26 July 2021

Dixon Advisory Acted Against the Best Interest of its Clients 

Dixon Advisory failed clients and has been fined $7.2 Million.  In a statement to the Australian Securities Exchange E and P, formerly known as Evans Dixon, the operators of Dixon Advisory indicated that it had paid a penalty of $7.2 million to settle civil penalty proceedings which related to advice provided to clients that directed them to buy or to remain invested in its troubled United States property fund. It also agreed to pay the legal and investigation costs of the Australian Securities Investments Commission. As part of its settlement undertakings, Dixon Advisory has admitted that it contravened sections of the Corporations Act on 53 occasions in relation to personal advice. This included not acting in the best interest of clients in providing financial advice and providing advice that was not appropriate if the advice had been in the best interest of the client.

A court order will also be sought by ASIC requiring Dixon Advisory to demonstrate that it has the appropriate systems, policies, and procedures in place to comply with the relevant section of the Corporations Act and provide ASIC with a written report of an independent expert.

The ASIC case said that Dixon Advisory failed its clients by directing major chunks of their retirement nest eggs into a high-risk, high-fee US real estate venture it owned.

The Fundamental Weakness of In-House Investments 

The lessons have been hard earned: inhouse investments promoted by financial advisory organisations are at serious risk of compromising the organisations’ advisors, leading to misleading advice. 

The late 1980s commercial property crash exposed a variety of internally geared unlisted property syndicates which looked like winners in a rising market with gearing supported by high inflation, but in the early 1990s recession, oversupplied market and collapsing tenancies revealed their fundamental weaknesses; those who had advised the structures had no easy solutions for their clients. Investors could not sell out of collapsing structures. Some properties in Melbourne CBD did not recover their former value in 30 years! Bigger unlisted property trusts took the painful but necessary step to turn them into listed property trusts thereby creating a market on which unit holders could sell, albeit at substantial losses. 

Investor Lessons from Dixon Advisory’s Serious Error 

Dixon Advisory did not heed the lessons of the past and, having built a substantial client business advising and administering client self-managed superannuation funds (SMSFs), then got carried away by success and made a serious error to create a US-based residential investment fund buying a substantial number of properties and having them renovated by another Dixon related business. Its advisers recommended its clients to have their SMSFs invest in the US based investment trust which propelled it toward a serious breach of trust. 

When in-house investments strike trouble there is growing pressure on in-house advisers to present a more favourable account of the investment to clients than is warranted by the circumstances. There is also pressure to over-invest to meet the targets required by the in-house investment. The organisation becomes fearful of a rash of client demands to exit the investment when it has no means of achieving this. Clients come to mistrust the organisation and its advisers become heavily compromised. Inevitably the US property disaster rebounded on Dixons and lead to Evans Dixon changing its name—and of course, it led to the regulatory actions and penalties above.

What is not known is whether a class action will be mounted on behalf of the affected clients. It would appear to be a likely action as the findings against Dixon Advisory leave little scope for a meaningful defence against claims for damages.

Why In-House Investments Should be Avoided

Some examples of in-house investments:

·       An accounting group which created a syndicated Olive Grove into which it invited its clients to invest but which became an embarrassment.

·       A chocolate factory syndicated investment among other investments promoted by a group which eventually went out of business. It was easy to get into, but there was no ready market for investors to exit.

·       A series of syndicated vineyards promoted by a subsequently failed group. They were designed to be easy to invest in but there was no easy exit.

·       Various in-house property syndications. Again, they were easy to get into but lacked adequate exit paths. 

Each of the above trapped their clients into long term failed or at best extremely poor investments.

If Advised to Participate in an In-house Investment 

If an adviser or accountant hints that they are able to offer an opportunity to invest in an in-house investment, it is likely that it will—at best—greatly disappoint, and there will not be a ready market on which to sell the investment. It is time to shift to another accountant or adviser who is not part of a group promoting inhouse investments.

Seven Group Holdings Strategy to Control Boral 

It is well known that dependent on the spread of a company’s share register, control passes at around 40 percent of shares, often less, because lots of shareholders don’t vote their shares.  Takeover rules mandate that if a buyer purchases shares which take it beyond 19.9 percent, they must make a formal takeover offer to buy all the company shares at not less than the most recent price offered. There is also a creeping provision whereby having gotten to 19.9 percent a predator can purchase 3 percent of shares each succeeding 6 months and creep up the share register gaining ultimate control over time. This was the method followed by Kerry Stokes to win control of Seven Group Holdings which has television interests as well as the well performed Westrac Caterpillar business, Coates Hire and 30 percent of Beach Energy. This avoided the necessity of paying a significant takeover premium.

More recently, the now Stokes-controlled Seven Group Holdings bought a substantial stake in the poorly performed but asset rich Boral and has set about gaining control with tactics which will gain control but is unlikely to be a complete buyout. Having bought its initial shares at a relatively low price it made a low-ball takeover offer aiming to acquire only some of Boral’s shares with conditional modest increases to its takeover offer if certain ownership threshold percentages were reached. The Stokes-family-controlled Seven Group Holdings is now in control of Boral, albeit formalities of board changes are still to occur. Kerry and Ryan Stokes had no intention of Seven Group offering a price sufficient to buy all of Boral’s shares, merely sufficient to gain control as cheaply as possible. It appears that Seven Group ended up buying more of Boral than needed to assume control. As a result, it may end up with too much debt. 

Afterpay Looks Likely to be Swamped

Afterpay was briefly a stock market wonder but has very little actual profit. With announcements that Commonwealth Bank, PayPal and Apple—each with huge market reach—are to provide similar services, the days of rapid growth may have turned into retreat. Afterpay’s peak price on 10 February 2021 was $158.47 and it’s current price on 26/07/2021 has fallen to $104.36.

ARB Corporation LTD 

ARB’s update to the stock market of 14/07/2021 indicated that sales grew by 33.9 percent in the recent financial year. Its full year results are scheduled to be announced on 17/08/2021 but guidance is for a full year profit of $145 to $150 Million which compares with a prior year profit of $57.3 Million. 

Illogical Advice

A friend copied me in on advice that they had received to sell part of their holding of I Shares S&P 500 Exchange Traded Fund which owns a pro rata weighting of the top 500 shares listed on the New York Stock Exchange and the NASDAQ on the grounds that it had gone up significantly and to reinvest the proceeds in specified shares. Those 500 stocks include a host of massive global companies. The advice is illogical because if the New York Stock Exchange falls significantly so will global markets including the shares which have been advised to purchase as replacement investments.

Solomon Lew is Still Stalking Myers

Mr Lew’s long conflict with Myer Holdings Ltd is nearing the end game. While he does not have a controlling stake in the name of Premier Investments, which he controls, it is apparent that with his recent acquisition of more shares and indications that significant other shareholders are likely to favour him over the existing board, control of the business is now likely to pass. Lew has made the appropriate moves to obtain a copy of the share registry in support of a move to call an extraordinary general meeting. Serious resistance by non-executive directors including the chairman appear futile.

Premier Investments has been very successful with its range of retail brands and the success of its online strategies whereas Myers which had a share high price of $3.0 on 30 April 2013 has been on a path toward oblivion with a recent kick up in its share price following the announcements of acquisition of additional shares by Premier Investments to 48.8 cents. It has been a consistent loss maker and various plans to reinvigorate its business have failed. It is time for its chairman and non-executive directors to recognise the inevitable and move aside. Solomon Lew has been a controversial figure in Myers’ past, but it is evident that its best chance of rescuing some value for shareholders is to agree to him taking control of it and changing its business plan. Unless Myer changes quickly it is threatened with extinction.

In its present form Myer is a retailing dinosaur which must urgently adapt or perish.

Private Health Fund Insurers Are Screwing Dentists and Their Patients

Some major health funds have not increased payments for dental procedures for three years or have only provided miniscule increases in four years. Their strategy is to reduce payments for all healthcare providers while milking 30 percent or more of gross margin from extras insurance cover. This margin is milked partly from the insured patients and partly from dentists.  Dental practices that don’t realise this and set about a strategy of educating their clients are setting themselves up for their income and the value of their practice to be systematically reduced over their life as a practice owner. The vital question is how many dentists are setting out to educate their patients to dispense with extras (ancillary cover) and pay for their own dental treatment. Smart dentists are setting out to rid themselves of ties to private health funds. 

Health funds concentrate their advertising on signing up clients for ancillary healthcare cover (extras) policies rather than hospital cover because legislation requires the funds to pool their hospital cover risk but not their extras cover risk. As such, they are able to control their huge extras margins by rationing the services per member per annum. This is only partially realised by their members.  As American circus promotor Phineas T Barnham famously observed, “there is a sucker born every minute.”

I have long recognised that ancillary health care insurance represents poor value, but we maintain hospital cover.

I spent 33 years advising dentists which included measuring their practice profitability and valuing profit. During that whole time the most profitable non preferred provider practices consistently outperformed preferred provider practices by large margins as well as having far less administrative issues. Dentists who swallow the health insurers Kool-Aid finish up far worse off over their career while their patients do not get value from ancillary insurance. As dental benefits are consistently at or above 50 percent of total extras benefits, without dentists the extras insurance policies would be unsaleable. The remainder is mainly shared among optometrists, physiotherapists, chiropractors and podiatrists.

Available in the Near Future 

The book that no dental practice owner or intending practice owner can afford to be without.

This publication will be available to dentists and dental specialists within the next few weeks being currently at the printers. It describes the key business decisions enabling many dental practice owners who have been far more financially successful through their dental careers than many of their peers and who’s practices I advised, performance benchmarked and valued over a period of 33 years. The book will be mailed to those who make a tax deductable donation of at least $60 to the Delany Foundation a charity I support which contributes to schools in Ghana, Kenya and Papua New Guinea.  All such donations will benefit the charities work. The printing and distribution costs will be met by me personally.

General Advice 

This newsletter contains general advice. Readers must do their own research and source additional advice and brokers’ reports as necessary. Those with advisers should do additional research of their own and become familiar with investing fundamentals before simply following advice.

I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.

Best wishes to all 

Graham Middleton