to sit in a more conservative position, make investments that make good sense, but we're not really forced to make the money go out there and work, whereas there's a lot of funds out there, particularly growth funds, that will promise much higher rate of return, but they're having to really deploy that money almost instantaneously in order to keep their investors happy, which we don't need to do that in order to satisfy our investors.
Tim Neary: That's an interesting observation that you made there earlier, David. You said you like to understand the investment to its nth degree and you're risk averse and a slow burner. And at the same time, James, you were talking about your typical investor is a high net worth individual, $500,000 and more. Obviously astute investor's all ready to have that kind of wealth in their pocket, looking for a return but also being risk averse, so it's quite an interesting position that they find themselves in, and I guess you would get asked that question quite a lot?
James Mawhinney: It would have to be up there with the top three questions we get asked, absolutely. The way most of our inquiries go, they'll inquire and say, look, we've got X amount of money currently sitting in a term deposit earning not much.
David: Yeah, nothing.
James Mawhinney: And we're looking to park it somewhere that's gonna earn a little bit more without obviously spreading ourselves too thin or taking unnecessary risks, can you help us out? And that's really where IPO Wealth comes in.
David: Yeah, steady and reliable income is purely ...
Tim Neary: The name of the game.
David: Yeah, absolutely. These days as well, you never know what's around the corner. But I think that links as well ... One of the other top questions you get ... If you can elaborate a bit more on the government guarantee.
James Mawhinney: Yeah, be happy to. 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. Now as most listeners will be aware, 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 I believe it's $20 billion. Now, at the moment in Australia, there's somewhere in the vicinity of around $400 to 500 billion sitting in savings accounts and term deposits. Now if you break that down across the top four banks, they're 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.
I think to add to that, given that our clients that we work with and our investors that park money with us 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 percent 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.
Again, I don't want to harp on it too much, but it should be something that gets factored in to an investor's decision as to where they park their money, and again, that might be some or all of it, across different financial institutions. And we see and hear of all sorts of very creative and elaborative investment strategies that people use, but ...
David: Someone's trying to game it somewhere.
James Mawhinney: That's exactly right, but we recommend Googling the government guarantee and really doing your own homework, because there is a lot of information out there that, in my opinion, isn't actually disclosed by the banks. But when you do actually dig a little bit deeper, and there's plenty of discussion forums about it, you'll find that it isn't actually quite worth the paper that it's written on.
David: Yeah. I think it's one of those things where clarity in an investment portfolio needs to be clear as day. And if it's not, it does ... Sometimes those terms and conditions and the fine print at the bottom, if you don't read those, you can get stung.
James Mawhinney: I think just to finish off on this point of the government guarantee, David, again, worst-case scenario, if hell froze over and we had a massive financial collapse in Australia, which given the recent press about certainly the property market coming to a bit of a halt and interest rates inevitably going up, which is leading us in some ways to what I would foresee being a mini-US housing crisis, it's certainly not completely unfathomable that some situation like that could potentially exist. It's important therefore that investors really take that into consideration when they're looking at parking money. One of the organisations that we provide debt funding to via the IPO Wealth Fund actually has investments across eight different countries. I think that's up to about nine countries as of last week. So the portfolio is actually quite diversified as opposed to really just focusing on, say, Australian stocks and shares, which everyone knows that's listening, they can be great one day and not so favourable the next.
David: Yeah, for sure.
Tim Neary: Sounds like that word guarantee is quite a dangerous word to use.
David: It is.
James Mawhinney: It is.
Tim Neary: Sounds really strong but doesn't really have the muscle sometimes that it's purported to have.
James Mawhinney: I agree.
David: Definitely, that's true. And one of the other things ... A lot of our listeners out there have fantastic relationships with their financial advisors. Some people I've spoken to personally have had great success stories where they've gone from their own investments to going with a financial advisor, and there's a lot of people that likewise do better on their own. But how can a financial advisor link that, and how can they get involved with their clients as well? How can I take this to my financial advisor, for example, and can they link into this their side?
James Mawhinney: Sure. Look, we encourage all of our investors, current and future, to discuss IPO Wealth as an investment option in their portfolio. But we always encourage people to be mindful of the fact that it's a bit like walking to a BMW dealership and asking the sales rep, "Should I buy a Porsche?" The financial advisor has a set of products in his kit bag that he can market and makes commission on, and therefore recommending a product outside of that really isn't to his financial benefit. One of the strategies that we will be deploying in 2018 is actually to go to the financial planning industry, which we've already had a lot of discussions with. We have a lot of interest, actually, across a lot of financial planning firms and wealth management firms about adding IPO wealth to their approved product lists, because it will give investors another alternative to term deposits, those that, particularly, again, high net worth individuals, are looking for something with a little bit of a better rate of return. Again, different risk profile, but if you look at the sort of advice that financial planners are in a position to give, as I said, based on a lot of discussions over the last six to 12 months, this is something that's looking like it will be very favourable.
I think one other point worth adding on that topic, David, is also investors going and asking their lawyers and accountants for advice. Lawyers and accountants, and we all need them, they're great, they serve very much a purpose, but again, they're in a position where they don't want to necessarily lose their client, and if they are seen to be giving advice that that client acts upon and the investment doesn't work for whatever reason, they don't want to risk their client. So it's easier for them to actually do nothing. Again, I come back to what I was saying, at the end of the day, if someone is considering making an investment, whether it's us or anything else or any other financial product, make up your own mind and start with an amount that you're comfortable with. As you really start to see good proof of concept, just work up to a level that you're always comfortable with. Never overstretch yourself.
David: Yeah. The biggest thing that I follow as well is, an educated investor is a confident investor. Do your homework, do the research. Probably the best point that I've actually learnt across the last few years from investing is just, it pays to do your research across this thing as well. Look, there's also the other chance of that we wanted to discuss, called the independent trustee, so I know that that's a big thing which is coming through as well.
James Mawhinney: Yeah, when we establish the fund, there's a couple of features that we really saw as important to investors. I know earlier we talked about regular returns. We do provide the option of quarterly distributions. The way that we've established the fund, we actually have an independent trustee, which means that the funds that are invested are in many respects ring-fenced, and largely overseen by an independent third party. We've got a very reputable firm in Melbourne that acts as our independent trustee. Again, it's all written there in the disclosure document in terms of who they are and their credentials. What it means is that the money, when it's invested, is in many respects ring-fenced and only released to IPO wealth, as in us, as an investment manager, on the basis the investment submissions we make align with what's disclosed in the disclosure document.
David: No, of course. I think as well, a lot of people have had that conversation where they've walked into their bank branch, sat down with a very polished salesman or at least someone who works along the bank, and had this conversation of how can I get a term deposit. So how can people get involved in IPO Wealth?
James Mawhinney: Sure, it's very straightforward. If you Google IPO Wealth or go to ipowealth.com.au, you'll see that you're able to request an investor pack that we'll send you over an email, and we've got a team of people in our office more than happy to speak to investors, even more than happy to meet with people face-to-face. So we're very much, again because we work specifically with high net worths as opposed to the likes of banks that work with every man and his dog, we're able to provide a much more tailored service which includes, in some instances, taking clients for lunch. I actually got invited ...
David: Yeah, your phone is buzzing already now.
James Mawhinney: True story, I actually got invited to, I think it was our second investor who put a million dollars into the fund, for Christmas lunch with her.
James Mawhinney: It was a beautiful lady, lives in St Kilda, Jen, you'll know who you are. Thank you very much for the kind invitation, and at this stage I have no Christmas plans, so there's a good chance I may yet take her up on it.
David: Gosh, yeah, that's a good deal, isn't it? That's it, Christmas lunch. There you go. Look, I really look forward to following your journey, James. Appreciate the time coming in today and discussing it. Is there anything else you'd like to add to this?
James Mawhinney: No, look, I think we've covered most of the key points. I really appreciate both of your time and the opportunity to share a bit of an insight into what we do on a daily basis, and as I said really certainly encourage people to dip their toe in the water because we're doing something that's pretty unique and special, and our success is really our clients' success at the end of the day too.
David: Good man.
Tim Neary: It was just interesting to hear you talking about doing your research, and it just struck me again how important it is to do that. And to weigh that up against what you were saying, James, around if you like what you're seeing ... If you're doing the research and like what you're seeing, then dip your toe in the water. Have a go. And you don't have to go all in, just have a go and see what you're comfortable with, I guess.
David: Yeah, it's all about, like I said, being a confident investor. If you've done your research and you feel like you're getting into something which is worth your while, it's still is worth checking out. And if you don't, you're not opening the doors.
Tim Neary: Not giving yourself a chance.
David: There you go. It's all about opportunity these days, isn't it?
Tim Neary: That's the way, David.
David: James, thank you very much for coming in. Tim, thanks for coming in.
Tim Neary: That was really nice, David, thank you.
James Mawhinney: Thank you.
About the author
Join The Nest Egg community
We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians
About the author
Join The Nest Egg community
We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians