Smart Investor blue ribbon awards: investment

Smart Investor, September 2011

In uncertain times, people love cash. And there’s nothing wrong with that: when it’s impossible to form a clear view on where shares, bonds or property are going, it’s only prudent to keep some assets in the safest available place.

But the world of deposits becomes ever more complicated and differentiated. There are plain old bank accounts, term deposits, online accounts, accounts for first home savers, transaction accounts, deeming accounts, and accounts to link to your broking. And at the same time that consumers are bombarded with ever greater choice and segmentation, they also appear to be crying out for simplicity.

It’s a tricky combination, but it rewards those products that know exactly what they want to be, and then do it with transparency, clarity – and a decent rate.

Take, for example, SGE Credit Union, which offers the products that won both of our term deposit categories, short and long term. For investors putting in $5000 or more, they offer some of the best rates in the business: from 5.5% for a month, to 6.15% for a year, to 6.9% for five years. Infochoice, our judges on the deposit awards, say SGE deposits “have consistently offered some of the highest returns across a variety of deposit tiers and terms.” But Michael Coburn, SGE’s chief financial officer, thinks it’s not just about the headline rate.

“SGE has experienced strong growth in our term deposits and savings accounts generally – well above market trends,” says Coburn. “Obviously price determines activity, but once they’re a member of the credit union we hope superior service means they stay a member. Our philosophy is simple: provide exceptional customer service and provide appropriate products at the right price.”

Coburn says that in today’s market environment, people are prepared to lock up money for a decent chunk of time. “Members currently have appetite for longer investments, with the comfort of knowing their rate is fixed for the entire term,” he says. “We know this and that’s why we’ve priced our deposits the way we have. Longer investments are becoming increasingly attractive given the uncertainty in the curve.” (Curve refers to interest rates at various investment durations.)

An illustration of the quest for simplicity comes with the success of National Australia Bank’s no-branch subsidiary UBank, and in particular its USaver account. UBank wins our overall savings account and online saver account this year; Infochoice notes it has “again led the way this year by offering the highest average interest rate and flexible and secure access options for savers.”

Patrick Nolan, business development director at UBank, says that growth in deposits has been “nothing short of spectacular” since launch two years ago. The USaver account, he says, “combines a couple of key things we saw customers wanted in the Australian market: a great rate, and incentive for rewarding customers for saving; and more control, with an easy mechanism for managing their money.”

USaver has tried to embrace changes in society – much of the feedback from customers comes through channels like Facebook and Twitter – and has made simplicity its calling card for a technologically literate generation. “You can set it all up online, even your ID; end to end, it takes a couple of minutes,” he says. “And, once it’s set up, you can transfer money into it immediately and starting servicing it. The whole thing is about control, empowering customers to make choices on how to manage their funds.”

The no-branch approach is not for everyone; given its parent, UBank is likely to refer those who want face-to-face interaction to NAB itself. “But if you’re comfortable online – and more customers are going that way – our account is very helpful,” says Nolan. It also has a 24-hour call centre – which, it is keen to emphasise, is based in Australia. “We’re not saying because we don’t have a branch we don’t want to talk to customers or understand them. The barriers that may have existed 10 years ago about not having a branch are breaking down.”

[Subhead] Strong backers, and no flaky intro rates

USaver demonstrates two other trends commonplace in the deposit industry. One is the need for a trusted backer. NAB “is critical to us,” says Nolan. UBank’s own logo includes the tagline “backed by NAB”, and without that backing, the bank may well never have got off the ground. “All of the research we do says that the backing is really important to customers: they want to have confidence we are going to be here tomorrow.” Clearly, the financial crisis strengthened this need.

The other is USaver’s insistence on eschewing the idea of a headline introductory rate. “We don’t have an introductory offer that rewards you for six months and then moves you into a different account,” Nolan says. “You get a very good rate of 6.01% for a standard variable rate, and on top of that 50 basis points if the deposit goes through an automatic savings plan – and a huge percentage of our base does that.”

This is a common theme among winners in our awards. ME Bank won the award for the best first home saver product. Ian Hendey, group executive for brand, product and distribution, bemoans the confusing nature of many deposit intro offers. “People will talk simple and low-cost, but their behaviour reflects something completely different,” he says. “If you look at term deposits in the market across the majors you have real variability up and down across their terms. They might bring someone in for six months at 5%, then roll them over to 2.5% after 90 days. Unless you’re truly alert – and the only people who really are alert are those who are searching for hot money, since the majority of people are time-poor – then the funds just roll over. It’s costing people thousands of dollars a year and they are missing out.”

The ME Bank approach is similar to that at UBank (and, for that matter, SGE). “We’ve been clear that we maintain a consistent interest rate, and we don’t play the games of bringing you in at a high rate and rolling you over into a lower one.”

[Subhead] Good times in deposits

Providers agree that this is a good time to be in the deposit game. “We’re seeing a boom in savings products,” says Hendey. Savings and term deposit products have risen to the point where about 10% of people’s income is being saved, he says, in a way that is starting to resemble Asia. “Asian markets have been great savers, whereas historically Australians have been great borrowers of debt. Getting a good mix of savers is critical, and post-GFC people have start to think differently about their approach to saving.”

ME Bank’s first saver product reflects mounting concerns about the affordability of property, although the last year has brought a welcome stabilisation of property prices in many areas. “It’s a good thing for Australia, because affordability was getting away from younger people,” Hendey says.

The premise of First Home Saver is “giving the Generation Ys a chance to get into the market. First time buyers have virtually disappeared; they are down to somewhere around 7% from a peak of 20% a few years ago. I read recently we are at a 17-year low on first home buyers getting into the market, and that isn’t a good thing: it puts pressure right through the economy. The good old Australian dream is getting a lot tougher.”

The account is very easy to set up, accessible over the internet, and provides a solid interest rate (currently 5.5%) while giving people a dedicated savings vehicle that sets them up to apply for a mortgage and, ultimately, gets them into their first home. “It’s giving people, with government support, a real incentive to help with home loan affordability.”

Another area of growth is the cash management account, linked to other functions like brokerage. CommSec won this category with its investment account, offering “one of the highest unconditional interest rates in the market that makes this account a very attractive option for investors,” according to Infochoice.

Brian Phelps, general manager of CommSec retail distribution, says that market circumstances have helped to drive popularity in this product. “It’s been one of our stronger products over the last two years,” he says. “The key rationale is that a lot of clients in the equity markets have divested and parked a lot of their previous investments into cash. Having this product linked directly to their trading accounts, as part of the one-stop-shop scenario we set up for them, made it pretty easy to simply park the funds and hold on until they want to invest again.”

Thanks to that pattern, CommSec has around $4.5 billion of cash in these accounts, double what it was a few years ago.

Another example of the growth in tightly focused products is the arrival of deeming accounts, which cater for recipients of government pensions governed by so-called deeming provisions, which assess how much income people are generating from their investments (and therefore the impact on the pension). Deeming accounts make sure people are earning exactly the rate of interest that the government assumes they are.

“In a financial environment where consumers are unsure what’s going to happen next, particularly in relation to performance of the share market, deeming accounts provide security and certainty by offering a stable interest rate in an account with ‘at call’ access,” says Annabel Hamilton, general manager of marketing and product development at People’s Choice Credit Union (formerly Australian Central Savings and Loans), whose Club 55 account won the award in this category. “Over the last few years, many people, particularly those who are retired or close to retiring, have suffered losses on the share market. Because of this, we have seen continued strong demand for ‘cash’ investments, and our Club 55 account has benefited.” Like other products that are excelling in this environment, it thrives on simplicity: good interest rates, free and unlimited access to many transactions, no monthly account keeping fees, and bundled benefits such as discounts on general insurance and financial planning. It’s available to customers aged 55 and over, which is the key age at which deeming starts to become an issue. It’s clearly found a willing market, as the portfolio balances in the account grew just under 25% last year.

“Across the industry we’re noticing that people are looking for safety and security for their funds,” says Hamilton. “Along with this, they’re also looking for choice and flexibility in their deposit or savings accounts. Consumers are far more astute now and know they can shop between financial institutions for the best deal.” It’s a remark that could have been made by any of our winners in the deposit categories, which just goes to show that there’s a clear pathway to a successful product.

BOXES

Overall savings account

UBank USaver

What the judges say

The winner last year, USaver has again led the way this year by offering the highest average interest rate and flexible and secure access options for savers.

Online saver account

UBank USaver

Base rate: 6.01%

Bonus: 0.5%

Features and conditions

The bonus rate applies if contributions come from the automatic savings plan

What the judges say

USaver has been a stand out performer in the online savings account space in the last year. This product offered serious savers a market leading rate for most of the year.

Cash management account

CommSec Investment Account

Interest rate: 5.5%

What the judges say

CommSec’s CMA offers one of the highest unconditional interest rates in the market that makes this account a very attractive option for investors.

Personal Transaction Account

ING Direct: Orange Everyday Account

Features: ATM fees reimbursed on withdrawals over $200, no monthly account fees or minimum balance, acts as offset account for Orange Advantage home loan.

What the judges say:

This ING Direct innovation offers banking without monthly account keeping fees and offers customer full transaction features at the best price.

Short-Term Time Deposit (30-270 days)

SGE Credit Union Term Deposits

Term rates (min $5000)

1 month               5.5%

3 months             5.75%

6 months             6%

9 months             6.1%

What the judges say

SGE Credit Union’s term deposits have consistently offered some of the highest returns across a variety of deposit tiers and terms between 30 and 330 days.

Long-Term Time Deposit (one year and over)

SGE Credit Union Term Deposits

Term rates (min $5000)

1 year    6.15%

2 years  6.35%

3 years  6.5%

4 years  6.6%

5 years  6.9%

What the judges say

SGE Credit Union’s average rate for long term deposits offered both small and large investors the best return in the last year.

First Home Saver Account

ME Bank First Home Saver Account

Interest rate: 5.5%

What the judges say

ME Bank’s First Home Saver Account provides aspiring home owners with the best possible return under the Federal Government’s first home savers account scheme.

Deeming Account

Australian Central Savings and Loans Club 55 Account

Rates of interest:

$0-$43,199          3.05%

$43,200 4.6%

What the judges say

The Club 55 Account offers customers the highest interest rate in the market with no account keeping fees and useful features