Consider Yourself Warned…

Oh dear.

It happens every now and again. A handwritten letter hits my desk. It’s written in beautiful cursive script — a skill from a bygone era, like sewing, or customer service.

“In good faith we invested our life savings with the advice of a Bendigo Bank financial advisor”, it begins. (And with a lead-in like this, I know the next line isn’t going to be: “and thanks to his independent advice, we’ve solidly outperformed the stock market”).

The letter continues: “We’re both approaching 80 years of age, our funds have been frozen for years, and we need our money back to replace our fridge.”

I don’t know about you, but when I hear the word ‘frozen’, it conjures up a Disney image of a fearless princess who sets off on an epic journey alongside a rugged iceman. Yet a frozen fund isn’t quite as magical — though the lady who wrote me the letter had certainly been on an epic journey, which started roughly a decade ago.

She and her husband went to see a financial advisor from their community bank, who recommended they invest their life savings into the Australian Unity Mortgage Income Trust. For the uninitiated, these unlisted (i.e. not traded on the share market) mortgage trusts are often run by big financial institutions and, as the name suggests, they invest in mortgages on residential and commercial properties.

In the lead-up to the Global Financial Crisis they were heavily promoted by financial planners as a safer way to earn higher returns than bank term deposits, yet without the risks of investing in the share market. The funds marketed themselves to advisors as a good way to earn a commission on the money that their clients had sitting in term deposits (which paid them no commissions).

In 2008, around 150,000 people, many of them retirees, had money tied up in these unlisted mortgage and property trusts. When the Government slapped a rock-solid guarantee on bank deposits at the height of the fear and loathing of the GFC, many of them headed for the managed fund exit at the same time. Within days, the mortgage funds were as frozen as Siberia, and about as difficult to get to.

And that’s the situation our letter-writer and her husband are in right now. They’re getting dribbles of their money out as their frozen fund thaws, eventually to be wound up.

That won’t happen again, right?

Well, the Reserve Bank’s Deputy Governor, Philip Lowe, thinks it might. Last week he warned investors that if they chase high returns in unlisted managed funds, they risk getting frozen the next time the markets get crunched.

It’s a timely warning, given that historically low interest rates are basically forcing retirees to take their money out of government-guaranteed bank accounts in search of higher returns.

And the financial industry has a habit of capitalising on this desire. Every few years, somebody on the 22nd floor of a high-rise comes up with a shiny new ‘risk-free’ product to lure in cashed-up retirees. They often use terms like ‘enhanced yield’, ’hybrid security’, ‘international diversification’ or ‘alternative strategy’.

And, let me tell you, it never ends well.

Meanwhile, I called up the lady who wrote me the letter. “He made it all sound so good and so safe. I wish now, though, that there had been someone around to tell me the truth.”

The truth is, there’s no such thing as a free lunch. The financial services industry knows this better than anyone. Yet they also know that people have short memories: despite going through the GFC, a financial system enquiry, and the ‘future of financial advice’ reforms, they know the punters will be back for more (just like they were after mortgage trusts went belly up in the early 90s — remember that one?).

Well, consider yourself warned.

Tread Your Own Path!