July 3, 2025 • 33 mins
Is it really this easy? You buy a share market index fund and it goes up by 10 per cent every year.....Hmm...Well, actually, the ASX 200 index is comprised of 50 per cent banks and miners: When they rise together, an index fund will fly high. But if the going gets tough, your share portfolio will not be as diversified as you may think. What's more, major problems are forming in the market where enormous amounts of money are pouring into stocks often because ETF algorithms are blindly following market momentum...how will it end?
Adviser Jack Tossol from the Partners Wealth Group joins Associate Editor - Wealth, James Kirby, in this episode.
In today's show, we cover...
- The hidden dangers of index funds
- Polluting the pond - New wave ETFs reintroduce risk
- Ethically oblivious passive investing
- Sophisticated investor rules should be scrapped
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:09):
Hello and welcome to the Australians Money Puzzle podcast. I'm
James Kirby. Welcome aboard everybody, and I've had a.
Speaker 2 (00:15):
Really interesting few weeks.
Speaker 1 (00:17):
Unusually I think in some ways that the shows have
been dominated by themes. I think it's probably because there's
a couple of really big issues out there at the moment.
I mean, obviously, the returns for the year have been
quite astonishing. As one analyst put it, that that is
the financial year that's we've just come in with. We've
also had a very interesting shows on crypto, on bad
(00:41):
property returns. Who would have thought, but as you know,
the apartment market is very weak, and we've covered that
and the new super tax. Now on that issue of
how good the markets are, if you had index funds
or exchange traded funds now increasingly dominant for investors, you'd
have had a terrific return because you would have just
(01:02):
captured the market. And the market was very good. It's
one of those years when it's well above average in
terms of returns, double digit returns, so it looks like easy.
Speaker 2 (01:12):
It looks easy. It looks easy.
Speaker 1 (01:14):
You buy these edfs and they roll home with high returns.
Speaker 2 (01:17):
You don't have.
Speaker 1 (01:18):
To think, you don't have to do a damn thing.
You just sort of look and see how high it
is each day. It's not that easy.
Speaker 2 (01:24):
There is no perfect investment. I want to look at that.
Speaker 1 (01:27):
My guest today is Jack Toussall of the Partner's Wealth Group.
That's a financial advisory group which is in the Baron's
Top fifteen. We've had Matthew has today on the show
from Partners before. Jack's got some really interesting views on
these subjects and I wanted to have him on the
show for some time.
Speaker 2 (01:46):
All right, Jack, I'm doing great.
Speaker 3 (01:48):
Thanks for having me.
Speaker 1 (01:49):
James, great to have you on the show. I know
that I suppose it was the time, really it was
difficult for financial advisors to express views, larger views beyond
the sort of the details of financial advice itself, and
maybe they spoke at conferences or whatever. That's all changed
now and people are able to sort of get their
(02:09):
views out there, and you're one of the advisors of
that new crop of advisors who've come to prominence with
clear views just about that issue of the markets. So
the ASX two hundred has given me what eleven percent
for the year. The s and P five hundred. I'm
talking about the financial year, very strong year as well.
Speaker 2 (02:30):
But you have.
Speaker 1 (02:33):
You have been arguing that people have to be very
careful about thinking about just the index, the ASX two
hundred or the S and P five hundred or whatever
you've got.
Speaker 2 (02:43):
What is the issue for you?
Speaker 3 (02:44):
Well, I think it's been quite distorted. So you said
there the IX has gone up by about eleven percent,
but come up bank. You know one individual out top
two hundred company US has gone up about fifty percent
of the time. If you took that senior investment out,
your returns only really around six percent. So it's not
really reflective of how the grand market has performed.
Speaker 1 (03:08):
One so in the ASX two hundreds, which did over
ten percent, yah of those two hundred stocks, one stock, Yeah,
is it if you didn't have it would have taken Well,
it isn't that an argument for ETFs in some fashion
that you capture.
Speaker 3 (03:25):
It's an argument when it's going one. But if you
can go up in going you on the dance slide
as well.
Speaker 1 (03:31):
Okay, So what you're saying is that if I had
the ASX two hundred in an ETF, for instance, in
the last year and they were down fifty percent.
Speaker 3 (03:40):
Yeah, then that would.
Speaker 1 (03:41):
Have really dragged me down as well. Because so the
point I think behind this what you're saying is concentration, right,
is that the problem that one bank is too important
for this index, it doesn't really reflect the market.
Speaker 3 (03:55):
Yes, spot on. What I'd say is they typically sprouted
as being well diversified. You've got save the ASEX two hundred,
you've got access to two hundred companies, and your risk
is quite well spread out. The reality is the top
ten companies of that whole index are about fifty percent
of it. So if you add two hundred companies, ten
of them are half of it, and then the other
(04:15):
night one hundred and ninety spread across the other fifty percent.
And that's not even before we delve into diversification of
sectors of the economy as well. So Australia is really
good and the bigg at two key things. The first
one is banking and financials and then the second is
digging sup out of the dirt. So mine those two
industries as a whole represent half of the whole index.
(04:37):
So really what you're doing is having a punt on
whether banking, financials and mining are going to do well.
And so you go on a situation where we have
another financial services review and that sector tanks or China
cracks it at us again like they did in twenty
twenty one, stops buying our coal and iron ore. Well,
then you complete portfolios, Cactus. It's not actually as diversified
(04:59):
as what people think it is.
Speaker 1 (05:02):
So it's not as easy as it seems to capture
an economy or a market, because you're saying that if
we look at the share market, we think we're buying
the market and a good wide diversified hundreds of companies.
In fact, banks, we're really buying banks and miners. And
(05:23):
if the banks and miners don't go well, you're in trouble.
But can you avoid that.
Speaker 3 (05:28):
You can have an actively managed portfolio, and really, if
you look at building out a portfolio, really what you
want to do is have allocations towards all the key
sectors of the economy. So if one individual sector isn't
doing that well, it's not going to tank your whole portfolio.
Speaker 1 (05:44):
You know.
Speaker 3 (05:44):
Part of crafting that is say I'm trying to build
out my personal portfolio and I go, look, I need
some banking financial sector allocation. There's a four big banks.
I think you know cbas are value. Not going to
invest in that, I might invest in NAB instead, might
leg the two hours out. If you're just going to
invest in index fund like Fast for example, you're buying
(06:06):
all four of those investments in the exact sound white
and you actually buy the ones which you might think
are more overvalued higher and the lower ones less.
Speaker 1 (06:14):
Okay, it's interesting, and what we're going to do. What
are we're just doing here? Focus is and we're just
going to have a look at the indices on which
the index investing are passive investing rules. And then in
the second hope we're going to do is we're going
to look at the problems. Obviously, then that loom if
you like. For ETF, they seem just now to be
(06:35):
I suppose in a way it's like they're too good
to be true, because because an advisor can say, hey,
i'll put you into this ETF, you won't do any
better or worse than anybody else.
Speaker 2 (06:44):
It just so happens for the last three years you
do really well.
Speaker 1 (06:47):
Right, so everyone sort of nobody asks hard questions when
things are arising. We look at that at the moment,
So just look at that wider issue. So in Australia,
the failing if you like, of an indicy's being the
asex too, is that it's literally half banks and miners.
And if you have a period where banks and miners
are not going well, and let's see other parts of
(07:07):
the economy are going really well, you're going to pay
for that. And it isn't Oddly Wall Street, which we
were always told as the world was a magnificent apros
fate market. Those in the sense really aren't really reflect that,
do they.
Speaker 3 (07:23):
It's inn where if you look at the S and
P five hundreds of the top five hundred bise counties
in the US, they the top seven, which they call
the magnificent seven examples of metal also known as Facebook apples,
your amazons, et cetera. Those seven out of five hundred
represent a third, about thirty three percent of that whole index.
So again, what you're doing personally if you invest in
(07:44):
that index fund is you're taking a punt on the
tech he's going to do well, and look if it doesn't,
you're going to get burnt.
Speaker 1 (07:51):
Right, So you're not really buying the US market, I'll say,
you're not really buying it, but you think you're buying
the US market, but you're actually taking a substantial bet
on tech. And more than that, you were taking a
substantial bet on just seven companies in tech.
Speaker 3 (08:06):
Exactly seven companies, all within the same industry.
Speaker 1 (08:10):
You said something pretty entertaining about the Dow one time,
so the that was even worse, I believe. Is it
Dow Jones index.
Speaker 3 (08:17):
That is my objectively the least beneficial index in the world.
Speaker 2 (08:24):
Sucks.
Speaker 3 (08:26):
Why, Well, it's a product of when it was made,
which was in the late eighteen hundreds, and effectively I
think it was Charles doubt someone plays.
Speaker 1 (08:35):
Correct, dal Jones, Wall Street Jungle, Yeah, I think cooperation
which John's the Australian just for disclosure.
Speaker 3 (08:44):
Looks out the time he made this index, it was
purely based on stocks which he thought were relevant to
the everyday man. There was no sort of objectivity of
it representing the great market. I think there were nine
or ten, but at the moment there's thirty. The biggest
issue is that it's price weighted, not market cap weighted.
Speaker 1 (09:03):
So what so Jack tell the everyday listener that's really
important and we're going to talk about that.
Speaker 2 (09:09):
But explain what.
Speaker 1 (09:11):
That is and the difference between the two categories.
Speaker 3 (09:14):
Yeah, well, I've got a good example of that. So
the index will increase if phenomenal value of a stock
goes up. So save for stocks worth ten dollars and
increases by ten percent, goes to eleven, you know, then
the index would go up by that much. There are
multiples in there. It's weighted by, say, if you had
a larger company in there, if it goes up by
one percent, and the index is going to go up
(09:34):
a greater around than say a company which is half
the value went up by one percent. I've got an example.
So two companies which are both in the Dow Jones
are Bowing and Amazon. Prices are pretty much the same.
I think Bowing's about two hundred and twelve dollars and
Amazon's two hundred and twenty dollars. For share buying market
capitalization of one hundred and sixty billion, Amazon two point
(09:58):
three trillions, about fifty teen sixteen times larger. Its Boeing
share price increases by one percent and Amazon's goes up
by one percent, then the index goes up the exact
same amount. It doesn't take any factors such as that
Amazon's fifteen times the size of Boeing. There's another example
(10:19):
as well which just shows how much of a data
in the index it is. In my opinion, Apple used
to have share prices of seven hundred dollars and at
the time they will consue putting the doubt, but they
really didn't do it because it would have just pushed
up the price significantly. So what did Apple do? They said, look,
we're going to do stock split. One share becomes seven,
it's worth one hundred and it goes in the index.
(10:41):
It's the exact same company, it's got the same financial metrics,
it's worth the same amount. But what it can go
in now because it's got seven times as many shares,
which you know, one seventh of value, that just doesn't
make sense to me.
Speaker 2 (10:53):
We'll take a short breath back in the moment.
Speaker 1 (11:05):
Hello, Welcome back to The Australian's Money Puzzle podcast. James
Kirkby with Jack Tussel of the Partner's Wealth Group. We've
just been talking now about stock market indices and the
distortions around them, and it's really important to grab this
point that the ASX two hundred is heavily dependent on
(11:25):
banks and minors if they go south and have a
bad year.
Speaker 2 (11:29):
It's not that you're going to have a bad year.
Speaker 1 (11:30):
You're going to have a much worse year than you
would have had if you had a more properly diversified
share portfolio. Similarly, the US, funnily enough, though, for all
its reputation, as Jack was explaining in the first part,
indices like S and P and the Dow in particular,
they're really narrow and they had the really strange distortions,
so they could have a good year, but it wasn't
(11:51):
really that good for most investors or vice versa. So
this is an issue, but it's it was never very important, Jack,
but suddenly it is. Because exchange traded funds are now
so common, they become very popular, and I think it's
probably a time that people really need to know more
about them and their limitations. I mean, the obvious thing
(12:14):
I have always thought about them is it's like it's
dull money. No one's thinking as such. They set their sales.
This is an a conventionality. If they set their sales,
they say we buy the top two hundred, close our eyes,
and you can get all sorts of issues. Then you're
consciously buying the worst rubbish on the market because if
(12:36):
it's there, you're going to buy it. And there's this
argument that ethically you're oblivious. I mean, there could be
a company where you know, the most atrocious things are
going on. Again you're buying it because your ETF just
buys it. I mean, are they fair criticisms?
Speaker 3 (12:51):
No, I'd say absolutely fair, and you know, I'd say
it's going to get worse and worse. At the moment.
In Australia they say about eighty five percent of new
investment can rule is going towards just passive index funds.
And I'm at the argument right Look at Commonwealth Bank.
It is the most expensive bank in the world. It
resides strictly in Australia, a country twenty seven million people,
(13:13):
doesn't do any international business. Can anyone honestly tell me
that it is the best bank in the world. And
I've asked myself where is the money coming from that
pushes it up? If individuals already own it, I can
understand why you continue to hold it and ride the momentum.
But if you're looking to invest in chairs, who's actually
(13:33):
buying dedicating the money to go there? You know, in
my opinion, what it is index funds further pushing it up,
and then super funds as well, who at the moment,
as a result of regulation, effectively market huggling index funds
in practice, not in name, but in practice.
Speaker 1 (13:50):
Right, So there is that notion of the closet index
fund right, yeah, yeah, yeah, explain what that means to
our listeners, because it's very interesting.
Speaker 3 (14:00):
So about four years ago they had your Future your
supernw rulins which came in and look, you know, it
sounds very good in principle, which is to name and
chain poor at performing super funds. But the consequence of
that is that no one's chasing better returns now because
the consequences of doing so is you can also deviate
(14:21):
from what the market's doing. So rather than actually trying
me better, it's like it's a how of a lot
easier just to track the indexes and you know, if
they go up, we go up. If they go down,
we go down as well, and can say, oh, that's
just the markets.
Speaker 1 (14:35):
Yes, right, so it's sort of self perpetuating failure feelings.
Speaker 3 (14:40):
Yeah, exactly, spot on.
Speaker 1 (14:42):
So the way the mechanics are it is come WO Bank,
which has I can't recall, but it's like single digit growth, Yeah,
a couple of percent. It's only in Australia. Australia is
only three percent of the world and it's top fifty percent.
Speaker 2 (14:57):
Go figure.
Speaker 1 (14:58):
And you're saying this is perhaps one of the first
sort of iterations of the issues of the ETF and
what they're distorted, how they're distorted in the market.
Speaker 3 (15:08):
Yeah, exactly. And I put in one of my LinkedIn
person was Michael Burry, who is made famous by the
Great with the Big Short and you know, one of
his catch phrases was that index funds may be worse
than Marxism because they effectively just destroy efficiencies, you know
overall markets that you know, price discovery mechanism of you know,
say individual investors or funds going well, hey, you know,
(15:30):
do the metrics stack up? Should I invest in or not?
Whereas as you touched on the dumb money, index funds
just throw it out regardless of any outwards considerations.
Speaker 1 (15:41):
So let's just and I'm not saying this is going
to happen, but I think it's something everybody should be
aware of. What is the risk here for all investors
if they if it keeps going like this where the
question where it's all mechanical algorithm based buying. And then
if the everything amplified, So if Coverwealth Bank is going well,
(16:04):
it goes even better because the amplification of index funds
for the money chases the money.
Speaker 2 (16:11):
It's it's gone up.
Speaker 1 (16:12):
Five percent, so we have to buy five percent more
of it because that's.
Speaker 2 (16:15):
Our game as an index fund.
Speaker 1 (16:17):
And if things turn down, I presume it's the same
that if they're falling ten percent, so then we have
to sell because we've got too much because they've shunk,
so we must shrink our holdings. So ultimately, is there
actually like systemic risk to the actual nature of markets here?
Speaker 3 (16:32):
That's absolutely just with the concentration of those specific indusues
and holding teeth in the market. Absolutely there is.
Speaker 1 (16:39):
So what should the active investor do. I'm going to
take it that. I'm still going to say that I
think ETFs are useful. They're useful from two ways. One
for the new investor who has never bought anything for it.
Once upon a time they said what chairs do I
buy it?
Speaker 2 (16:54):
To start?
Speaker 1 (16:54):
And you said, oh, oh by BHP bye app by couse,
this sort of thing that was actually quite risky. I
always say the first two shares I bought and they
be in Pacific done, loop one, doubled.
Speaker 2 (17:05):
One disappeared.
Speaker 1 (17:06):
This was in the period of whatever ten years, but
it captured the issue. So I think they're good for
introductory investors getting to know how to invest, and I
think they can't be useful as a core approach core
on satellite with some sophisticated thinking around it maybe market
way that we won't go into that just now. But
what I'm saying is, what do you think the active
investor should do? Knowing what you've just been telling us, Well.
Speaker 3 (17:30):
You know, as a touch on before, you want to
have a well curated portfolio which you know, diversify as
you reached you know, you always touch on the adage
don't have all your eggs in one basket. That is
literally what people are doing.
Speaker 1 (17:42):
That's that's the Yeah, that's what I need to have,
isn't it.
Speaker 2 (17:45):
It's a basket. They actually call it a basket.
Speaker 3 (17:47):
And then the consequence is, yes, you know, these funds
might have had an absolutely cracking you know the last
twelve months, but if it's so hedge on one sector
or one stock align, how would you feel if your
portfolio underperform relative to all the other investments for the
next five plus years, I don't imagine people will be
too happy.
Speaker 2 (18:05):
With that, right, So do you.
Speaker 3 (18:09):
Do?
Speaker 1 (18:10):
Is your approach that core and satellite idea where an
ETF ETF are in the mix or are you actually
don't like them at all?
Speaker 3 (18:20):
Well, it depends on the individual client. Yes, both would
work well in the expands you touch on. Can serve
a great purpose, especially getting into the markets and giving
you an allocation towards other sort of markets, for example,
especially within the international side, because it can be extremely
expensive to say, invest directly, and there's a heap of
(18:42):
tax consequences which I don't need to go into. Cheering.
Speaker 1 (18:45):
Yes, yeah, something like if you want to buy American
small CAFs or something. Yeah, I mean that would be
quite difficult to sitting here. You'd have to buy twenty
of them. How on earth would you pick them? How
would you get to know them? You buy an ETF,
but you won't get the big winners, but you know,
get a big winner or a big loser, but you'll
you will reflect the general tempo of small caps, so
(19:05):
they have their uses there. Okay, very interesting, Just one
last thing, and I mean, I must say, if you
are as skeptical as you are about conventional mainstream ETFs
as we know them, you must be terribly skeptical about
the new wave of uts where they unfortunately are starting
to innovator. And I use the word in sneak quotes,
where they're coming up with all sorts of smart ideas,
(19:28):
thematic ETFs leverage dtfs, and in a way they're kind
of to me at least, they're kind of polluting the
original notion, the Jack Bogel notion of a straight mirror index.
Speaker 3 (19:40):
Yeah. I think that the issue with those is they're
easy to sell, right, and you get all of these
cowboys social media influences out there. You just tell every
random person I dedicate Twain CENTI bi checking in missing
these index funds and now right up about oh this
industry is going wow. So they'll just put it all
in there. And then again, you can't and training your
(20:01):
risk in one sector, which just completely flies in the
face of sound financial management diversification.
Speaker 1 (20:10):
Which brings us back to that thing that you're buying.
You're buying everything, Yeah, good stuff, the good stuff under rubbish.
Yeah yeah, Okay, just one nice thing. You didn't pick
up on my contention, which for some reason people don't
seem to be.
Speaker 2 (20:25):
I was ranged about it all.
Speaker 1 (20:27):
But it's like, to me, the ethical side of things,
they're ethically oblivious.
Speaker 2 (20:33):
For you at all. Yeah.
Speaker 3 (20:34):
So for example, right, if you buying the S and
P five hundred, you know you're getting the American to pacco,
you're getting Lockheed Martin, most notably known for making bombs
which get dropped on families and mulance. It's helping to
that too much. You know, you've got gambling, you've got alcohol,
You've got everything in there. You know, especially as an
advisor ethical investors, you know, it's becoming more and more
(20:54):
of a talking point. And look, everyone's got their own
view on it. Everyone's moral is different. But for a
lot of individuals out there who are quite moral paper
and they're just investing in these in the expands, not
actually realizing that they're getting exposure to these companies, which
is flying the face of everything they stand for as a.
Speaker 1 (21:12):
Person understand for Yeah, Look, I think if anything, just
from what we've talked about today, Jack, I think it's
been a really good illustration to all investors and our
listeners that do you actually know what an ETF is.
It's easy to give you a top line explanation. It's
a mirror of an indices, but behind that there is
(21:33):
all sorts of distortions and games being played and issues
that perhaps really it's time to get some air. And
luckily perhaps the Commonwealth Bank. The extraordinary, astonishing and really
unconvincing fifty percent increase in comebank in the last year
in our market has brought the issue of the other side,
(21:56):
the ETFs, the issues, the problems that they have, the
problems that may loom for them, really interesting. Jack, we'll
take a short breakase. I also want to talk to
you about sophisticated investors, a different issue, but another issue
that I think our listeners will be really keen to
hear your views on.
Speaker 2 (22:13):
Back in a moment.
Speaker 1 (22:27):
Hello, Welcome back to The Australian's Money Puzzle podcast. I'm
James Kirby from The Australian and I'm talking to Jack
Tossl of the Partner's Wealth Group. Now, Jack, I don't
know your client list. I haven't seen them, but I
imagine that they are. We could classify them all as
wealthy one way or another. And it is a big
(22:48):
trend now in financial advice, particularly at the top end,
to make things simple for everybody, they simply classify their
investors as sophisticated investors. In doing so, it opens up
future of canvas of investments that they can access that
they couldn't as a retail investor. And they also the
(23:09):
price of that is that they give up, if you like,
some of the regulatory protections that are in there, such
as the Australian Financial Complaints Authority or the Conversation Scheme
of Last Resorts.
Speaker 2 (23:20):
So that's the deal.
Speaker 1 (23:20):
But advisors love it right because it makes it really
simple and they don't have to sign as many documents
or go through as much red tape. The criteria for
becoming a sophisticated investor, if you don't already know, is
two point five million in assets and that can include
the family home. It shouldn't, but it does. Or two
hundred and fifty grand a year for two years in
(23:43):
a rowan income. There was a time that was a
really lot of money when they created this system. So Jack,
there's also the problems with it, isn't there. I mean,
it's been abused as people who are not sophisticated or
classified as sophisticated. So there's all sorts of issues and
it's under review at the moment. The push is to
(24:05):
make it even harder to qualify, like ACID is talking about.
I said, four millions you're supposed to have, perhaps in
the future, to be to qualify a sophisticated investor. What
do you think about this? What do you think our
listeners should know about this area?
Speaker 3 (24:21):
In my opinion, I believe that the current tests it
is so completely arbitrary. Now the two point five million
dollars in net assets or you've two hundred and fifty
thousand dollars a year for the last two years, you know,
and you instantly tick a box and you're sophisticate investor.
You can have someone that's never invested, is sharing their life,
has no financial literacy, and gets a three million dollar
inheritance because one of their realities pass away, and then
(24:43):
they can access all these away unlistened investments.
Speaker 1 (24:48):
It's actually it's made me think it's dumb money again.
There is actually a segue here between part between the
first two segments and the third segment, folks, and the
segue is it's the dumb money issue because I if
I'm wrong, But okay, so I know nothing. I'm hopeless.
I am the worst investor you ever came across. But
I inherit three million tick. I'm classified as a sophisticated inventor.
Speaker 2 (25:12):
Isn't it that easy? Yes? And no, it's that easy
to be classified.
Speaker 3 (25:18):
If advisor is doing a duty dilidence, then they need
to actually note know that you are actually scare investor
and capable of making financial decisions. But in practice, whether
that actually happens across the country, I'll a bit dubious.
Speaker 1 (25:33):
I'd be bore than jubious. I doubt it happens at all,
to be honest, because the person says, well, that's my
legal classification. Now I want to buy hedge fund number four.
It's only for sophisticated investors. I qualify as once, so
I want it. What can you say to me? What
could you possibly say to me to stop me?
Speaker 3 (25:51):
Exactly? And that's the thing. I can just go straight
to a fund man injury or get off. And they're
not making financially sound decisions. And you know, leaning under
what I said before, you, an individual is extremely financially
A student who's invested for ten or twenty years, but
doesn't have the privilege of having a lot of family
wealth which has passed on to them, and then they
can't access these investments. It's interesting the US is actually
(26:13):
looking at going down a different route. Hasn't been brought
in yet, but they're considering bringing in an effectively financial
literacy test. And the key reason they're doing that is
because they're saying that this divide between you know, ticking
a box man sophisticated investor not just based on assets,
is further exacerbating the wealth divide, the inequality between the
(26:35):
haves and have not.
Speaker 1 (26:36):
Yeah, yeah, I see the upset of meritocracy. The professor
of finance. Yes, no, inheritance is excluded from the person
who picked up the four million from Anti lou And
there was nothing.
Speaker 3 (26:52):
Exactly and it's ridiculous. Do you like a fantastic statistic
which is actually from Tony Robbins's recent book where you
know he actually solid what are these issues? And you said, look,
the last thirty five years in the US, the private
equity asset class returned fourteen point two percent compared to
the list of markets in the US, which shares a
bible to your everyday retail investor which did nine point
(27:14):
two percent. That's a fifty percent difference in annual returnments.
And you think about the multiplier effect of that. So
you had one hundred thousand dollars one individual put it
in private equity left it there for twenty years, to
the other individual put it into public equity and left
it there for twenty years. The difference is one point
four million dollars versus five hundred and eighty thousand dollars.
(27:34):
You know, it's a bit more than a round drinks.
Speaker 1 (27:37):
As a round the drinks, and you were saying the
investor was excluded. The investors were excluded from that party
basically because they weren't classified the sophicity exactly. Yeah, so
what should they do? Should they raise the bar, which
is what Assek wants, or.
Speaker 2 (27:52):
Should they scrap it?
Speaker 1 (27:54):
Should they have scrap the whole thing.
Speaker 3 (27:55):
I'd scrap it all together and I'd replace it with
the financial literacy.
Speaker 1 (27:58):
Test, but that's still that they're still a test.
Speaker 3 (28:01):
Then, Yeah, it should show that you actually have you know,
the financial competence and the knowage of it, and you
actually understand, you know, what the benefits are of proceeding
with these types of investments and also what the consequences
are if that goes wrong.
Speaker 1 (28:14):
Okay, that's very interesting. I mean I must say if
you had to choose between the two, I mean, logically
it does make a lot of sense. Why continue the
separation at all?
Speaker 2 (28:24):
Jack?
Speaker 1 (28:24):
Why have sophisticated and unsophisticated anyway? I mean I can buy,
I can go on a crypto size, and I can
put my life savings on it.
Speaker 3 (28:34):
Yeah, we can talk about hours talked about crypto. But
I think it's about if you look at why they
have the asset tests, you know those tests. The reality
is because you know, the government goes look if you've
got two three million investment goes bale up and you
are these two hundred three hundred thousand not that consequence
you all whereis what they're worried about is if you
get saying everyday retail investors only got one hundred grand
(28:56):
in super and one hundred percentage of that is invested
in you know, just a typical mom and dad and
that goes belly up. That's going to be you know,
not good at all. The every every day I.
Speaker 2 (29:07):
We just try Okay, So that's there.
Speaker 1 (29:10):
Yeah, the separation between sophisticated and unsophisticated has to remain
a retailer, as they say, it has to refeel it.
Speaker 2 (29:17):
It's there as a safety net.
Speaker 3 (29:19):
There's yeah, there's less guard rails as well.
Speaker 1 (29:21):
But you think it should be based on basically, it
should be based on competence, not money exactly. Okay, I
like that. Well, who could argue against meritocracy? All right,
very good, it's been really interesting. We have just do
a couple of quick questions that I have here. You
may chip in if you like, Jack, I just want
to try and catch up we have. We have had
a lot of questions of course, on the super tax,
(29:43):
on crypto, on apartments, a couple of other questions that
haven't getting issues that have not been getting the sort.
Speaker 3 (29:50):
Of light that they have.
Speaker 1 (29:53):
One is from Anna who says, I don't think there's
any point knocking the home buyer incentives. It's free money
and a competitive mark. When I get a chance, I'm
going to use every grant or assistance I can find. Yes, okay,
and a point taking yes, I suppose the issue with
these boys we're making with these on the grants in
the context of an apartment market that is very weak
(30:16):
just now is that at its worst, people are being
incentivized to buy into weak spots in the market. And
we mentioned the course in Queensland state budget you could
buy a million dollar house with a two percent mortgage
back if you don't mind buy the government.
Speaker 2 (30:33):
I don't know if.
Speaker 1 (30:34):
That's really great from a macro perspective, it certainly isn't.
But I take your point all right, and charm Me asks,
our superannuation is meant to replace the government pension. But
everyone calculates assuming you claim the pension when your fund's
run out. Now, But that's about is the retirement calculator.
So you go in and you say how much should
(30:54):
I have? You say how much you have, etc. And
they make an assumption. Careful with that. The general retirement
calculator assumes not that you live forever, that you're going
to live forever. It doesn't assume you live to one hundred.
It assumes you live to an average life expectancy. And
then it assumes you go on the pension. You may
(31:18):
not want to do that. That might not be exactly
what you aspired to. So I think that's just be
careful with those calculators. I think you want to chip
in on those two.
Speaker 3 (31:27):
Jack touching the last one. You know, if you bank
relying on the government pension later on, the issue is
that you completely lose your control. The government changes the
rules every single year every time your government gets elected.
What happens when they pull the carpet out from benetti faith.
Speaker 1 (31:46):
Yes and yeah, well exactly, or what happens when they
can't afford in real terms the pensions perhaps that we
have today. It's a rich country, remains a rich country,
but will we always have the ability to pay as
we do now? Very interesting, Great to have you on, Jack.
We will have you on again. That was very interesting.
I think there was a couple of issues that are
(32:07):
very timely. I think the ETFs this is the time
to reconsider them really and understand what they are, because
it's not always going to be this easy, is it.
It's not every year your shares are going to roll in.
Speaker 3 (32:20):
You're working on the laws of averages, and as we
just showcase, you don't have much diversification over on your
portfolios if you're just chasing those behind in next ONNSE.
Speaker 2 (32:31):
Very interesting.
Speaker 1 (32:32):
It's very interesting because that's the whole proposal.
Speaker 2 (32:35):
Thanks Jack, Love you to have you on the show.
Speaker 4 (32:37):
Thanks having me, Jame, It's been absolute pleasure. That was
Jack Tossl of the Partner's Wealth Group. Let's have some
more correspondents the Money Puzzle at the Australian dot com
dot au. Love to hear what you thought of those
observations on ETFs, which I must say are rarely made,
but I think you'll find they're going to be made
much more often in the near future.
Speaker 1 (32:57):
Talk to you soon.
Speaker 3 (33:00):
The wood, the collect the
Hello and welcome to the Australians Money Puzzle podcast. I'm
James Kirby. Welcome aboard everybody, and I've had a.
Speaker 2 (00:15):
Really interesting few weeks.
Speaker 1 (00:17):
Unusually I think in some ways that the shows have
been dominated by themes. I think it's probably because there's
a couple of really big issues out there at the moment.
I mean, obviously, the returns for the year have been
quite astonishing. As one analyst put it, that that is
the financial year that's we've just come in with. We've
also had a very interesting shows on crypto, on bad
(00:41):
property returns. Who would have thought, but as you know,
the apartment market is very weak, and we've covered that
and the new super tax. Now on that issue of
how good the markets are, if you had index funds
or exchange traded funds now increasingly dominant for investors, you'd
have had a terrific return because you would have just
(01:02):
captured the market. And the market was very good. It's
one of those years when it's well above average in
terms of returns, double digit returns, so it looks like easy.
Speaker 2 (01:12):
It looks easy. It looks easy.
Speaker 1 (01:14):
You buy these edfs and they roll home with high returns.
Speaker 2 (01:17):
You don't have.
Speaker 1 (01:18):
To think, you don't have to do a damn thing.
You just sort of look and see how high it
is each day. It's not that easy.
Speaker 2 (01:24):
There is no perfect investment. I want to look at that.
Speaker 1 (01:27):
My guest today is Jack Toussall of the Partner's Wealth Group.
That's a financial advisory group which is in the Baron's
Top fifteen. We've had Matthew has today on the show
from Partners before. Jack's got some really interesting views on
these subjects and I wanted to have him on the
show for some time.
Speaker 2 (01:46):
All right, Jack, I'm doing great.
Speaker 3 (01:48):
Thanks for having me.
Speaker 1 (01:49):
James, great to have you on the show. I know
that I suppose it was the time, really it was
difficult for financial advisors to express views, larger views beyond
the sort of the details of financial advice itself, and
maybe they spoke at conferences or whatever. That's all changed
now and people are able to sort of get their
(02:09):
views out there, and you're one of the advisors of
that new crop of advisors who've come to prominence with
clear views just about that issue of the markets. So
the ASX two hundred has given me what eleven percent
for the year. The s and P five hundred. I'm
talking about the financial year, very strong year as well.
Speaker 2 (02:30):
But you have.
Speaker 1 (02:33):
You have been arguing that people have to be very
careful about thinking about just the index, the ASX two
hundred or the S and P five hundred or whatever
you've got.
Speaker 2 (02:43):
What is the issue for you?
Speaker 3 (02:44):
Well, I think it's been quite distorted. So you said
there the IX has gone up by about eleven percent,
but come up bank. You know one individual out top
two hundred company US has gone up about fifty percent
of the time. If you took that senior investment out,
your returns only really around six percent. So it's not
really reflective of how the grand market has performed.
Speaker 1 (03:08):
One so in the ASX two hundreds, which did over
ten percent, yah of those two hundred stocks, one stock, Yeah,
is it if you didn't have it would have taken Well,
it isn't that an argument for ETFs in some fashion
that you capture.
Speaker 3 (03:25):
It's an argument when it's going one. But if you
can go up in going you on the dance slide
as well.
Speaker 1 (03:31):
Okay, So what you're saying is that if I had
the ASX two hundred in an ETF, for instance, in
the last year and they were down fifty percent.
Speaker 3 (03:40):
Yeah, then that would.
Speaker 1 (03:41):
Have really dragged me down as well. Because so the
point I think behind this what you're saying is concentration, right,
is that the problem that one bank is too important
for this index, it doesn't really reflect the market.
Speaker 3 (03:55):
Yes, spot on. What I'd say is they typically sprouted
as being well diversified. You've got save the ASEX two hundred,
you've got access to two hundred companies, and your risk
is quite well spread out. The reality is the top
ten companies of that whole index are about fifty percent
of it. So if you add two hundred companies, ten
of them are half of it, and then the other
(04:15):
night one hundred and ninety spread across the other fifty percent.
And that's not even before we delve into diversification of
sectors of the economy as well. So Australia is really
good and the bigg at two key things. The first
one is banking and financials and then the second is
digging sup out of the dirt. So mine those two
industries as a whole represent half of the whole index.
(04:37):
So really what you're doing is having a punt on
whether banking, financials and mining are going to do well.
And so you go on a situation where we have
another financial services review and that sector tanks or China
cracks it at us again like they did in twenty
twenty one, stops buying our coal and iron ore. Well,
then you complete portfolios, Cactus. It's not actually as diversified
(04:59):
as what people think it is.
Speaker 1 (05:02):
So it's not as easy as it seems to capture
an economy or a market, because you're saying that if
we look at the share market, we think we're buying
the market and a good wide diversified hundreds of companies.
In fact, banks, we're really buying banks and miners. And
(05:23):
if the banks and miners don't go well, you're in trouble.
But can you avoid that.
Speaker 3 (05:28):
You can have an actively managed portfolio, and really, if
you look at building out a portfolio, really what you
want to do is have allocations towards all the key
sectors of the economy. So if one individual sector isn't
doing that well, it's not going to tank your whole portfolio.
Speaker 1 (05:44):
You know.
Speaker 3 (05:44):
Part of crafting that is say I'm trying to build
out my personal portfolio and I go, look, I need
some banking financial sector allocation. There's a four big banks.
I think you know cbas are value. Not going to
invest in that, I might invest in NAB instead, might
leg the two hours out. If you're just going to
invest in index fund like Fast for example, you're buying
(06:06):
all four of those investments in the exact sound white
and you actually buy the ones which you might think
are more overvalued higher and the lower ones less.
Speaker 1 (06:14):
Okay, it's interesting, and what we're going to do. What
are we're just doing here? Focus is and we're just
going to have a look at the indices on which
the index investing are passive investing rules. And then in
the second hope we're going to do is we're going
to look at the problems. Obviously, then that loom if
you like. For ETF, they seem just now to be
(06:35):
I suppose in a way it's like they're too good
to be true, because because an advisor can say, hey,
i'll put you into this ETF, you won't do any
better or worse than anybody else.
Speaker 2 (06:44):
It just so happens for the last three years you
do really well.
Speaker 1 (06:47):
Right, so everyone sort of nobody asks hard questions when
things are arising. We look at that at the moment,
So just look at that wider issue. So in Australia,
the failing if you like, of an indicy's being the
asex too, is that it's literally half banks and miners.
And if you have a period where banks and miners
are not going well, and let's see other parts of
(07:07):
the economy are going really well, you're going to pay
for that. And it isn't Oddly Wall Street, which we
were always told as the world was a magnificent apros
fate market. Those in the sense really aren't really reflect that,
do they.
Speaker 3 (07:23):
It's inn where if you look at the S and
P five hundreds of the top five hundred bise counties
in the US, they the top seven, which they call
the magnificent seven examples of metal also known as Facebook apples,
your amazons, et cetera. Those seven out of five hundred
represent a third, about thirty three percent of that whole index.
So again, what you're doing personally if you invest in
(07:44):
that index fund is you're taking a punt on the
tech he's going to do well, and look if it doesn't,
you're going to get burnt.
Speaker 1 (07:51):
Right, So you're not really buying the US market, I'll say,
you're not really buying it, but you think you're buying
the US market, but you're actually taking a substantial bet
on tech. And more than that, you were taking a
substantial bet on just seven companies in tech.
Speaker 3 (08:06):
Exactly seven companies, all within the same industry.
Speaker 1 (08:10):
You said something pretty entertaining about the Dow one time,
so the that was even worse, I believe. Is it
Dow Jones index.
Speaker 3 (08:17):
That is my objectively the least beneficial index in the world.
Speaker 2 (08:24):
Sucks.
Speaker 3 (08:26):
Why, Well, it's a product of when it was made,
which was in the late eighteen hundreds, and effectively I
think it was Charles doubt someone plays.
Speaker 1 (08:35):
Correct, dal Jones, Wall Street Jungle, Yeah, I think cooperation
which John's the Australian just for disclosure.
Speaker 3 (08:44):
Looks out the time he made this index, it was
purely based on stocks which he thought were relevant to
the everyday man. There was no sort of objectivity of
it representing the great market. I think there were nine
or ten, but at the moment there's thirty. The biggest
issue is that it's price weighted, not market cap weighted.
Speaker 1 (09:03):
So what so Jack tell the everyday listener that's really
important and we're going to talk about that.
Speaker 2 (09:09):
But explain what.
Speaker 1 (09:11):
That is and the difference between the two categories.
Speaker 3 (09:14):
Yeah, well, I've got a good example of that. So
the index will increase if phenomenal value of a stock
goes up. So save for stocks worth ten dollars and
increases by ten percent, goes to eleven, you know, then
the index would go up by that much. There are
multiples in there. It's weighted by, say, if you had
a larger company in there, if it goes up by
one percent, and the index is going to go up
(09:34):
a greater around than say a company which is half
the value went up by one percent. I've got an example.
So two companies which are both in the Dow Jones
are Bowing and Amazon. Prices are pretty much the same.
I think Bowing's about two hundred and twelve dollars and
Amazon's two hundred and twenty dollars. For share buying market
capitalization of one hundred and sixty billion, Amazon two point
(09:58):
three trillions, about fifty teen sixteen times larger. Its Boeing
share price increases by one percent and Amazon's goes up
by one percent, then the index goes up the exact
same amount. It doesn't take any factors such as that
Amazon's fifteen times the size of Boeing. There's another example
(10:19):
as well which just shows how much of a data
in the index it is. In my opinion, Apple used
to have share prices of seven hundred dollars and at
the time they will consue putting the doubt, but they
really didn't do it because it would have just pushed
up the price significantly. So what did Apple do? They said, look,
we're going to do stock split. One share becomes seven,
it's worth one hundred and it goes in the index.
(10:41):
It's the exact same company, it's got the same financial metrics,
it's worth the same amount. But what it can go
in now because it's got seven times as many shares,
which you know, one seventh of value, that just doesn't
make sense to me.
Speaker 2 (10:53):
We'll take a short breath back in the moment.
Speaker 1 (11:05):
Hello, Welcome back to The Australian's Money Puzzle podcast. James
Kirkby with Jack Tussel of the Partner's Wealth Group. We've
just been talking now about stock market indices and the
distortions around them, and it's really important to grab this
point that the ASX two hundred is heavily dependent on
(11:25):
banks and minors if they go south and have a
bad year.
Speaker 2 (11:29):
It's not that you're going to have a bad year.
Speaker 1 (11:30):
You're going to have a much worse year than you
would have had if you had a more properly diversified
share portfolio. Similarly, the US, funnily enough, though, for all
its reputation, as Jack was explaining in the first part,
indices like S and P and the Dow in particular,
they're really narrow and they had the really strange distortions,
so they could have a good year, but it wasn't
(11:51):
really that good for most investors or vice versa. So
this is an issue, but it's it was never very important, Jack,
but suddenly it is. Because exchange traded funds are now
so common, they become very popular, and I think it's
probably a time that people really need to know more
about them and their limitations. I mean, the obvious thing
(12:14):
I have always thought about them is it's like it's
dull money. No one's thinking as such. They set their sales.
This is an a conventionality. If they set their sales,
they say we buy the top two hundred, close our eyes,
and you can get all sorts of issues. Then you're
consciously buying the worst rubbish on the market because if
(12:36):
it's there, you're going to buy it. And there's this
argument that ethically you're oblivious. I mean, there could be
a company where you know, the most atrocious things are
going on. Again you're buying it because your ETF just
buys it. I mean, are they fair criticisms?
Speaker 3 (12:51):
No, I'd say absolutely fair, and you know, I'd say
it's going to get worse and worse. At the moment.
In Australia they say about eighty five percent of new
investment can rule is going towards just passive index funds.
And I'm at the argument right Look at Commonwealth Bank.
It is the most expensive bank in the world. It
resides strictly in Australia, a country twenty seven million people,
(13:13):
doesn't do any international business. Can anyone honestly tell me
that it is the best bank in the world. And
I've asked myself where is the money coming from that
pushes it up? If individuals already own it, I can
understand why you continue to hold it and ride the momentum.
But if you're looking to invest in chairs, who's actually
(13:33):
buying dedicating the money to go there? You know, in
my opinion, what it is index funds further pushing it up,
and then super funds as well, who at the moment,
as a result of regulation, effectively market huggling index funds
in practice, not in name, but in practice.
Speaker 1 (13:50):
Right, So there is that notion of the closet index
fund right, yeah, yeah, yeah, explain what that means to
our listeners, because it's very interesting.
Speaker 3 (14:00):
So about four years ago they had your Future your
supernw rulins which came in and look, you know, it
sounds very good in principle, which is to name and
chain poor at performing super funds. But the consequence of
that is that no one's chasing better returns now because
the consequences of doing so is you can also deviate
(14:21):
from what the market's doing. So rather than actually trying
me better, it's like it's a how of a lot
easier just to track the indexes and you know, if
they go up, we go up. If they go down,
we go down as well, and can say, oh, that's
just the markets.
Speaker 1 (14:35):
Yes, right, so it's sort of self perpetuating failure feelings.
Speaker 3 (14:40):
Yeah, exactly, spot on.
Speaker 1 (14:42):
So the way the mechanics are it is come WO Bank,
which has I can't recall, but it's like single digit growth, Yeah,
a couple of percent. It's only in Australia. Australia is
only three percent of the world and it's top fifty percent.
Speaker 2 (14:57):
Go figure.
Speaker 1 (14:58):
And you're saying this is perhaps one of the first
sort of iterations of the issues of the ETF and
what they're distorted, how they're distorted in the market.
Speaker 3 (15:08):
Yeah, exactly. And I put in one of my LinkedIn
person was Michael Burry, who is made famous by the
Great with the Big Short and you know, one of
his catch phrases was that index funds may be worse
than Marxism because they effectively just destroy efficiencies, you know
overall markets that you know, price discovery mechanism of you know,
say individual investors or funds going well, hey, you know,
(15:30):
do the metrics stack up? Should I invest in or not?
Whereas as you touched on the dumb money, index funds
just throw it out regardless of any outwards considerations.
Speaker 1 (15:41):
So let's just and I'm not saying this is going
to happen, but I think it's something everybody should be
aware of. What is the risk here for all investors
if they if it keeps going like this where the
question where it's all mechanical algorithm based buying. And then
if the everything amplified, So if Coverwealth Bank is going well,
(16:04):
it goes even better because the amplification of index funds
for the money chases the money.
Speaker 2 (16:11):
It's it's gone up.
Speaker 1 (16:12):
Five percent, so we have to buy five percent more
of it because that's.
Speaker 2 (16:15):
Our game as an index fund.
Speaker 1 (16:17):
And if things turn down, I presume it's the same
that if they're falling ten percent, so then we have
to sell because we've got too much because they've shunk,
so we must shrink our holdings. So ultimately, is there
actually like systemic risk to the actual nature of markets here?
Speaker 3 (16:32):
That's absolutely just with the concentration of those specific indusues
and holding teeth in the market. Absolutely there is.
Speaker 1 (16:39):
So what should the active investor do. I'm going to
take it that. I'm still going to say that I
think ETFs are useful. They're useful from two ways. One
for the new investor who has never bought anything for it.
Once upon a time they said what chairs do I
buy it?
Speaker 2 (16:54):
To start?
Speaker 1 (16:54):
And you said, oh, oh by BHP bye app by couse,
this sort of thing that was actually quite risky. I
always say the first two shares I bought and they
be in Pacific done, loop one, doubled.
Speaker 2 (17:05):
One disappeared.
Speaker 1 (17:06):
This was in the period of whatever ten years, but
it captured the issue. So I think they're good for
introductory investors getting to know how to invest, and I
think they can't be useful as a core approach core
on satellite with some sophisticated thinking around it maybe market
way that we won't go into that just now. But
what I'm saying is, what do you think the active
investor should do? Knowing what you've just been telling us, Well.
Speaker 3 (17:30):
You know, as a touch on before, you want to
have a well curated portfolio which you know, diversify as
you reached you know, you always touch on the adage
don't have all your eggs in one basket. That is
literally what people are doing.
Speaker 1 (17:42):
That's that's the Yeah, that's what I need to have,
isn't it.
Speaker 2 (17:45):
It's a basket. They actually call it a basket.
Speaker 3 (17:47):
And then the consequence is, yes, you know, these funds
might have had an absolutely cracking you know the last
twelve months, but if it's so hedge on one sector
or one stock align, how would you feel if your
portfolio underperform relative to all the other investments for the
next five plus years, I don't imagine people will be
too happy.
Speaker 2 (18:05):
With that, right, So do you.
Speaker 3 (18:09):
Do?
Speaker 1 (18:10):
Is your approach that core and satellite idea where an
ETF ETF are in the mix or are you actually
don't like them at all?
Speaker 3 (18:20):
Well, it depends on the individual client. Yes, both would
work well in the expands you touch on. Can serve
a great purpose, especially getting into the markets and giving
you an allocation towards other sort of markets, for example,
especially within the international side, because it can be extremely
expensive to say, invest directly, and there's a heap of
(18:42):
tax consequences which I don't need to go into. Cheering.
Speaker 1 (18:45):
Yes, yeah, something like if you want to buy American
small CAFs or something. Yeah, I mean that would be
quite difficult to sitting here. You'd have to buy twenty
of them. How on earth would you pick them? How
would you get to know them? You buy an ETF,
but you won't get the big winners, but you know,
get a big winner or a big loser, but you'll
you will reflect the general tempo of small caps, so
(19:05):
they have their uses there. Okay, very interesting, Just one
last thing, and I mean, I must say, if you
are as skeptical as you are about conventional mainstream ETFs
as we know them, you must be terribly skeptical about
the new wave of uts where they unfortunately are starting
to innovator. And I use the word in sneak quotes,
where they're coming up with all sorts of smart ideas,
(19:28):
thematic ETFs leverage dtfs, and in a way they're kind
of to me at least, they're kind of polluting the
original notion, the Jack Bogel notion of a straight mirror index.
Speaker 3 (19:40):
Yeah. I think that the issue with those is they're
easy to sell, right, and you get all of these
cowboys social media influences out there. You just tell every
random person I dedicate Twain CENTI bi checking in missing
these index funds and now right up about oh this
industry is going wow. So they'll just put it all
in there. And then again, you can't and training your
(20:01):
risk in one sector, which just completely flies in the
face of sound financial management diversification.
Speaker 1 (20:10):
Which brings us back to that thing that you're buying.
You're buying everything, Yeah, good stuff, the good stuff under rubbish.
Yeah yeah, Okay, just one nice thing. You didn't pick
up on my contention, which for some reason people don't
seem to be.
Speaker 2 (20:25):
I was ranged about it all.
Speaker 1 (20:27):
But it's like, to me, the ethical side of things,
they're ethically oblivious.
Speaker 2 (20:33):
For you at all. Yeah.
Speaker 3 (20:34):
So for example, right, if you buying the S and
P five hundred, you know you're getting the American to pacco,
you're getting Lockheed Martin, most notably known for making bombs
which get dropped on families and mulance. It's helping to
that too much. You know, you've got gambling, you've got alcohol,
You've got everything in there. You know, especially as an
advisor ethical investors, you know, it's becoming more and more
(20:54):
of a talking point. And look, everyone's got their own
view on it. Everyone's moral is different. But for a
lot of individuals out there who are quite moral paper
and they're just investing in these in the expands, not
actually realizing that they're getting exposure to these companies, which
is flying the face of everything they stand for as a.
Speaker 1 (21:12):
Person understand for Yeah, Look, I think if anything, just
from what we've talked about today, Jack, I think it's
been a really good illustration to all investors and our
listeners that do you actually know what an ETF is.
It's easy to give you a top line explanation. It's
a mirror of an indices, but behind that there is
(21:33):
all sorts of distortions and games being played and issues
that perhaps really it's time to get some air. And
luckily perhaps the Commonwealth Bank. The extraordinary, astonishing and really
unconvincing fifty percent increase in comebank in the last year
in our market has brought the issue of the other side,
(21:56):
the ETFs, the issues, the problems that they have, the
problems that may loom for them, really interesting. Jack, we'll
take a short breakase. I also want to talk to
you about sophisticated investors, a different issue, but another issue
that I think our listeners will be really keen to
hear your views on.
Speaker 2 (22:13):
Back in a moment.
Speaker 1 (22:27):
Hello, Welcome back to The Australian's Money Puzzle podcast. I'm
James Kirby from The Australian and I'm talking to Jack
Tossl of the Partner's Wealth Group. Now, Jack, I don't
know your client list. I haven't seen them, but I
imagine that they are. We could classify them all as
wealthy one way or another. And it is a big
(22:48):
trend now in financial advice, particularly at the top end,
to make things simple for everybody, they simply classify their
investors as sophisticated investors. In doing so, it opens up
future of canvas of investments that they can access that
they couldn't as a retail investor. And they also the
(23:09):
price of that is that they give up, if you like,
some of the regulatory protections that are in there, such
as the Australian Financial Complaints Authority or the Conversation Scheme
of Last Resorts.
Speaker 2 (23:20):
So that's the deal.
Speaker 1 (23:20):
But advisors love it right because it makes it really
simple and they don't have to sign as many documents
or go through as much red tape. The criteria for
becoming a sophisticated investor, if you don't already know, is
two point five million in assets and that can include
the family home. It shouldn't, but it does. Or two
hundred and fifty grand a year for two years in
(23:43):
a rowan income. There was a time that was a
really lot of money when they created this system. So Jack,
there's also the problems with it, isn't there. I mean,
it's been abused as people who are not sophisticated or
classified as sophisticated. So there's all sorts of issues and
it's under review at the moment. The push is to
(24:05):
make it even harder to qualify, like ACID is talking about.
I said, four millions you're supposed to have, perhaps in
the future, to be to qualify a sophisticated investor. What
do you think about this? What do you think our
listeners should know about this area?
Speaker 3 (24:21):
In my opinion, I believe that the current tests it
is so completely arbitrary. Now the two point five million
dollars in net assets or you've two hundred and fifty
thousand dollars a year for the last two years, you know,
and you instantly tick a box and you're sophisticate investor.
You can have someone that's never invested, is sharing their life,
has no financial literacy, and gets a three million dollar
inheritance because one of their realities pass away, and then
(24:43):
they can access all these away unlistened investments.
Speaker 1 (24:48):
It's actually it's made me think it's dumb money again.
There is actually a segue here between part between the
first two segments and the third segment, folks, and the
segue is it's the dumb money issue because I if
I'm wrong, But okay, so I know nothing. I'm hopeless.
I am the worst investor you ever came across. But
I inherit three million tick. I'm classified as a sophisticated inventor.
Speaker 2 (25:12):
Isn't it that easy? Yes? And no, it's that easy
to be classified.
Speaker 3 (25:18):
If advisor is doing a duty dilidence, then they need
to actually note know that you are actually scare investor
and capable of making financial decisions. But in practice, whether
that actually happens across the country, I'll a bit dubious.
Speaker 1 (25:33):
I'd be bore than jubious. I doubt it happens at all,
to be honest, because the person says, well, that's my
legal classification. Now I want to buy hedge fund number four.
It's only for sophisticated investors. I qualify as once, so
I want it. What can you say to me? What
could you possibly say to me to stop me?
Speaker 3 (25:51):
Exactly? And that's the thing. I can just go straight
to a fund man injury or get off. And they're
not making financially sound decisions. And you know, leaning under
what I said before, you, an individual is extremely financially
A student who's invested for ten or twenty years, but
doesn't have the privilege of having a lot of family
wealth which has passed on to them, and then they
can't access these investments. It's interesting the US is actually
(26:13):
looking at going down a different route. Hasn't been brought
in yet, but they're considering bringing in an effectively financial
literacy test. And the key reason they're doing that is
because they're saying that this divide between you know, ticking
a box man sophisticated investor not just based on assets,
is further exacerbating the wealth divide, the inequality between the
(26:35):
haves and have not.
Speaker 1 (26:36):
Yeah, yeah, I see the upset of meritocracy. The professor
of finance. Yes, no, inheritance is excluded from the person
who picked up the four million from Anti lou And
there was nothing.
Speaker 3 (26:52):
Exactly and it's ridiculous. Do you like a fantastic statistic
which is actually from Tony Robbins's recent book where you
know he actually solid what are these issues? And you said, look,
the last thirty five years in the US, the private
equity asset class returned fourteen point two percent compared to
the list of markets in the US, which shares a
bible to your everyday retail investor which did nine point
(27:14):
two percent. That's a fifty percent difference in annual returnments.
And you think about the multiplier effect of that. So
you had one hundred thousand dollars one individual put it
in private equity left it there for twenty years, to
the other individual put it into public equity and left
it there for twenty years. The difference is one point
four million dollars versus five hundred and eighty thousand dollars.
(27:34):
You know, it's a bit more than a round drinks.
Speaker 1 (27:37):
As a round the drinks, and you were saying the
investor was excluded. The investors were excluded from that party
basically because they weren't classified the sophicity exactly. Yeah, so
what should they do? Should they raise the bar, which
is what Assek wants, or.
Speaker 2 (27:52):
Should they scrap it?
Speaker 1 (27:54):
Should they have scrap the whole thing.
Speaker 3 (27:55):
I'd scrap it all together and I'd replace it with
the financial literacy.
Speaker 1 (27:58):
Test, but that's still that they're still a test.
Speaker 3 (28:01):
Then, Yeah, it should show that you actually have you know,
the financial competence and the knowage of it, and you
actually understand, you know, what the benefits are of proceeding
with these types of investments and also what the consequences
are if that goes wrong.
Speaker 1 (28:14):
Okay, that's very interesting. I mean I must say if
you had to choose between the two, I mean, logically
it does make a lot of sense. Why continue the
separation at all?
Speaker 2 (28:24):
Jack?
Speaker 1 (28:24):
Why have sophisticated and unsophisticated anyway? I mean I can buy,
I can go on a crypto size, and I can
put my life savings on it.
Speaker 3 (28:34):
Yeah, we can talk about hours talked about crypto. But
I think it's about if you look at why they
have the asset tests, you know those tests. The reality
is because you know, the government goes look if you've
got two three million investment goes bale up and you
are these two hundred three hundred thousand not that consequence
you all whereis what they're worried about is if you
get saying everyday retail investors only got one hundred grand
(28:56):
in super and one hundred percentage of that is invested
in you know, just a typical mom and dad and
that goes belly up. That's going to be you know,
not good at all. The every every day I.
Speaker 2 (29:07):
We just try Okay, So that's there.
Speaker 1 (29:10):
Yeah, the separation between sophisticated and unsophisticated has to remain
a retailer, as they say, it has to refeel it.
Speaker 2 (29:17):
It's there as a safety net.
Speaker 3 (29:19):
There's yeah, there's less guard rails as well.
Speaker 1 (29:21):
But you think it should be based on basically, it
should be based on competence, not money exactly. Okay, I
like that. Well, who could argue against meritocracy? All right,
very good, it's been really interesting. We have just do
a couple of quick questions that I have here. You
may chip in if you like, Jack, I just want
to try and catch up we have. We have had
a lot of questions of course, on the super tax,
(29:43):
on crypto, on apartments, a couple of other questions that
haven't getting issues that have not been getting the sort.
Speaker 3 (29:50):
Of light that they have.
Speaker 1 (29:53):
One is from Anna who says, I don't think there's
any point knocking the home buyer incentives. It's free money
and a competitive mark. When I get a chance, I'm
going to use every grant or assistance I can find. Yes, okay,
and a point taking yes, I suppose the issue with
these boys we're making with these on the grants in
the context of an apartment market that is very weak
(30:16):
just now is that at its worst, people are being
incentivized to buy into weak spots in the market. And
we mentioned the course in Queensland state budget you could
buy a million dollar house with a two percent mortgage
back if you don't mind buy the government.
Speaker 2 (30:33):
I don't know if.
Speaker 1 (30:34):
That's really great from a macro perspective, it certainly isn't.
But I take your point all right, and charm Me asks,
our superannuation is meant to replace the government pension. But
everyone calculates assuming you claim the pension when your fund's
run out. Now, But that's about is the retirement calculator.
So you go in and you say how much should
(30:54):
I have? You say how much you have, etc. And
they make an assumption. Careful with that. The general retirement
calculator assumes not that you live forever, that you're going
to live forever. It doesn't assume you live to one hundred.
It assumes you live to an average life expectancy. And
then it assumes you go on the pension. You may
(31:18):
not want to do that. That might not be exactly
what you aspired to. So I think that's just be
careful with those calculators. I think you want to chip
in on those two.
Speaker 3 (31:27):
Jack touching the last one. You know, if you bank
relying on the government pension later on, the issue is
that you completely lose your control. The government changes the
rules every single year every time your government gets elected.
What happens when they pull the carpet out from benetti faith.
Speaker 1 (31:46):
Yes and yeah, well exactly, or what happens when they
can't afford in real terms the pensions perhaps that we
have today. It's a rich country, remains a rich country,
but will we always have the ability to pay as
we do now? Very interesting, Great to have you on, Jack.
We will have you on again. That was very interesting.
I think there was a couple of issues that are
(32:07):
very timely. I think the ETFs this is the time
to reconsider them really and understand what they are, because
it's not always going to be this easy, is it.
It's not every year your shares are going to roll in.
Speaker 3 (32:20):
You're working on the laws of averages, and as we
just showcase, you don't have much diversification over on your
portfolios if you're just chasing those behind in next ONNSE.
Speaker 2 (32:31):
Very interesting.
Speaker 1 (32:32):
It's very interesting because that's the whole proposal.
Speaker 2 (32:35):
Thanks Jack, Love you to have you on the show.
Speaker 4 (32:37):
Thanks having me, Jame, It's been absolute pleasure. That was
Jack Tossl of the Partner's Wealth Group. Let's have some
more correspondents the Money Puzzle at the Australian dot com
dot au. Love to hear what you thought of those
observations on ETFs, which I must say are rarely made,
but I think you'll find they're going to be made
much more often in the near future.
Speaker 1 (32:57):
Talk to you soon.
Speaker 3 (33:00):
The wood, the collect the
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