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Online Investments Pty Ltd t/a Mayfair 101 (ABN 981 34 785 890) provides investment and corporate advisory services including funds management, asset management, capital raising, corporate advisory, M&A (merger & acquisition) advisory, and direct investment either directly or via its wholly owned subsidiaries.

 

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Investor Education Centre > Bank Products > Term Deposits vs Non-Bank Alternatives

Term Deposits vs Non-Bank Alternatives

In recent years there has been an increase in the number of investment options available to Australian investors who have traditionally been comfortable with leaving money in term deposits with major banks such as Commonwealth Bank, NAB, ANZ, St George, Westpac, Citibank, Bank of Queensland, Bank of Melbourne, Bendigo Bank etc.

With interest rates at historic lows investors are seeking higher yields to boost their income generating potential and keep ahead of inflation.

Non-Bank Alternatives Proving Popular

Savvy investors have more choice than ever when it comes to finding a home for their hard earned money, with non-bank offerings becoming increasingly popular.  Popular non-bank options that term deposit and savings account holders are moving to include:

  • Income funds – these are funds that pay a regular distribution to investors, typically at a quoted target rate of return

  • Property funds – these are funds that are backed by commercial or residential property, and can either pay a return throughout the duration of the investment or at the end

  • Bonds – these are a form of security issued by a company that provides the company with the ability to finance its activities with this money

  • Peer-to-peer lenders – these are typically platforms that connect borrowers with lenders, effectively cutting out the middle man and providing the opportunity for higher returns (for the lender) and access to capital that otherwise may not have been achieved (for the borrower)

 

Considerations when moving away from term deposits

If you are considering placing your funds with a non-bank alternative such as those listed above it is important to firstly understand the security provided by the banks. 

A frequently quoted security feature of a bank is the Financial Claims Scheme, better known as the ‘Government Guarantee’.  Below are some facts about the Government Guarantee as it relates to bank deposits:

  • The Government Guarantee was introduced as a result of the Global Financial Crisis

  • The Government Guarantee applies to $250,000 per individual, per ADI (Authorised Deposit-taking Institution)

  • If you have more than $250,000 with an ADI, every dollar above $250,000 is not covered by the Government Guarantee

  • There is a limit of $20 billion per ADI

  • The big 4 banks each have approximately $400 billion in bank deposits

  • If a bank were to fail (highly unlikely in Australia, though they said the Titanic would never sink), the Government would need to come up with up to $20 billion to bail them out

  • At the time of writing this article we checked the websites of 10 ADI’s and none of them disclosed this $20 billion limit

Five key things stand out from this information:

  1. Investors with more than $250,000 in an ADI are taking more risk yet are not being rewarded with higher rates on their savings or term deposits (in fact some banks pay lower rates for larger investors).

  2. The $20 billion limit per ADI would mean bank deposit holders in Commonwealth Bank, ANZ, National Australia Bank and St George would receive less than 100 cents in the dollar in a worst-case scenario.

  3. It would seem that investors are better off with smaller banks given they have less money on deposit and therefore have better coverage from the Government Guarantee

  4. Either Australian taxpayers would effectively be bailing out the bank if one collapsed or the Government would need to borrow from an external source, placing the country further into debt (the Government doesn’t have $20 billion spare for such an activity)

  5. The banks are not being transparent about a fundamental component of the guarantee, yet they will gladly accept investor money without disclosing what the limit is relative to their bank deposit balances

Now it’s not all doom and gloom in the Australian banking sector.  Banks are required to manage their liquidity ratios tightly in order to retain their banking licenses.  The Australian framework for these ratios is more conservative than the likes of the United States, which saw several banks collapse during the Global Financial Crisis.  The chances therefore of such an outcome is very slim, however investors ought to understand the risks of any investment.

 

Questions to ask yourself before making the switch

If you are considering moving away from a bank you should ensure you read the disclosure documents of the company you are considering investing with to understand the risks.  Ask yourself whether you are comfortable with:

  • The Government Guarantee not applying to your investment

  • The security measures in place to protect your investment

  • The amount you are investing (consider starting small and building up over time)

  • The rate being offered relative to the risk profile

  • How your funds are put to use

  • Whether there is any independent oversight of your investment

  • The track record of the company you are investing with

  • The profile and experience of the team

  • The customer satisfaction rating other investors have given the company

  • The level of accessibility of your point of contact

Term deposits continue to be popular with Australian investors because of the low perceived risk associated with the investment, and will continue to be the preferred option for those wanting the comfort of knowing their money is in a ‘bank’.  Innovative non-bank alternatives however have gained a lot of traction in recent years and whilst they do have a different risk profile to banks, they are certainly proving popular with investors seeking a higher yield.

 

IPO Wealth is not a bank however many of our investors are former term deposit holders. Our investment product (the IPO Wealth Fund) was modeled on various popular features of term deposits (e.g. term-based options from 3-60 months, the option to automatically renew when your term expires, monthly income distributions).  We have a different risk profile to a bank and are not covered by the Financial Claims Scheme, however our fresh approach to investing has proven popular with investors throughout Australia.  Most of our investors invest more than $250,000 and you can get started from just $100,000.

Mayfair 101 established IPO Wealth to specifically cater for High Net Worth investors seeking income-producing investments.  For more information visit www.ipowealth.com.au

Disclaimer

This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.

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