Why CBA and Colonial First State Are in Strife With Class Action

You have to pity the poor old lawyers for Commonwealth Bank. Well…perhaps not pity them, for I am sure they are not poor.

As we speak, their client is in the process of refunding fees to dead people. Though, exactly how they do that, I’m not entirely sure.

‘Excuse me…has your dearly beloved passed? I’m sorry to hear that…um, did you have a nice funeral? By the way, while I’ve got you, we have some money to return to your late Aunt Dot…’

No doubt a challenging script to write (and get right), for those buried deep inside the bank’s marketing department.

As far as public relations go, I guess it’s sometimes better to just roll over and cop the inevitable whack. And the fines that will likely come your way.

This week, CBA’s lawyers sensed an even bigger payday as they grappled with another suit. And no, not the pin-stripe kind.

Class-action lawyers have lobbed a lawsuit against CBA’s wealth management arm, Colonial First State.

And what is the suit about…is it charging fees for services never rendered?

No, it is much simpler than that. It is all about performance — or a lack of it.

The class action lawyers argue that Colonial could have generated a higher return for its clients by not depositing funds with its parent, CBA.

For those Colonial clients selecting to invest their super in cash, including the cash component of a balanced fund, they could have got a higher interest rate from another bank.

Yes, we are talking fractions of a percent. Maybe half a percent. But if you add all that up across potentially hundreds of thousands of clients, it adds up to a whole lot more.

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At the heart of it lies the potential conflict when a bank is also a wealth manager.

Because Colonial could have got a higher rate somewhere else, the lawyers will argue that CBA benefitted by paying a below-market rate.

The cash CBA holds on deposit from local investors funds just over two-thirds of its loan book. The less interest they pay, the bigger their margins will be.

It’s perhaps cold comfort for CBA, but other banks look to be next on the list.

With this CBA case, the issue is the cash Colonial deposited in CBA products. Colonial could have sought a higher rate from CBA, or as I say, invested its funds elsewhere.

But what about the rest of the money tied up in managed funds? What if an investment manager fails regularly to at least match their benchmark index. Does this also constitute underperformance, and is the manager liable?

Colonial First State have a case to answer

The Australian market has been sluggish compared to others. However, in August, the ASX 200 reached its highest level since 2007. After such a long run up in the share market, many people’s investments are showing a healthy balance.

More scrutiny will come, though, when the markets take a tumble…or even just trade sideways.

You can bet that a lawsuit about the fees that active managers charge is just around the corner. Especially if they continue to track below average.

Beating the market is the goal of every active manager. Otherwise, there is no point investing with them — it is much cheaper to buy an index ETF.

The problem is that beating the market is much harder than it looks. And by definition, half the fund managers will be below the group average.

The tricky thing for the big financial institutions is managing this expectation. Part of the argument against Colonial is that, while the interest amounts might have been small, they add up to a lot if you compound them.

The same applies to investing in shares. If a fund has performed below average consistently, are its managers duty bound to invest that money elsewhere?

Much bigger might the compensation paid to an investor be, who has paid above average fees, for below average performance. Particularly if you compound it over 30-plus years.

As I say, this is something the wealth managers will need to grapple with. You can be sure a test case will not be far away.

All the best,

Matt Hibbard

Editor, Options Trader

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While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.

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