David Tweed does not seem to be a very nice person.  As the man behind Australian Share Purchasing Company he obtains the list of all shareholders in a company and then writes to them offering to buy their shares at below market value.  Invariably some less financially literate people fall for the offer and David Tweed ends up buying their shares at a discount to their true value.  A practice that seems to me to be nothing more than an intolerable disgusting rip-off of good people.

Earlier this week David Tweed launched a fairly pathetic defensive of his practices in a letter he wrote to the Australian Financial Review.  People will, however, defend his right to such activity on the basis that it is a 'free market'.

One of the theoretical inputs that a free market needs to work property is 'perfect information'.  The lack of information is what David Tweed is exploiting in his 'venture'.  (It is hardly a venture - something that destroys value for all customers is more akin to robbery than any proper business venture).  That is, people are not aware of how they can sell their shares to realise a higher price that David Tweed is offering, or else they would do that.  While ASIC has tried to limit David Tweed's attempts at robbery, including forcing David to put the current market price of the shares on any offer to purchase them, is seems people still get caught by his offers. 

Australian Share Purchasing Company seems to be so ironically named.  After all, ripping off good hark working people who just don't have all the information at hand is simply un-Australian!

Over the past three months I have been writing a second book with Scott Keefer.  Scott has commerce and post graduate financial planning degrees and is joining the firm.  The book is called 'Its Time You New the Truth - Building Investment Portfolios that Work!'

The book looks at the key aspects of building an investment portfolio.  These are:

• Focus on asset allocation as the long term driver of portfolio returns.
• Minimise trading and tax costs
• Be well diversified
• Stick to your portfolio over time

It is worth considering what people who started investing 4 or 5 months ago are now thinking.  The Australian share investments are probably down up to 10%.  Now would be the worse time to sell.  It is important to focus on the fact that volatility is part of the investment experience.  In the long term higher volatility asset classes like Australian shares produce higher expected returns.

I had the somewhat saddening experience of being an exhibitor at the Investment Expo on the weekend.  The part that made me sad was the number of people selling trading programs promising returns of over 100% a year.  This just won't happen.  How do I know?

Let's assume for a minute that I have just been granted the gift of trading that lets me earn a 100% return a year on the stockmarket.  What am I going to do with it?  Probably the first thing I would do is borrow $300,000 and trade this myself.  The interest costs on $300,000 are $25,000.  That is a tidy profit for me of $275,000 a year.  I could live on half of this and then use the remaining $140,000 to add to the $300,000 starting balance and made $440,000 in the next year.  And so on. 

Or I might start a managed fund that charged a fee of 4% and 40% of the profits in excess of the average sharemarket return.  With an ability to return 100% a year I would very soon have $1 billion in funds under management.  The 4% fee would equate to $4 million a year.  The outperformance over the average sharemarket return would be, on average, 88% a year.  Being entitled to 40% of this equals a $350 million annual bonus.  That is $354 million of income - and growing over time!

What I would not do with this ability is sell it as a 'share trading' program.  Why?  Because as other people are buying when I am buying, and selling when I am selling, it will reduce the returns from my trades.  I will be selling away my secret.  I am far better off trading the secrets myself, or profiting by starting a managed fund.  No rational person will be selling share trading programs that really work!!  And they certainly would not have to use the high pressure sales pitches that underlie such sales.

Rivercity is the latest in a string of new sharemarket floats that has been disappointing.  With an issue price of 50 cents, the stock closed 10% down on this after the first two days trade.  We tend to hear about floats that do really well, however fail to be told that many floats end up 'under water'.  Recent poor performers such as Sydney Roads and Emeco have highlighted that not all is 'blue sky' in the land of floats. 

There is a effect known as the 'losers curse' when talking about investment floats.  It means that if small investors are offered stock in a float, there is a chance this is because none of the big investors, such as institutions, want it.  For example, high profile floats like Babcock and Brown, Tattarsals and Wotif are hard to get access to for the retail investor.  However speculative biotech stocks are more likely to be available. 

My latest Eureka report article considered the big issue of how well have the biggest fund managers performed over the past 5 years?  I looked at only Australian share fund and found that, on average, the Australian share funds of companies like Macquarie, BT, Colonial and AMP had failed to beat the average market return.  In fact, they failed to the tune of 1.7% a year.

This is an interesting warning.  If the biggest and best financial services industry can't beat the index return through 'active management', then who can?

Another interesting aspect of the article is that an index fund, which simply matches the average return with little buying and selling of investments, was very tax effective.  The Vanguard Australian share fund had a pre tax return over the 5 years to the 30th of June of 11.6%, beating the vast majority of the active funds, and an excellent after tax return of 11.33% for someone in the 30% tax bracket.  The active funds, which by their very nature will be trading a lot, would have lost much more than this in tax.

It is no wonder that house prices have increased sharply over the past 7 years.

Firstly, the Government re-introduced first home owner grants to help people purchase property.  This was, in part, to encourage participation in the property market after the introduction of the GST.  And it worked.  People who had previously struggled to save a deposit how had a big kick start in the form of a Government hand out.  So it was time to go house shopping.

Lending institutions started to make it easier and easier for people to borrow money.  No long was a 10% deposit required, a 5% deposit was enough.  More recently we have seen the introduction of no deposit home loans.  Once again, a bunch of people who would previously not been able to afford property decided that it is time to go house shopping.

Now we are just emerging from a period of very low interest rates.  The low interest rates meant that people could borrow more money than previously, and the memories of nearly 20% interest rates from 15 years ago don't seem important.  Once again, with interest rates so low people decided that it is the time to go house shopping.

Finally, all of these factors combined to produced record growth in the price of houses over the past seven years.  This perpetuates the myth that house prices only go up over time.  Not true, of course.  Witness the 30% drop in house prices at the start of the 1990's.  Recent house price rises and the often repeated myth that house prices only go up in value, often repeated by real estate agents who may have a conflict of interest there, meant that it seemed to be a great time to buy property and watch in go up in price - time to go house shopping.

And now we are looking at 40 year home loans.  Let us keep in mind that the people who offer these home loans have one thing in mind.  They want to keep consumers in debt for as long as possible.  After all, that is how they make their money.  Exhibit A - redraw style homeloans.  Even though the aim of the consumer is to own their home, redraw home loans have been a great product for lenders, with people continuing to draw money out of their home loan so that, at the end of the day, they stay in debt longer.'

40 year home loans should come with a warning:  '40 Years is the Average Working Life of an Individual.  In fact, many young people have a desire to retire prior to completing a 40 year working life.  To do this you will have to build some wealth yourself.  Taking a 40 year home loan and dedicating part of your income for the next 40 years to pay off your home will not help you achieve this.'

So AMP have been 'busted'.  Last week ASIC got them to agree to an enforceable undertaking, part of which was to contact a number of clients who had not received an appropriate 'basis of advice' for investment recommendations.

The term 'basis of advice' is important.  It is the link between the strategy and investment advice that is given to a client and the client's goals and objectives.  For example, a client may have the goal of retiring at age 60.  The advice that a financial planner might give her is that she should salary sacrifice extra superannuation contributions.  The 'basis of advice' would be that salary sacrificing will save tax, that the salary sacrifice contributions are invested in the low tax environment of superannuation and that at age 60 that person will be able to withdraw the superannuation tax free under the proposed superannuation changes.

When we are talking about AMP, we should note that the financial planners within AMP's structure trade under a number of brands including AMP Financial Planning, Hillross Financial Services, Arrive Wealth Management and PremierOne.  This is one of the tricks for a person looking for an independent financial planning firm, who would have through that Hillross = AMP?

What I was interested in was a quote in the Australian Financial Review on the 28th of July.  Craig Dunn, AMP's Financial Services director was quoted as saying that '.........customers go into the restaurant knowing this is the food that is served'.  Putting aside the crassness of equating a financial services relationship with choosing a restaurant, this is a big admission.  The food in an AMP financial planners office will be AMP solutions.  That is probably not surprising, however tougher for consumers to keep an eye on when they are in a Hillross office, or Arrive Wealth.

And how good is the food in the AMP restaurant?  AMP's two big Australian share funds have both underperformed the market index over 5 year periods by 1.5% a year.  Which is not too good really.

The benefit of finding and independent financial planner is that they are not restricted to serving just the one dish.  They can serve up any solution that best suits their clients.  Independence also means that the financial planner is not receiving any commission from the investment products, so the only way that they are getting paid is through client fees.  This aligns their interest to yours, because you are both keen to optimise your investment experience.  You are because you want the best financial result.  The financial planner is because they want you to be a satisfied client who will pay them a fee again next year.

NB.  All opinions expressed in the blog are those of Scott Francis.  They should be considered general information only.  They do not reflect the opinions of any other party, including compass financial planners Pty Ltd.  You should not act on this information without seeking professional advice.