It’s time to change our reliance on TDs
Earlier this month the RBA kept rates at 1.5%. An historic low which we’ve been stuck with for two full years. Moreover, the market is of the view that we have at least another full year, if not longer at this record low1.
Many investors have been left feeling the pinch on their income. The need to search for a better yield, whilst keeping funds allocated to low risk profile investments has never been greater.
Break the rolling habit
APRA data indicates that households are holding close to $900 billion2 in bank deposits, SMSFs alone account for $157 billion. The data shows that while more than 90% of deposits are with the top 10 institutions, the lion’s share heads to Australia’s big 4 (over 80%).
Many investors may feel that they are stuck in a cycle of rolling short-term TDs for years – taking out a 3-month TD and rolling it 5-6 times. Towards the end of each term, when the bank asks them what they want to do, the response is “roll it”. While the intent may be to sort out an alternative ‘next time’, the problem is most haven’t. The end result is investors may have missed the opportunity to earn a higher rate that an 18 month investment would have paid. And they are missing out by getting lower and lower returns with each roll.
But, this cycle of short-term TDs offers a key opportunity. With most of the money in the shortest term TDs – 60% in 0-3 month TDs3 – that means up to $540 bn is due to roll in the next 12 weeks. Now’s the time to assess past behaviour and look for new opportunities.
It’s a matter of trust
Higher TD rates can often be achieved by looking outside of the top names, to ones investors are less familiar with. Making the choice to lock up money for longer periods can also provide higher returns. But, both of these approaches have key drawbacks. Is there the same level of comfort when investing with a less familiar bank? And what if unforeseen circumstances makes earlier than planned access to funds necessary?
Add to this recent research published by Deloitte4 and Nielsen5 suggesting the banking industry as a whole has experienced a significant decline in trust over the last two months. The reports suggest the decline has resulted in more than 2 million Australians currently considering their options.
Gen X and SMSF Trustees impacted most
Neilsen research shows that across the population, its Generation X that are the most impacted. Perhaps their needs for an array of financial products (mortgages, insurance policies and bank accounts) may be behind a feeling of paralysis. With many SMSF trustees being Gen Xers, the link between SMSFs and the need to look for alternative options, without creating too many headaches for the customer, is clear to see.
The greater the number of touchpoints with one organisation, the harder it can be to see where changes can be made. The research confirms this. Deloitte found 18-34 year olds are the most likely to make wholesale changes to their banking relationships. Over a quarter said they were “highly” or “quite likely” to switch banks. For 35-49 year olds the percentage dropped to 20% and it fell again for the over 50s to 11%. This shows Gen X, and therefore SMSFs, have a dilemma. Deloitte research suggests they have the greatest concerns, but feel the most tied to their existing banking relationships.
Where can I find a better rate than bank TDs?
Invest with brands you trust and make your money work harder
Much over-looked corporate bonds could be the simple solution that:
- Offers a choice of issuers outside of just the banks
- Keeps your money in a lower risk asset class
- Improves the return on your portfolio.
Corporate bonds provide predictable returns for investors and have a similar pay-off profile as a TD – return of capital and set income payments along the way. Term Deposits may enjoy the benefit of protection under the Financial Claims Scheme.
They don’t have the government guarantee of TDs. Bond investors are effectively loaning money to top ASX-listed companies rather than a bank. But, in exchange for the additional risk, the yield achieved is generally higher – up to 40%6 higher.
Access, flexibility and choice at your fingertips
Accessing corporate bond returns has never been easier. With a range of almost 50 individual corporate bond XTBs on ASX, investors can pick and choose from more than 25 ASX100 brands – names they know and trust. Add to this a growing range of bond ETFs, investors really have a broad range of solutions to choose from. Both XTBs and ETFs also come with the added benefit of being traded on ASX. Investors can say goodbye to the drawbacks of minimum investments and break fees. They can buy and sell XTBs just as they do shares, benefiting from the ASX T+2 arrangements. And giving investors quicker access to their money should they need it.
Corporate bonds could make your money work harder and put you back in control. So when your next TD matures, you have the perfect opportunity to move your investment to a brand you trust AND get a better yield. It could be a win-win situation.
This article first appeared in Selfmanagedsuper