Why investors will continue to be burnt by managed investment schemes
A Victorian Supreme Court judge said it all earlier this month when, in dealing with investment schemes, he referred to the existence of a "profound, irreconcilable conflict" between a manager's duty to investors and its own self-interest.
One of the major problems for defenders of some of the managed investment schemes (MISs) that have collapsed over the past 18 months is that, in too many instances, there was not sufficient separation between the fund manager and the responsible entity.
Thus, there existed a natural and probably inevitable conflict between the interests of unit-holders (in the scheme) and the interests of shareholders in the fund manager.
Many would suggest this is an issue that needs to be addressed by the Government and then prosecuted by the regulator. It would require only a small amendment to Corporations law to close off the loophole that has allowed these real and perceived conflicts to evolve.
However, it is probably too much to hope that a minority Government operating in a finely balanced Parliament and confronted by a decidedly aggressive Opposition will move with alacrity on the issues that have given rise to the problems with MISs, but a good starting point would be to examine the tax breaks and other investment motivators.
As debate and comment has swirled around the collapse of companies such as Great Southern and Willmott Forests, there has been a consistent theme in the investor complaints reaching Money Management.
That theme has been investment strategies predicated upon tax minimisation rather than sound principles.
Investors have bemoaned being persuaded by their accountants to invest as much as $20,000 in schemes about which they know little or nothing on the basis of paying less tax.
All too often there has been an abject lack of understanding that those schemes have been built on the foundation of government-mandated tax breaks rather than sound business or investment principles.
Where investors have been persuaded to borrow to make the investment, the damage lives on long after the liquidated assets have been harvested by their new owners.
Amid all the claims and recriminations that have followed recent collapses, there have been those that have pointed the finger at the banks for not giving these schemes a fair go and there have been those who have pointed their finger at the scheme promoters.
In reality, the blame must be shared by all, including the nation's legislators.
Until accountants and advisers clearly explain that tax breaks on particular investments must be viewed concurrently with the inherent risks, investors will continue to be burned and the industry will continue to carry an undesirable odour.
AUTHOR
Mike Taylor
Recommended for you
In the latest episode of Relative Return Insider, host Maja Garaca Djurdjevic and AMP’s Shane Oliver break down US and Australian rate cuts, soaring gold, and bitcoin’s volatility.
In the latest episode of the Relative Return Insider, host Maja Garaca Djurdjevic and AMP’s chief economist Shane Oliver unpack the surprising twists in the Australian economy, diving into the latest GDP numbers, what’s really driving consumer spending, and what it all means for the Reserve Bank’s next moves.
In this episode of Relative Return, host Laura Dew chats with Roy Keenan, co-head of fixed income at Yarra Capital Management, to discuss the evolving fixed income asset class, his sector preferences, and the RBA’s rate-cutting policy.
In this week’s episode of Relative Return Insider, AMP chief economist Shane Oliver joins the show to dissect the ongoing government economic reform roundtable and reflect on the wish lists of industry stakeholders – and whether there is hope for meaningful reform.
