A term account is not a term deposit


Can one word really matter when you’re chasing 7% returns? ASIC thinks so.

Subscribe to Money Matters Newsletter

Subscribe to Money Matters


Keep up to date on consessions, retirement planning, retirement income, funding aged care, superannuation, and more with Money Matters

Subscribe for the latest on financial matters relevant to your stage of life, including regular articles from experts Effie Zahos and Paul Clitheroe, straight to your inbox.

Subscribe here

In an extraordinary intervention, the corporate regulator, ASIC, recently paused some high interest-bearing products from the much-advertised and popular La Trobe Financial Asset Management.

The target of ASIC’s concern was La Trobe’s 12-month term account and two-year account products. ASIC is concerned the funds suggested investors allocate an inappropriate proportion of their portfolio to the funds, given the risks.

Since then, La Trobe has addressed some of the concerns, resulting in restrictions on some products being lifted. Commentators believe ASIC’s move “set off alarm bells in the private credit sector and shook confidence in the firm”.

It confirms ASIC has stepped up its scrutiny of the sector, focussing on fund transparency, governance, valuation practices, management of conflicts of interest, and fair treatment of investors – which was “conducted as part of its response to Australia’s evolving capital markets”.

ASIC says it acted to protect consumers and retail investors from acquiring products that may not be suitable for their financial objectives, situation, or needs.

The Australian Financial Review (AFR) described La Trobe’s 12-month and two-year funds as being heavily exposed to property, including to borrowers who cannot get finance from major banks. As of August, the 12-month account had $10.5 billion in mortgage investments and $149 million in cash.

Term accounts are not term deposits

ASIC’s concern should also be a concern for retirees chasing higher deposit returns. The regulator warns, “These products (term accounts) are not bank term deposits. The rates of return are not guaranteed and are determined by future revenue of the pool of assets that comprise the account, the investment may also not generate the expected income returns and there are conditions around withdrawals.”

ASIC is looking into the possible confusion for investors who mistake “term account” for “term deposit”. Private credit organisations, such as La Trobe can offer only term accounts not term deposits, which are bank products.

What’s the difference?

Simply, funds in term accounts are not guaranteed, not by the lender or by the government, and while they offer high interest rates, also come with greater market risk. On the other hand, term deposits up to $250,000 offered by financial institutions registered with the Financial Claims Scheme are guaranteed by the government.

According to recent figures, $1.24 trillion is invested in term deposits – the highest monthly total in more than 20 years. Currently, the highest rate for term deposits is between 4% and 5%.

However, term accounts offering up to 7.5% return are increasingly popular with retirees, who either accept the risk or may think they’ve bought a bank-like safe investment product.

Term accounts’ higher returns are achieved by investing in longer-term credit assets, including residential mortgage-backed securities (mortgages) and asset-backed securities, which one commentator told the AFR “are always going to have liquidity management problems when you get a stress event in the economy”.

Marketing of confusion

So, is the use of “term account” versus “term deposit” intentional? Financial researcher Ben Walsh thinks so, telling the AFR the conflation of the phrases is a deliberate marketing ploy.

“The audience is not sufficiently literate to understand the risk-reward trade-off,” he said, adding that “there’s no real, true discussion of risk”.

“They should all be stress tested in the same way that the banks get stress tested,” Mr Walsh said.

While account deposits invest in a mixture of cash, residential mortgage-backed securities, and asset-backed securities and generally disclose in the small print that they carry more risk than term deposits – how much more isn’t usually made obvious until deep into the fine print.

Andrew Stone, an investment fund and private market lawyer, said, “The use of product descriptions and terminology is definitely something that’s on ASIC’s radar again.”

La Trobe does disclose that “term accounts” are not as safe as a term deposit, noting that “an investment in the credit fund is not a bank deposit, and investors risk losing some or all of their principal investment”.

It is the extent to which those disclosures are enough to protect investors is what concerns ASIC.

Related reading: AFR, ASIC 

Author

John Austin

John Austin

Policy and Communications Officer, National Seniors Australia

Discover the benefits of an NSA Membership

Members save 10% on Travel Insurance*

Members save 10% on Travel Insurance*

National Seniors members receive a 10% discount on travel insurance policies*.

Thousands of Australia-wide discounts

Thousands of Australia-wide discounts

Exclusive offers and savings across dining, shopping, gift cards, and more – all in the EAT | PLAY | SAVE app.

Financial Information Consultant

Financial Information Consultant

Speak to a real person and receive up-to-date information on retirement planning, superannuation, and more!

Branches

Branches

Expand your social circle, enjoy social events, day trips, guest speakers, and meet like-minded members.

Exclusive Travel Discounts

Exclusive Travel Discounts

Save on tours, cruises, and holidays with exclusive discounts on National Seniors Travel.

Our Generation Digital Magazine

Our Generation Digital Magazine

Receive a yearly subscription to Our Generation Digital Magazine.

Advocacy & Research

Advocacy & Research

Your membership directly funds our advocacy and research work fighting issues that affect you.

Competitions

Competitions

Access exclusive member-only weekly competitions including books, DVDs, CDs, movie tickets and more.

Discounts

Discounts

Save with over 1,000 discounts on groceries, fuel, accommodation, fitness, health care, gift cards and more!

Become a member

Latest news articles


This article and any links provided are for general information only and should not be taken as constituting professional advice. National Seniors is not a financial advisor. You should consider seeking independent legal, financial, taxation or other advice to check how any information provided relates to your unique circumstances.

Disclaimer: National Seniors Australia Ltd ABN 89 050 523 003, AR 282736 is an authorised representative of nib Travel Services (Australia) Pty Ltd (nib), ABN 81 115 932 173, AFSL 308461 and act as nib's agent and not as your agent. This is general advice only. Before you buy, you should consider your needs, the Product Disclosure Statement (PDS), Financial Services Guide (FSG) and Target Market Determination (TMD) available from us. This insurance is underwritten by Pacific International Insurance Pty Ltd, ABN 83 169 311 193. *The discount applies to the total National Seniors travel insurance premium and is for National Seniors Australia members only. Discounts do not apply to the rate of GST and stamp duty or any changes you make to the policy. nib has the discretion to withdraw or amend this discount offer at any time. This discount cannot be used in conjunction with any other promotional offer or discount

We've got your back

With National Seniors, your voice is valued. Discover how we campaign for change on your behalf.

Learn more