Abuse of market power

Apparently, the Australian Big 4 banks have been talking about raising rates outside of RBA movements again. Website www.keepbankshonest.com.au suggests that they have already raised rates by 1% above RBA. The Banks’ cite higher funding costs as a reason for future hikes. My opinion is that it’s absolutely despicable for them to consider doing this. It’s an abuse of their market power. They have to act responsible as they have the economy’s health and Australian’s livelihoods in their hands. The GFC has handed the Banks’ a massive amount of power (i.e. huge market share). They have an oligopoly over the banking market – something the smaller players just can’t crack into. If the Banks’ are allowed to increase interest rates independently, they will become more powerful and more profitable which will mean less competition. The Federal Government needs to wake up to itself and take action. Verbal warnings from the Federal Treasure are useless! This week, CBA owned BankWest withdraw its hallmark competitive product. Why? Probably because it was cannibalising CBA’s profit. No need to offer such a good deal in a market you dominate. Right?

Get ready to rumble

Australian Prudential Regulation Authority (or APRA) data suggest that the Big 4 Australian banks had 100% market share of new mortgages in July 2009. Their market share in September 2007 was just 65%! This is a huge change in a relatively short amount of time. Financial commentators suggest that the government needs to do something to assist funding the smaller banks. I agree. However, it will take years of government intervention and hard work by smaller lenders to claw back some of this market share. The problem is; once you give a bank something as valuable as market share, they will hang onto it for dear life! They’ll flight the smaller lenders tooth and nail and they’ll probably win. Therefore, government intervention is necessary but it’s not a solution – at least not in the short to medium term. Prepare yourself for less competition because it’s here to stay. I don’t think we’ve seen the full effects yet. One solution could be to find yourself a good debt advisor. They’ll know the lay of the land and can ensure you won’t be a victim of no competition.

Don’t believe the banks bullshit

I was at a Big 4 bank seminar today where they AGAIN complained about home loan profit margins being ‘tight’. This PR crap makes me so angry as it’s only half the story. Sure. The GFC has increased the cost of funding mortgages which is negative on profit – no argument. However, the GFC has also resulted in a hell of a lot of consolidations (mergers) and sent customers flooding back to the Big 4 banks on mass. Their market share is absolutely huge now (over 90%). They now have more customers that they can cross-sell products to = even more profit. But what happens when margins ease… they make zillions! Business nirvana is winning more clients at the same or higher profit margin. Stuff we all dream of. A very good outcome is winning heaps of new customers at slightly lower margins that you can sell more products to. I would take that any day of the week. Feeling sorry for the banks (or ‘buying’ their story) is like feeling sorry for someone that tells you they lost $1 million last week. If the person went on to tell you that they still had $500 million in the bank (i.e. you heard the full story), you wouldn’t be that sorry for them would you? A tighter home loan profit margin is only half the story. The fact of the matter is the GCF has been the best thing to happen to the Big 4 banks in years. Over the longer term they will prosper greatly. Tighter home loan margins in the medium term it’s a small price to pay for this huge upside and they know it!

It's never a good time to invest

Many people get caught up with when it’s a “good” or “bad” time to invest in property. Sometimes they get utterly confused, scared and bamboozled. They feel if they “wait a few more months to see what happens to prices” they might magically feel more confident – it never happens. Either prices fall and they then they need to wait until they hit to bottom or prices rise and now they think that they can’t invest at the ‘peak’ of the market. They’re crippled and they don’t do anything. Consequently, years go by and nothing happens. A much better approach is to invest when it’s a good time for “you”. Wait until you are confident with borrowing money and you feel you can afford the next investment. When the time comes, make the leap. Trust me. The “market” will not tap you on the shoulder one day and say “hey, it’s a perfect time to buy. Prices have bottomed out and in the next month they’ll start to rise. Buy now. Buy now”. It will NEVER happen so take control of your financial future and you determine when you do something. Who the hell cares about the ‘market’ when you’re investing for the long term in quality property. “Doing” is the most important part of investing. I’ve seen too many people let wealth pass them by through sitting on the sidelines – particularly in the last 18 months.

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ANZ is marketing a rate hike

I note that Mike Smith is quoted in the press today commenting that the banks might increase home loan rates before the RBA. Why? Maybe they are still annoyed that they will have to “follow the leader” and cut overdrawn fees like the other 3 banks. Just watch this space... the banks report their financial results soon and all eyes will be on their ‘cash profits’ from home loans to see if they are suffering or profiteering.

Sign of the times

NAB has had a professional package for as long as I can remember – at least 20 years. However, it’s the first time ever that they have advertised this package on TV. The standard package has been pretty ordinary until 12 months ago when they brought it into line. This week they have reduced the competitiveness of the package. Before the change this week, the bank used to provide a 70 bpt discount if you borrowed more than $250k. Today, to get the same discount you need to borrow in excess of $500k. Clearly, the bank has advertised and subsequently realised how easy it is to get business in this post-CFG world (with 4 major’s controlling nearly 95% market share). Consequently, they have decided “we don’t need to provide these discounts”. To me, this is a sign of the “less competitive” times. It’s not a good sign. Home loan customers should brace themselves for more “non-competitiveness” ahead.

The anti-commissions train... all aboard!

Of the past few months, many bodies within the financial planning industry have started to talk about banning commissions paid to financial planners (e.g. Financial Planning Association and Investment and Financial Services Association). The Federal government will focus on commissions in its review of the industry. It has been a talking point for many years but I guess the recent high profile collapses such as Storm Financial and tax-effective investments have made people focus on the quality of financial advice and the fees charged for it.

One argument for a commission based system (more often than not argued by financial planners themselves) is that commissions make financial planning advice more affordable because the client doesn’t need to pay. However, this argument fails to recognise the fact that clients are paying for these commissions indirectly in the form of higher fees. Therefore, instead of paying a once-off planning fee, they are paying higher ongoing fees.

In my opinion, there is no question that a commission-free environment brings about a more transparent financial planning experience. A fee-for-service based financial planning industry clarifies exactly who the financial planner works for (should be you, not the managed fund provider). Whether fees are charged as a once-off upfront fee or an ongoing trail style payment, is not relevant. Investors just need to ensure that the financial planner’s fee is not dependent upon the advice or product outcome thereby avoiding any conflicts of interest.

I don’t think that commissions should be outlawed. That’s probably overregulation. Instead, I think commissions should be (by law) capped so that the maximum commission a financial planner can receive from selling a product is one percent of the amount invested.

Storm clients have to accept responsibility

I was watching Lateline on Channel 2 last night and it featured husband and wife investors that were Storm Financial clients. The husband was a policeman and their combined income was $100,000 p.a. They borrowed $4 million from CBA to invest (per advice from Storm). They were upset with CBA and blame them for this troubles.

In my opinion, if you are silly enough to borrow $4 million when you only earning $100,000 (and not even get a second opinion), then it’s only a matter of time before some clown takes you to the cleaners. Investors must be proactive with this investments. They need to take responsibility for their decisions. Ask questions. Make sure it makes sense to the average person. Speak to friends and family. Do some checking. If these Storm clients had have done their research, I'm sure they would have found out that borrowing $4 million was financial suicide.

If I jump off a building because someone tells me too, who’s the idiot? Who normally gets the blame. It looks like the CBA and Storm were totally wrong and unethical. No argument there. However, the clients need to take some responsibility for their own decisions.

Perhaps the clients should be angry with the government? The government sets school curriculum and school is supposed to prepare you for life. The lack of education about personal financial management is mind numbing. Parents, if there’s anything you can do to help your children its teach them about money.