Money matters: Beware the fat monitoring fee

By MARY HOLM

Q. About two years ago we invested in a cash management trust as one of a group of unit trust investments suggested by our financial adviser.

We invested an initial lump sum and set up a regular deposit into the fund of $100 a month.

It was also arranged that the financial adviser's monitoring fee be deducted from the trust every six months.

My calculation of the before-tax return paid by the fund to us for the last financial year is 3.77 per cent.

This is not as good as the interest paid on our interest-bearing cheque account, which was 4 per cent in April last year and has now increased.

Can you suggest any reason for remaining in the trust when there are cheque accounts like that available, or other savings accounts with as good or better interest rates?

The trust does not seem to have any more flexibility than a cheque or savings account.


A. I am not as concerned about your cash management trust as I am about your financial adviser. But let's get your question out of the way first.

Cash management trusts operate rather like bank call accounts. But they often have minimum withdrawal amounts or a maximum number of withdrawals a month.

Also, you cannot usually do all the little banking tricks, like Eftpos and ATM transactions, although that is likely to change, says stockbroker John Reuhman of Reuhman & Co, whose clients use several cash management trusts.

The main advantage of such trusts is that they tend to pay higher interest rates than bank call accounts.

Generally, the interest is calculated on your average daily balance.

On some bank accounts, it is calculated on the minimum monthly balance, which can reduce your interest considerably.

Also, the interest rates quoted by cash management trusts are after all charges. There are no additional fees.

Mr Reuhman says cash management trusts generally pay more than 5 per cent. On $100,000-plus it is more than 6 per cent. So your 3.77 per cent is puzzling.

Is it possible you have miscalculated? Or is the difference because of the adviser's monitoring fee?

I am rather suspicious of monitoring fees. Sometimes they are justified but it seems to me that unscrupulous advisers deliberately put people in unnecessarily complicated portfolios of investments.

That makes it hard for the clients to keep track of all the returns, fees, taxes and so on.

When the adviser says he or she will take care of all that for a "mere" x per cent of the portfolio, the client readily agrees.

The result? The adviser gets several hundred dollars or more, for doing a few computer printouts twice a year and mailing them to the client. And the client earns x per cent less than he or she would have otherwise.

Here is what I would do? Get the adviser to earn his or her fee by:

Checking that your calculations are right.

Answering your question about why you should remain in the cash management trust - apart from the fact that he or she probably gets 0.25 per cent of your balance each year as a commission.

Explaining why you are putting in $100 a month.

On the third issue, perhaps those regular deposits cover the monitoring fee.

In that case, ask what you get for $1200 a year - and it had better be worthwhile. It is a lot of money, even if it covers a large portfolio.

If the monitoring fee is less than that, you are obviously accumulating money in the trust. That may then be moved periodically into other investments. If not, it seems a rather odd thing to do.

Cash management trusts are a good parking place for the few hundred or thousand dollars most people like to have readily available for unexpected expenses. But they are not the best place for long-term savings. Again, ask for an explanation.

If you feel reluctant to ask any of this, you have not got a good enough relationship with your adviser.

If you ask, and the answers do not seem satisfactory, the adviser is not up to scratch.

In either case, it is fairly obvious what you should do next.


Q. In September 1998, I foolishly (as it turned out) bought 1000 National Mutual shares. Now that they have been delisted, what are they worth and how do I go about cashing them in?


A. Wake up, Rip van Winkle! National Mutual is still listed on the Stock Exchange, but it has changed its name to AXA.

The shares, as I write this, are trading at $3.12, and you can "cash them in" by selling them through a stockbroker.

AXA, a global company based in France, bought 51 per cent of National Mutual in 1995. National Mutual then listed on the Australian and New Zealand stock exchanges in October 1996.

Last August, National Mutual started using AXA as its brand name, and this February shareholders voted to change the company name to AXA Asia Pacific Holdings.

As a shareholder, you should have received a notice about the February meeting and the resolution to change the company's name, says AXA.

This was also notified in the 1999 annual report.

Turning to whether your purchase has been foolish. In September 1998, when you bought your shares, they were trading at $3.80.

So you are right, it has not turned out to be a great investment - if you sell now.

But did you really buy with the idea of selling within two years? That is a risky game to play.

There is a big chance that any share will lose value over such a short period.

You might be better to wait a while.

I am not saying the price will rise. I do not know, and neither does anyone else, although some brokers will no doubt have opinions on it.

It's your call.

Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.