Managed Funds/Margin Loans/Regular Gearing

[Gordon Gekko]

Hi All,

I am new to the forum and looking for a few answers with regard to the above.

I have been investing in 9 managed funds for the past year which have done great (20%+) Initially 50k contribution with a 70k Margin loan. Started a regular savings plan of 2k per month with a 3k monthly draw down from my margin loan account which after a few months went up to 3k-3k for the first year. Now I am up to 4k personal and a 6k monthly draw down per month.
Margin loan is for 115k and the % rate is 9.10, LVR is around 48%. and have reinvested 42k in distributions

I guess the question is in regards to fee's I pay for the above investments.
I pay 3% contribution on every $ invested
1.86% to each of the fund manager
.66 to my financial adviser

The first year i Think the fee's equaled over 10k (3600$ initial contribution fee and 6k ongoing)
Do these fees sound high to anyone? Especially now that the fund has grown and the monthly investments are higher. It could cost me 15k per year.

Should I accept the fee's as the performance has been good or should I try to renigotiate with my Financial planner or else maybe try this invest smart company and get the contribution fee as a rebate.
I'm convinced my financial planner is just a salesman looking for his commissions and the service I get for the above fee's is a joke. Ie he rarely answers e-mails,

Any info would be appriciated.

If your not on the inside your on the outside!

 

[Awesomandy]

Re: Managed Funds/ Margin Loan/ Regular Gearing

The standard contribution fee is around 4%, so 3% isn't too bad if you look at it this way. But then, for most funds, you can invest in them without paying a cent in contribution fee. Although, with funds, you need to also look at the MER and the exit fees as well.

Also, I question why you would have 9 managed funds. Just like shares, too much diversification is actually a bad thing. It adds complexity to the portfolio, but not reducing risks either. With the amount of money you have there, I would generally consolidate them into may be a max of about 3 funds, and also make use of the lower fees offered by wholesale funds.

*Note that I'm ignoring the implication of capital gains tax, which you need to consider.*

Personally, I'm using my margin loan account for a geared equity fund with a regular gearing strategy as well. My amount is much smaller than yours (I'm not going to bet my life long saving in a doubly-geared strategy) but I don't pay any contribution fees. I'm also pretty lucky with its performance. This strategy should net me somewhere around 100% gain (before tax) for the 06/07 financial year. (haven't done the maths for it yet)

 

[Gordon Gekko]

Thanks for the reply,

I also have a geared share fund CFS geared share fund which has done awesome. It's the one I make my biggest monthly contribution to (4600p/m)

With regard to contribution fee again:
Who gets this 3%? Does it get rebated to my financial planner or does it go to the Fund manager of each of the 9 funds or is it what makes up the 1.86% MER to the fund manager?
I can't seem to figure out where they take the 1.86% unless its with regard to the buy/ sell price of the units when I purchase them monthly.

If it is as I expect and that the 3% gets rebated to the financial planner then that means he is recieving 3% of every $ invested as well as a .66% MER monthly as well as trailing commissions on each fund and a kick back for the margin loan recommendation. I could be way off here?
It not to hard to see these investments are in his best interest and maybe not mine? But as I said in my last post the returns are good so maybe I should'nt complain.

Anyway, I have a meeting with him next week so I plan on taking as much time as I need to figure all this out.

Thanks again

 

[Junior]

By law you should have had these fees explained to you in a Statement of Advice as well as in the product PDSs, and the planner should explain to you verbally how the fee structure works and exactly what he receives. Quiz him at your next meeting.

 

[jimmyyu]

I am interested in finding out the best interest rates available for margin loans in Australia, and would like to know what sort of rates people are getting.

I am currently with NAB. Their rates start with 8.8% (variable) and goes down to 8.3% for account over 1 mil.

Thanks.

 

[MS+Tradesim]

Gordon, if you invest through a discount broker like comsec (not necessarily recommending them) you will have all entry/exit fees rebated fully as extra units (in most cases, depends on the funds) and only have to pay the MER. If your planner is not rebating your fees then he is just a salesman. As a rule of thumb planners with integrity charge fee-for-service and rebate the entry/exit fees.

The returns MAY be good but bear in mind you can access exactly the same funds through a discount broker and get exactly the same returns and NOT pay entry/exit. You should be paying him for advice, not products.

Consider: start with $100k compounded at 20% over 10 yrs = $619,173.
Compounded at 23% over 10yrs = $792,594.

Despite the fact that you may not get that return 10 yrs running...you are still being robbed!!

ps. the math in my example isn't exact because I'm only starting with $100k and no additional contributions but still assuming an ongoing 3% extra. However, your strategy does mean you lose 3% every month from your contributions. So as long as you get the idea!

 

[larry123]

I also have a geared share fund CFS geared share fund which has done awesome. It's the one I make my biggest monthly contribution to (4600p/m)

I've also invested in this fund. It has done quite well hasn't it

 

[Gordon Gekko]

Thanks for the info all.

I had just recently a meeting with my FA where he went over my stagetgy for last year and the year ahead. I also had several meetings with other FA's.

I decided to fire my current salesperson (FA) and go with a new one even though he got me 27% average last year over my 9 funds.

In the end it all came down to costs and service. I may not be his biggest client but I am sure I was paying the highest fee's.

The good news is my costs will go from around 10k per year 4k per year.

My advser who set up my first stategy set it up as follows.
CFS Imputation
CFS Geared share fund
Platinum asset management
GSJBwere global small co
First choice small co
Challenger Australian share
Barclays Australain Share
CFS Future leaders
Acadian Asset Management

All retail funds even though the starting balance was in excess of 100k
So the costs were as follows
3% contribution fee (Rebated to my FA)
1.86 MER (.60 rebated back to my FA)
.66 Adviser service fee (tax deductable)
$350 rebted to my FA for the margin loan
I also contribute monthly so I pay 3$ on every $100 I invest.

My new adviser has suggested we role it over to wholesale funds where I will have to pay no contribution fee's. It will all the same funds, but the costs will be as foloows.
0% contribution fees
1.1% MER (any trailing commissions rebated to me as additional units)
1.1% Adviser fee (tax deductable)

I knew I had to fire him when at our meeting he gave me a very nice pen and said it was mine to keep. I mean this is a flash pen. I was thinking the whole meeting that this prick is using my money to buy these flash pens to suck in as many people as possible, so he can skim even more money. I guess he has the old insurance attitude to just get as many clients as possible, give them no service and a large part will stay with you out of some kind of apathy.

I may not be able to control how the funds perform but I can certainly control the costs!!

"If your not on the inside your on the outside"
GG

 

[MS+Tradesim]

Good to hear GG. BTW, are you appropriately insured? TPD/trauma? Income protection? Last thing you would want is a crisis resulting in being forced to sell down your investments. Hopefully your new adviser has discussed this with you if you don't already have it.

 

[Awesomandy]

My new adviser has suggested we role it over to wholesale funds where I will have to pay no contribution fee's.

Will that have a taxation implication - e.g. extra capital gains tax?

 

[Gordon Gekko]

My first adviser never mentioned insurance's and the new one has, so we will be getting income protection as we are 30 & 32 and will need to continue to invest if one of us gets sick or injured.

There will be a CGT issue but we will be looking to reduce it even if it means unwinding the porfollio over the next year.

The investments were initially set up in my wife's name as I am Canadian and did not have my residancy sorted out at the time. Now I am a Permanant Resident. So we would like to set it up in joint names. We earn the same money so I don't think it suits us to have it set up in one's name.

Thanks Again,

"Lunch? I don't have time for lunch"
GG

 

[MS+Tradesim]

Hi GG,

Talk to your adviser. It may be more appropriate to set it up in a trust or company/trust structure especially if you intend to invest in property or have children. Barring those considerations using a trust may still give you more tax advantages. Get the structure wrong now and you may end up paying more tax than necessary.