Investment Road Test: ANZ Online Investment Account

PORTFOLIO POINT: The ANZ account looks and feels like a simple bank product and appears designed for younger or less sophisticated investors, but its costs seem hard to justify.

Following last week’s review of the Westpac BlueChip 20 investment (click here) a reader emailed and asked for my comparison with the ANZ Online Investment Account. The query was from the son of a subscriber whose interest was piqued by the simplicity of the product for startup DIY investors.

A review of the ANZ Online Investment Account shows that it is also targeted at this market, with the lower minimum investment amounts suggesting it is aiming for younger or less sophisticated clients than the Westpac product.

The ANZ Online Investment Account is a simple investment that buys units in the State Street SPDRs S&P/ASX 200 Exchange Traded Fund. This ETF was one of the first and best low-cost ways to buy into the top 200 ASX stocks. It blindsided typical active fund managers when it was launched a few years ago: its very low fees (0.26% plus GST) are significantly lower than the typical fund manager fee of 1–2% pa. And since many fund managers don’t even beat the overall performance of the index, the SPDRs concept has been a great product for investors wary of underperforming managers.

SPDRs are ASX-listed, even though they are units in an exchange traded fund that is managed by State Street, they trade and can be bought and sold like ordinary shares. Like any ASX-listed security they can be transacted via online and discount brokers. The convenience and simplicity of ETFs is one of their main points of appeal.

The main attraction of the ANZ Online Investment Account is that it looks and feels like a simple bank product. Similar to using a cash management account (which isn’t a bank deposit, and is separately managed by an external investment trustee), the ANZ account provides statements, ease of entry and exit, and the security of being managed by ANZ Trustees.

Dividends from the SPDRs are automatically reinvested into more units, and investors get the benefit of franking credits attached to them. Compared to transacting in SPDRs through a stockbroker, the ANZ Online Investment Account offers the relative simplicity of normal bank products.

Even so, it’s hard for most investors to justify the high additional cost imposed by the ANZ account. In addition to the cost of the SPDRs themselves (0.26% plus GST), the ANZ account charges fees of 1% pa, as well as brokerage of 0.25% for each time an investment in the SPDRs is made. Those are fees commensurate with actively managed portfolios – without active funds’ prospect of outperformance.

What is fascinating, though, is the prospect of using the ANZ Online Investment Account as a way to get children and low income earners started into the market. Initial investment amounts are $1000 and further contributions of $100 minimum can be made. Like stockbroking accounts, the ANZ account can’t be opened in the name of children under 18, but there may be many investors that are attracted to the low ongoing contributions available compared to using a stockbroker to buy SPDRs or other shares.

The ANZ Online Investment Account website shows how powerful long-term sharemarket investing can be, using an example of an 8% pa market return, $1000 initial investment and $25 a week thereafter:

“If you started investing when your child was born they would have:

• $20,514.24 when your child turned 10
• $37,910.74 when your child turned 15
• $70,371.60 when your child turned 21

Even if you stopped making further contributions after a child turned 21 but they held on to the investment, they would have $320,135.87 at the age of 40.”

** Update **

ANZ has advised Eureka Report that:

“We advertise our product as having a 1% fee which includes State Street's 0.286% fee. ANZ charges a 0.714% pa fee, calculated daily and collected upon withdrawal or netted off any distribution. Overall we are very confident that our product remains a very low cost way to invest small amounts over the long term.”

I have reviewed the ANZ correction and accept that the costs as referenced in my Road Test did overstate the true cost of the ANZ Online Investment Account. The amount of the overstatement, 0.26%, deserves some analysis and discussion. On the one hand, that amount is the ENTIRE cost charged by the underlying investment, SPYDERS, charged by the ETF provider, StateStreet.

It’s hard to imagine the complexity of the systems and business operations for which StateStreet charge that fee; economies of scale must help keep that cost down, but nevertheless the SPYDERS cost sets a new benchmark against which others must operate. On the other hand, noting that my Road Test did overstate the true fees in the ANZ Online Investment Account, reinforces my conclusion.

However, the sheer simplicity and convenience of the ANZ Online Investment Account and its flexible user interface, does make the product a powerful tool for starting out investors, who need to start investing as soon as possible in life in order to benefit from the compounding growth prospects of the Australian share market. I am happy to revise my scorecard for the ANZ Online Investment account by increasing the score to 3.5 stars, as follows:

The score: 3.5 stars
1 Ease of understanding/transparency
0.5 Fees
1 Performance/durability/volatility/relevance of underlying asset
0.5 Regulatory profile/risks
0.5 Innovation

Tony Rumble is the founder of the ASX-listed products courts LPAC Online, a provider of investment training to financial services professionals.