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Monday, 9 August 2010
It’s tax time again and with it are the usual voices calling for financial advice to become tax deductible. Trouble is, isn't ... Read more
Latest Financial Planning News
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Featured Paper
The past few years has seen the role of financial adviser and the financial services industry come under intense scrutiny. While much of this scrutiny is welcome, there is a need to clearly and logically ... Read moreThe past few years has seen the role of financial adviser and the financial services industry come under intense scrutiny. While much of this scrutiny is welcome, there is a need to clearly and logically separate fact from fiction and to address the key question … “What do financial advisers do, and how do they add value to their clients?” This is the focus of this research conducted by CoreData-brandmanagement on behalf of the Association of Financial Advisers. The results, not surprisingly, are diverse and give a real sense of what consumers value, what they need and how the advice profession needs to deliver value.
Storyline: A Case Study in the Value of Advice
Understanding the ‘multiplier-effect’ derived from saving surplus cash flow is tributary to an accelerated wealth creation strategy.
It’s a red-letter day when the typical Aussie battlers finally pay off their mortgage, especially considering the ‘multiplier-effect’ ... Read more
Understanding the ‘multiplier-effect’ derived from saving surplus cash flow is tributary to an accelerated wealth creation strategy.
It’s a red-letter day when the typical Aussie battlers finally pay off their mortgage, especially considering the ‘multiplier-effect’ debt-free status can have on long-term wealth creation. So with this milestone looming as a present reality, forty-something Sydneysiders, Margaret and Dave Gibson* heeded their accountant’s recommendation and, for the very first time, sought financial advice. Being conservative by nature and having worked hard to get ahead, what the Gibsons wanted most was sage advice on what to invest in and why.
When the Gibsons first knocked on the door of CFP Telina Clarke of Bridges Financial Services six years ago, they were virtual investment novices. But with so much surplus cash about to be freed up, their immediate concern was what to do with it. The Gibsons were earning a modest, yet comfortable existence (around $90,000 between them) running their own kitchen design business as sole traders, but like a lot of SMEs they had little in the way of savings.
Beyond Margaret’s humble $32,000 and Dave’s $38,000 invested in a couple of personal super funds, the couple’s only other savings were an even more meagre $6,000 worth of shares divided between IAG and Coles – which at the time was offering shareholder discounts.
Between maximising mortgage payments and running a family, comprising two teenage kids aged 15 and 17, there was little in the way of surplus cash.
Diversifying exposures
Given that both Margaret and Dave still had many working years ahead of them, Clarke could see numerous advantages in using super as a platform for long-term wealth creation. While they could see the myriad tax benefits associated with this approach, Margaret says they were also keen to diversify and maintain access to cash if they needed it at short notice.
Based on the comments of friends who have had more dealings with financial advisers than they did, the Gibsons were initially wary of being sold a super strategy to the exclusion of all else.
“While we didn’t want to do anything rash that could overextend us, we did want to diversify our exposure across different asset classes,” says Margaret.
So with property prices in Sydney well off their highs at the time, Clarke initially mooted the idea of purchasing a local rental property. But after just retiring debt on the family home, Margaret says the idea of committing a further 15-plus years to mortgage repayments didn’t appeal.
“And with negative gearing looking less attractive since the highest marginal tax rates post-GST 2000 went from an income of $50,000 up to $70,000 and now $180,000 – this was quickly taken off the table as an option,” she says.
Having reviewed the Gibsons’ lifestyle, and their investment comfort zone, Clarke recommended a three-pronged investment strategy that would see the equivalent of fortnightly mortgage payments ($400) split evenly between super and a basket of directly held shares as cash funds accrued. To allow for unexpected expenses, cover pending university fees or add to other investments down the track, it was concluded that the final third of that fortnightly allowance be placed in a cash management account and reviewed annually in light of other investment options.
“Margaret and Dave had little to invest when they first came to me, and were too young to contemplate any transition to retirement strategies. So it was critical that they embark on a concerted savings drive,” says Clarke.
Multiplier-effect
Given how much they could now commit to this strategy, Clarke was confident that accelerated wealth creation would come through a) being in the right asset classes, and b) the ‘multiplier-effect’ embedded within the pace at which they could now save. At Clarke’s instruction, each of their super funds was rolled over into The Portfolio Service Retirement Fund, an administration service which provided better options and greater transparency into performance and underlying strategy.
While the Gibsons didn’t have sufficient earnings to be able to maximise super concessions, the plan was to top-up their respective funds with any surplus cash before the end of every financial year. During the worst of the global financial crisis (GFC) when business was quiet, they pulled back on super, but have since resumed regular contributions.
“I chose The Portfolio Service as I felt it provided the investment options we needed, including listed and managed funds, term deposits – plus added features such as anti-detriment payments – an additional amount that may be payable in the event of a client's death,” says Clarke.
Maximising benefits
By making one-off annual non-concessional contributions of $466 each, she says the Gibsons qualify for the government’s super co-contribution bonus of $1,398.00. They also continue to salary sacrifice $900 a month to super to take advantage of the concessional tax rate – resulting in 15 percent less tax and a much bigger super balance.
Clarke also recommended significantly boosting the Gibsons’ fledging share holdings. That meant progressively adding to a basket of directly held blue-chip ASX-listed stocks using dollar cost averaging (DCA). “Opting for stocks offering high yielding fully franked dividends meant there would also be ongoing tax benefits,” advises Clarke.
It was agreed early on, adds Clarke, that instead of trying to trade their way through the market’s volatility that a ‘buy-and-hold’ strategy with such a quality basket of stocks would deliver both income and capital growth over time. Since their initial dealings with Clarke six years ago, the Gibson’s share portfolio has risen from an initial $6,000 to over $60,000 covering core holdings like: BHP, Tabcorp and Wesfarmers that were converted from their former holding in Coles.
“To avoid the added pressure of turning Margaret and Dave into stock-pickers, I selected shares from Bridges’ carefully researched recommendations,” says Clarke.
Looking back
In hindsight, Margaret says there’s no way they would be where they are financially today had they not sought financial advice when they did. Instead of feeling like passive recipients, she says they’ve both got a much better grip on their finances.
“In the first year she (Clarke) really helped us take a good objective look at our family budgeting. It turned out we could save significantly more than originally envisaged, and so we started saving that too,” recalls Margaret.
She admits that in those early days, they really didn’t understand the depth or brevity of advice a financial adviser could provide, and cites the way Clarke sorted out their differences over where to invest as a case in point. Being more aggressive about investing, Dave was into gearing into shares, while Margaret says she was more comfortable with the idea of a rental property.
“Telina put all the options on the table and let us decide,” Margaret says.
By doing this, Margaret says they could see very clearly that gearing into property or shares wasn’t the right immediate strategy. And given the recent downturn in business, they are grateful they didn’t get saddled with this added financial burden. Nevertheless, she says they will revisit an investment property strategy once cash flow is freed up and all university fees are behind them.
Looking back, Margaret says Clarke’s initial $2,000 in fee-for-service paid for itself within the first year, especially given the value of being able to avoid costly mistakes. Within two years, she says savings in tax on super contributions were more than double that amount. And even though Clarke charges asset-based fees that have gone up over that time, she says the value has also grown by a corresponding amount.
Financial wellbeing
By the end of year two, Clarke says the Gibsons were much better positioned to assist their daughter with university fees than had they not set aside cash for such an eventuality. Since initially going to Clarke for advice, the Gibsons’ super funds have tripled from an opening balance of around $70,000 to over $205,000, while their net wealth has grown by $257,000 (41.4 percent) to $877,585.
While the Gibsons are in a much better place financially than they were six years ago, Clarke says there are no plans to modify the ongoing strategy too much. As long as they keep working, adds Clarke, the Gibsons have sufficient cash flow to spend a little more than they did during those earlier years (on themselves), while continuing to save to help their son cover future university fees.
“They continue to invest $200 a month into a cash management fund, and $200 a month is also set aside for more Australian shares,” Clarke says.
In addition to half yearly face-to-face reviews, Clarke is in regular email contact with the Gibsons and this is also supported by quarterly research updates. She says much of the Gibsons’ journey to long-term wealth creation has been about building peace of mind through financial performance. But equally important, she says ongoing knowledge transfer has empowered them to make confident decisions about their financial wellbeing.
“As a planner it takes time to build a level of client trust where they feel comfortable enough to use me as a sounding board and counsellor,” says Clarke. “It’s often through these relaxed non-confrontational discussions that I learn enough about their dreams, aspirations and anxieties to be able to add value through the advice provided.”
The Planner
Telina Clarke
Financial Adviser
Bridges Financial Services, Hurstville NSW
An authorised Representative of Bridges Financial Services, Clarke is a CFP, holds a diploma in Financial Services and is an affiliate member of the Financial Services Institute of Australasia. Clarke joined Bridges as a paraplanner in 1992, and has been providing investment and financial planning advice for the last 17 years.
Advice structure
In addition to a minimum financial plan fee of $1,100, ongoing client fees are a minimum annual $550 or asset-based fees, both dependent on the complexity and size of funds under advice – and preferably deducted from the product but can be invoiced. In an attempt to highlight the strategy underscoring the advice provided, Clarke neither charges nor receives commissions on products recommended.
Before and after
Assets
At inception (six years ago)
2010
Family home
$520,000
$608,326
Super combined
$78,620
$205,664
Australia shares
$6,000
$63,595
Cash
$15,591
Total
$620,211.00
$877,585.00
Difference
$257,374.00
* Pseudonyms used to preserve anonymity
Applied Financial Planning
With Australia showing a resilient economy through the global financial crises and looking like having a booming financial services industry, it's no surprise that overseas companies want a share of the ... Read moreWith Australia showing a resilient economy through the global financial crises and looking like having a booming financial services industry, it's no surprise that overseas companies want a share of the Australian market. John Bassilios explores the requirement for foreign financial services providers (FFSP) to hold an Australian Financial Services Licence (AFSL) when operating a financial services business in Australia. He sets out the various options available to FFSPs as laid out in the Corporation Act, clarifies definitions and goes on to explain exemptions and circumstances under which such exemptions would apply. Bassillios also notes how financial planners can advise on foreign financial products from issuers that do not operate in Australia.
In this report, Suzanne L. Duncan and Shanker Ramamurthy from the IBM Institute for Business Value endeavour to find answers for the question: How will the financial markets industry make money in the ... Read moreIn this report, Suzanne L. Duncan and Shanker Ramamurthy from the IBM Institute for Business Value endeavour to find answers for the question: How will the financial markets industry make money in the future? The global financial crisis has exposed the problems with creating and exploiting “pockets of opacity” across the system. It also altered the competitive landscape in which the industry operates, thereby changing how it does this and the way in which its clients behave. Given the changes, many senior executives are now wondering how to make profits in the future. In its latest study of the sector, more than 2,700 financial services industry participants were surveyed to determine: which forces disrupt the industry; how competition will change; and what steps financial services firms should take to prosper in the next three years. In short, where will the money come from? Exploiting "pockets of opacity" has not proven sustainable and new solutions are now needed for the industry to thrive in the future. If the industry is to deliver sustainable returns, it has to embrace change. It needs to begin by working with regulators to build a financial system that is stable while still allowing for healthy innovation.
Practice Management
Julia Feher won the 2009 IFSA Deloitte Future Leaders award for this paper, which looks at the different ways that the financial advice industry can ensure quality advice for clients whether the markets ... Read moreJulia Feher won the 2009 IFSA Deloitte Future Leaders award for this paper, which looks at the different ways that the financial advice industry can ensure quality advice for clients whether the markets are up or down. Feher explores how the market turmoil has affected the quality of advice and looks at current initiatives that have been employed to improve this quality for the future. She details some proposals for how Financial Advisory Networks (FANs) and advisers can deliver good advice without being affected by the financial market performance. She says the shortcomings of the industry are too broad to be addressed by FANs and advisers alone and that significant issues in remuneration and training impact the entire industry and must be addressed by the Government, the regulator and industry bodies. Meanwhile, she says there are steps that FANS can take to ensure quality advice for clients. With the world economy now on the mend, Feher says the process of change and improvement begins with looking at the core function of financial advisers so that these are reflected across the whole industry.
Increased competition in the advice industry, fueled by superannuation funds now being able to deliver financial advice to members, demands a fresh look at how we deliver advice. The benefits of rapid ... Read moreIncreased competition in the advice industry, fueled by superannuation funds now being able to deliver financial advice to members, demands a fresh look at how we deliver advice. The benefits of rapid advice delivery in providing quality advice to members or clients quickly are palpable, and this paper considers the ways in which technology can speed up the advice process. This technology enables advisors to better quantify their value, to generate more quality statements of advice in less time and lower the cost of advice per client, but it will not be smooth sailing for everyone.
Superannuation and Retirement Planning
Generational studies are always popular among financial services specialists. Having been around for a while, information on baby boomers are plentiful. However, research into the younger generations is ... Read moreGenerational studies are always popular among financial services specialists. Having been around for a while, information on baby boomers are plentiful. However, research into the younger generations is increasing, and in this qualitative research project, Mark McCrindle puts the spotlight on Generation X. He looks into who they are, why they are important and how they’re different from other generations. For planners and advisers, it is useful to know what drives Generation X in making their financial decisions and what their priorities are and what they expect from financial products.
Taxation Planning and Estate Planning
Kerstin Glomb is a solicitor at Argyle Lawyers specialising in the areas of estate planning and estate administration and she looks into the changes to intestacy law in New South Wales effective in March ... Read moreKerstin Glomb is a solicitor at Argyle Lawyers specialising in the areas of estate planning and estate administration and she looks into the changes to intestacy law in New South Wales effective in March 2010. Intestacy law applies when a person dies without a valid will or one that doesn’t cover the whole of the their estate. In today’s world of multiple spouses and blended families, Glomb stresses how important it is for planners to ensure that clients have a valid will, especially when the new law comprises a risk that the estate is distributed in a manner which is not in accordance with their client’s wishes and expectations.
The Taxation of Financial Arrangements, or TOFA, is one of the most significant changes to occur to the Australian Taxation Act over the past two decades. Its aim is to reduce existing taxation distortions ... Read moreThe Taxation of Financial Arrangements, or TOFA, is one of the most significant changes to occur to the Australian Taxation Act over the past two decades. Its aim is to reduce existing taxation distortions for Australian taxpayers and it broadly affects medium to large organisations across the breadth of the financial services industry. While at face value the TOFA Act appears to be straightforward, Ian Mathieson says in reality it is a complex regime to implement and poses many challenges for taxpayers, their record keepers, tax accountants and auditors. For the financial services firm to succeed in the post-TOFA era, from 1 July 2010 onwards, it must address the mandatory reporting requirements for its invesment administration systems. Firms will need to enhance their existing systems to manage the complex date and calculation services required by their clients and the Australian Taxation Office.
Consumer and Debt Management
In this report, Alan Shields discusses the study done by research firm Retail Finance Intelligent into the changes in saving behaviour among consumers since mid-2008, using economic data and the results ... Read moreIn this report, Alan Shields discusses the study done by research firm Retail Finance Intelligent into the changes in saving behaviour among consumers since mid-2008, using economic data and the results of The Australian Savings and Deposits Council (ASDC) savings surveys. The report aims to understand past and current consumer behaviour and suggest possible future outcomes. Specifically, it focuses on the idea that consumers are “cocooning” – increasing their savings and reducing their debt in order to protect themselves against the possibility of unemployment or other adverse financial circumstances. Shields describes the consumer savings patterns in times of financial uncertainty and what strategies are adopted and which products become more attractive.
Dean Rushton writes about the findings of the independent consumer research into the behaviours and motivations of homebuyers in the market. The study was commissioned by Loan Market last year and included ... Read moreDean Rushton writes about the findings of the independent consumer research into the behaviours and motivations of homebuyers in the market. The study was commissioned by Loan Market last year and included focus groups made up of first home buyers, first time investors, second and third home buyers, buyers who had used a mortgage broker, as well as those who had gone directly through a financial institution and never consulted with a mortgage broker. The results speak of the changed landscape of communication due to the proliferation of online tools and social networking sites. Technology means consumers have access to just about any information they need, but surprisingly, brokers are not rendered redundant. According to the study, access to information has improved greatly but trusted advisers will always play a critical role since most consumers still feel they lack the knowledge to make the final purchase decision. Rushton writes about the relationship between banks, brokers and borrowers and how this will continue to evolve into a more integrated partnership in the future.
Risk and Life Insurance
In an attempt to better understand the Australian life insurance sector, Fintechnix identified 28 thought leaders in the sector and asked them to share their views on the issues affecting their industry. Read moreIn an attempt to better understand the Australian life insurance sector, Fintechnix identified 28 thought leaders in the sector and asked them to share their views on the issues affecting their industry. The responses to the questions asked provide interesting insights into how the life insurance sector operates, what challenges the various participants face and the future direction that the industry may take. The report also uncovers some of the reasons for the country's underinsurance problem such as complacency of the industry and too much focus on the needs of specific distribution channels but not enough on the end consumer. To address the core needs for improving the working dynamic between life offices, reinsurers, distributors, advisers and technology vendors in meeting the life insurance needs of the end customers, Philip Fourie lays out some suggested action steps following the participants' responses.
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