Bad advisers, SMSFs, and The Good Guys

Summary: More trials and tribulations at the banks told anecdotally, a welcome and immediate change for SMSFs, and another lesson for Australian retail.

Key take-out: The long-term danger for shareholders is that as the banks change the culture to one where customers get a look in, profits will not grow, because in a strange way they have been artificially boosted. 

During the week I ran into a close family friend who is in retirement and not that well, and he told me a story that graphically illustrated the cultural problem at Commonwealth Bank the new CEO will have to address.  

And it also underlines that it is essential you don’t just blindly accept advice. Think through your own personal situation.  

My friend has a self-managed fund that has assets a little over $1 million and so is not on the government pension. Most of the equity exposure is around investment companies and publicly available trusts.  

He decided to have his portfolio reviewed by an adviser employed by his bank, which is CBA. Walking out of a CBA office in an outer suburban branch, after giving this CBA adviser all his personal and fund details, my friend was left feeling truly stunned by the advice he had received.  

The bank employee suggested, in all seriousness, that my friend’s fund should borrow money from the bank and invest in a dwelling. My friend has no income other than his superannuation pension, is not contributing to his fund, and yet, he was told to gear the fund to the eyeballs as part of a house purchase.

If anything went wrong, and the housing market fell, his fund would be hit hard with limited chance of recovery. He and his wife would have to go on the government pension. 

All this communication with CBA happened in the last three months, and since then house prices have eased slightly. The CBA employee didn’t bother to read the portfolio and showed no recognition of the existing strategy. It was all about getting my friend to take out a CBA loan that would be secured against the house and the assets of the fund. I am sure he would have received a commission and it was all about profits for the branch and the bank, and not about the interest of the client.

Maximising profits at a cost

It is always dangerous to take one example, but so many other awful practices have come to light through the Royal Commission, including the Australian Prudential Regulation Authority’s (APRA) reports on banking culture. You can see the banks have become totally dedicated to maximising profits.  

I think the rot started to set in at CBA and some of the other banks when they told their bank tellers that their job was to sell product to people making deposits or withdrawals. It was not a pleasant customer experience and many of the tellers didn’t have the skills base to do it well. I sort of accepted it at the time but I now realise that I was witnessing the beginning of cultural decline.

The long-term danger for shareholders is that as the banks change the culture to one where customers get a look in, profits will not grow, because in a strange way they have been artificially boosted. And, of course, there is also the risk that this drive for profits caused all the banks to issue loans that were not as well-secured by borrowers’ net income as they should have been. If dwelling prices hold at current levels or only fall a small amount, that will not be a problem. However, any major fall would leave all the banks exposed.

But sometimes banks do really good things. I ran into a couple in their mid-20s who live in a regional town and are well-known to everybody. The family clubbed in and a deposit was raised. There was a limited family guarantee. I know that is dangerous, but the young couple are really hard workers and the bank knew who they were lending to. That’s how banking used to be — the bank manager knew the customer and the family. But there are many 5 per cent deposit loans where the bank doesn’t know the background of the borrower. 

SMSF changes

Meanwhile, I hope you picked up during the week that the Minister for Revenue and Financial Services, Kelly O’Dwyer, has increased the number of people who can be members of a self-managed fund from four to six. Increasing the number of members in your fund may not suit your family circumstances, but if the ALP wins the next election, members of superannuation funds in pension mode with assets between around $800,000 and the tax-free cap of $1.6 million are clear targets. One of the ways to overcome the problem is to have your children and/or grandchildren as members of the fund, and of course, they will be contributing and paying tax so any franking credits tax benefits go to the family rather than a government.

It would have been better to increase the number of people who can join a self-managed fund to greater than six, but it is still a useful addition for those in that family situation. 

Not so Good, Guys

And finally, you may remember that I was dubious about the JB Hi-Fi acquisition of The Good Guys. So was the team at Intelligent Investor. JB Hi-Fi paid full price.

We buy many of our appliances from The Good Guys and they certainly know us by name and have a record of our purchases. But never have they bothered to email me with products they think I might find interesting; by contrast, JB Hi-Fi emails regularly. This is obviously a personal experience, and others may be getting frequent emails, but clearly The Good Guys' system has gaps.

Part of the success of The Good Guys was the fact that many store operators had equity in their business, which incentivises people to drive the business forward. But, as part of the rationalisation in advance of the float or trade sale, that structure was rationalised. The store managers either received equity or cash.  

JB Hi-Fi was buying a business that had changed its structure and was therefore much higher risk. The JB Hi-Fi profit announcement confirmed that The Good Guys was not performing to the levels that had been expected. I am not surprised.

JB Hi-Fi is managed by good people but they will have to work very hard to lift returns of The Good Guys at a time when digital disrupters like Amazon and Kogan have them under attack.