When David Hall retired after a career working on global banking IT projects, his intention was to live off the revenue generated by his self-managed superannuation fund.
But it has not gone to plan for the 66-year old from the Sydney harbour -side suburb of Neutral Bay, and he blames SMSF specialists Dixon Advisory.
He has taken his fight against the wealth advice firm to the financial ombudsman.
Dixon, he says, advised him in late 2015 to invest hundreds of thousands of dollars in its ASX-listed US residential property fund, URF, along with a suite of other Dixon funds.
US Masters Residential Property Fund (URF) was established in 2011 to give investors exposure to residential property in the New York metropolitan area. AFR
Those investment decisions resulted in lucrative fees accruing to the firm while exposing Hall to what have proven to be risky investments.
“Primarily I was concerned that the majority of their recommendations were for their own products,” he says.
Hall cut all ties with Dixon in 2017 but hung on to his holdings in URF as they continued to slide, destroying tens of thousands of dollars of savings before he pulled the pin on the investment.
His experience is not unique.
High fees, low returns
The Australian Financial Review has spoken to several of Dixon's 4,800 clients, and viewed the portfolios of three former clients. In each case they had been steered by their advisers to invest more than half their savings in funds managed by Dixon. The funds charged above-market fees yet delivered below-market returns.
The Financial Review does not suggest that these examples reflect the investment advice provided to all of Dixon's clients; they speak only to the advice provided to those individual investors.
While all investors have a responsibility to do their own homework, particularly when notified about potential conflicts of interest,complaints about certain recommendations of Dixon, which is part of ASX-listed Evans Dixon, highlight a clear problem with regulation of the issue. No finding of wrongdoing by Dixon has ever been made by the corporate regulators.
Even after the Hayne royal commission torched the reputation of some of Australia’s oldest and most trusted wealth managers for failing to act in their clients' interest, there is a section of the wealth world where conflicts still exist. Many of those conflicts are disclosed to investors.
The funds that Dixon owns and manages, and which (in the examples reviewed by The Financial Review) its advisers most heavily recommended, have performed terribly.
The URF share price has fallen 50 per cent in the past two years, despite a falling Australian dollar which should make the property fund’s US assets more valuable.
Dixon’s New Energy Solar fund, which invests in US-based solar farms,has lost 14 per cent of its value in the same period.
Meanwhile, shares in the Evans Dixon parent company have more than halved in value since listing in May last year in a float that was heavily marketed to the firm’s 4800 clients.
Discontent is growing among the some of the firm’s clients but few are willing to speak out publicly while they remain invested.
Hall, however, is happy to have his case aired. Nine months after he first made a complaint to the Australian Financial Complaints Authority, it is entering the investigations phase.
He is hoping to demonstrate that Dixon did not act in compliance with the Corporations Act and regulatory guidelines, putting its own interests before his.
"I think it is blindingly obvious. I hope the ombudsman feels the same," he says.
In this instance the firm is relying on the ‘safe harbour’ provisions of the Corporations Act that relate to the best interests duty. That is, the conflicts were disclosed and the advice was consistent with Hall’s stated strategy of investing in assets that would deliver growth and income.
In response to questions from the Financial Review, Dixon Advisory says it "always seeks to act in the best interest of clients,which includes prioritising the interests of clients above the firm at all times and only providing appropriate advice".
All recommendations, the firm says, are adequately investigated and assessed for suitability against the client's stated objectives and relevant personal circumstances.
The complaint challenges Dixon Advisory’s core business model, which has withstood scrutiny.
Founded in 1986 Dixon is a frequent advertiser, educator and host of seminars.
The brand-building campaign has allowed it to win the trust of middle-income public servants, solicitors and professionals across the country.
One retired real estate agent in her 70's, who declined to be named, says she was drawn to put her money with Dixon's because of the half-page advertisements in the financial press.
She had previously had her money with Macquarie but the flat fee for advice charged by Dixon was only around a third of what she had been paying in fees.
As some of its benchmark products slide in value, more questions are being asked about whether the firm truly has the interests of its clients at heart.
In the case of David Hall, his personal experience is they have not.
Dixon’s New Energy Solar fund, which invests in US-based solar farms, has lost 14 per cent of its value in the past two years. Rolfo Brenner
Hall says his assigned Dixon adviser told him that to meet his retirement needs he needed conservative income-bearing products such as cash and bonds, and medium to long-term growth products that would deliver a stable income. But he says two thirds of the growth investment options he was presented with were funds run and managed by Dixon.
Of course, the two issues are not mutually exclusive.It is possible that at the time the advice was given, the Dixon-aligned fund were ideal for Hall's retirement needs. Dixon's interests in the funds were disclosed to Hall before his decision was made.
Hall chose to keep a large portion of his wealth in a self-managed superannuation fund. But he claims Dixon recommended for him to invest in certain products, and provided him with some options.
Without exception they were high-fee-charging Dixon products: The New Energy Solar Fund, The Cordish Dixon private equity fund,Dixon’s US Masters Residential Property Fund (URF), listed notes that provide debt to the URF and the Fort Street property fund.
Unfortunately for Hall, those investments have not performed well.
Hall says he tipped more money into the URF ($150,000 in total at about $2 per share) and the URF notes on the basis that the fund had performed well upon listing and that the assets would offer security.
Once he looked through the accounts of URF, however, he became concerned about its financial strength, but also the fees he was being charged.
“I did not do the maths on all the various fees and re-charges that were being extracted by the various Dixon companies,” he says.
The URF manages over 600 homes in the New York and New Jersey area. The fund listed in 2011 at an opportune time when the US dollar and US property market were weak. It listed at $1.60 and initially performed strongly but has since fallen below its listing price and on Thursday traded below $1.00.
The total return on the URF, which includes the payment of dividends, has been a loss of 22 per cent over five years and a loss of 42 percent over two years.
Of course, like many investments, losses may be attributable to changes to market conditions that were not reasonably foreseeable at the time the investment was made. However, it is clear that these investments involved risks that Hall did not properly consider.
Big Apple, big fees
The URF has attracted scrutiny because it charges an array of management and cost recovery fees to recoup staff and office costs that other equivalent investments do not charge. At the same time Dixon Projects, a subsidiary that does renovations on properties, charges an additional 20 percent of the cost of renovations for its services. In recent years, Dixon Projects has been particularly active, overseeing $140 million worth of renovations in the past two years – resulting in $34 million in fees.
Dixon Advisory has also recommended its investors participate in debt and hybrid securities raising of the US Residential fund,and invest more capital via dividend and distribution reinvestment plans.
Hall also says he had nearly 25 per cent of his SMSF exposed to a single asset – the URF – because he invested in both the equity and debt of the fund.
Hall’s complaint to the ombudsman is relying on several regulatory guidelines that outline that a provider cannot rely on merely disclosing a conflict of interest, and on sections of the Corporations Act that relate to acting in the best interest of clients and prioritising their best interests.
Dixon’s response to the ombudsman has relied on “the safe harbour for best interests duty”.
The company said in a statement that the "best interests duty is at the centre of all its advice".
The safe harbour, it says, is an "evidentiary tool" to show compliance with the best interests duty but is not the duty itself.
"Dixon Advisory provides ‘whole of investment’ advice using a strategic asset allocation approach and diversification aimed at achieving clients’ objectives," a spokeswoman said.
"The advice provided to the former client was appropriate and formed part of a well-diversified portfolio."
The 'safe harbour' provision is a contentious issue. Among the problems, according to some legal experts, is that advisers could be pursued for breaching the provisions even if they have provided sound advice.
A recent Australian Securities and Investments Commission’s paper on ‘vertical integration’ said that 75 per cent of advice cases it reviewed were not compliant because they did not satisfy the safe harbour steps.
In 10 per cent of cases the customer was significantly worse off, while in 65 per cent cases it could not be demonstrated that the customer would be better of as a result of the advice.
ASIC commissioner Cathie Armour told the Financial Review the regulator was focused on “the customer outcomes” when assessing financial advisers. “We'll look to see to the customer got appropriate advice.”
In the case of the examples reviewed by the Financial Review related to Dixon Advisory, more often than not the advice has been for customers to invest in their own in-house products. The Financial Review reviewed three portfolios of former Dixon clients in detail.
One portfolio had $2.7 million of investments, of which $2 million were invested directly in products in which Dixon held an interest.Another had $600,000 of a $1.1 million balance in Dixon funds while a third had$620,000 of a $750,000 portfolio in Dixon funds.
Each of the several portfolios reviewed are heavily loaded with exposure to the URF. The property fund equated to between 15 and 20 percent of each portfolio, through either equity or hybrid notes.
A further client had 28 per cent exposed to the fund across URF equity, hybrids and debt.
While Dixon has defended the estimated $230 million of fees it has reaped from the fund in the past five years despite its under performance, property experts have openly questioned the sustainability of the URF in its current form. That is because its rental income does not cover its financing costs while it still incurs expenses, extracts fees and pays distributions.
Dixon Advisory said in a statement that, as per an ASX announcement, it is in the process of considering potential strategic alternatives with the aim of maximising value for investors and reducing theunit price discount to net asset value.
"The process is considering a range of options including divestment of assets and capital management initiatives."
Another complication for investors in the URF is that it is a closed-end fund, or listed investment company, which trades on the ASX.
Investors do not redeem funds but must find another buyer on the market. But the securities are largely owned by other Dixon clients and thinly traded.
Among five client portfolios, each investor had about$100,000 invested in the URF shares. While that amount is modest it equates to the average daily trading value over the past two years, making it difficult to sell out without having an impact on the price.
The majority of Dixon products that were offered to the investors who were consulted for this article are such closed-end funds, which reduces the risk to Dixon that funds will be redeemed, but can result in widening discounts to the underlying value of the fund assets if there are more sellers than buyers.
Last year the Financial Review reported that many clients were invited to invest in the initial public offering of the combined Evans Dixon Group.
The float came a year after the 2017 merger between Dixon Advisory and elite Melbourne stockbroking firm Evans and Partners.
It is a tie-up that led to an apparent clash of cultures between the typically younger Dixon advisers and the older Evans brokers, who serviced wealthier clients.
Ahead of the merger, a KPMG due diligence report that was later leaked identified that the URF may have accounted for 67 per cent of Dixon Advisory's total revenues.
One insider said they could not directly advise clients to invest in the Evans Dixon float, but when speaking to clients a common conversation was asking if they had read emails informing them of the IPO,before informing
them that they personally “would be buying their maximum allotment”.
That has turned out to be a poor investment. Last month, the company issued an earnings downgrade, blaming less activity and issuance levels within real asset funds - such as the property and energy funds- leading to a reduction in transaction fees, and an increase in expenses.
The stock has fallen to $1.01 on Thursday, 60 per cent down from its $2.50 listing price.
The investment losses are testing the patience of retirees,who are notorious for watching over every dollar.
The Evans Dixon $170 million float in May 2018 was heavily marketed to the firm's 4800 clients, which are now underwater on their investment. Jessica Shapiro
ASIC’s Armour concedes that a regulatory regime based on “an economic theory” that “if someone else’s interest in disclosed” they will actin a rational way might fall short. “The behavioural science developments since then show that that isn't the case,” she says. “We see that there are real limitations to relying on disclosure as the only tool to achieve the best advice.”
Financial law expert Dr David Millhouse told the Refinitiv conference earlier this week that advice firms need to think of their clients as people, not pools of money. “If you treat your customers as a financial consumer, rather than - [what has happened] in this country historically - as a supplier of capital to whatever scheme, then you can get an outcome that best for everybody,” he says.
“But the legal framework has been deficient, because it allows quite lawfully egregious behaviour.”
That is scant consolation for those whose retirement savings balances are smaller as a result of the advice they paid for, and received from Dixon Advisory.
No regulatory action has been taken in respect of the examples referred to, and any investigations remain ongoing.
The elderly Mosman real estate agent says she regrets“finally bending to the pressure” to sell her coveted blue-chip stocks and invest in Dixon’s managed fund.
She took out the frustration of having her pension portfolio worse off by $500,000 by writing a submission to Hayne royal commission.
“How can Dixons avoid the same scrutiny of the banks, in both managing our portfolios and pushing us into their own investments and charge a very healthy fee for it?” she wrote.
“The banks are in trouble for the exact same thing.”