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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 ... 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
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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.
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.
Practice Management
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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
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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
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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.
Storyline: A Case Study in the Value of Advice
Confronting entrenched prejudices towards ‘all things financial’ can be the first step towards adding value as a fee-based financial planner.
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We despise the share market, hate paying tax, loath superannuation, and have even less respect for financial planners – so what exactly can you do for us, matey? This was the brief given to financial planner Neil Kendall (pictured), of Brisbane-based firm Tupicoffs, from disgruntled locals Fran and Bob Cutter* when they darkened his doorstep eight years ago.
Like many self-made small business owners, the Cutters’ lack of investment savvy belied the success of their ever-expanding electrical trade franchise throughout south-east Queensland.
With the kids off their hands, the family home paid off, and a flourishing business, the Cutters had the cash flow to support an attractive lifestyle. But unlike many couples, the Cutters had given little thought to how much annual income they wanted in their retirement or what strategy would deliver on this outcome.
Nevertheless, it was Fran’s lingering intuition that they were mismanaging their finances and should be doing more with their money – than enjoying fancy holidays, boats and driving flash cars – that led them to seek financial advice. Ironically, a friend had referred them to Tupicoffs, which Kendall subsequently discovered was the original source of their disenchantment towards financial advisers. “Coincidentally, they’d had poor experiences with the firm under its former guise as a sole agency life insurance business,” says Kendall. “And every time they’d sought financial advice – the solution was always presented as – simply buy more insurance with [the company].”
Fear and ignorance
With Fran partially onboard from the get go, Kendall knew that his ability to positively engage with the Cutters hinged on appeasing the hostility of Bob who’d clearly been shoe-horned into seeking advice. While Fran and Bob were successful small business people, Fran admits being decidedly below average when it came to understanding investments and financial matters.
Thankfully, she adds they were smart enough to recognise how much they didn’t know. After five initial meetings over three months, Kendall progressively unravelled the root cause of the Cutters’ biases as fear and ignorance. As well as misunderstanding super as a tax structure, they also felt they had little control over their investments within it. And understandable, given their experiences with a former insurance agent, they’d tarred all financial planners as ‘commission-hungry’ product pushers.
“I knew from the outset that I’d only be able to proceed at a speed they were comfortable with and that a ‘change-the-world’ approach wasn’t going to work,” recalls Kendall. “Even after the first couple of years, I still wasn’t at the point where I could jokingly reflect on their attitude when we first met.”
Trust aside, what the Cutters also wanted from Kendall was demonstrable evidence of quick wins before entrusting him to do more for them. “We were impressed with Neil’s initial advice because it was both clear and comprehensive, with a compelling rationale for each recommended strategy option,” said Fran. “When we finally agreed to an overall plan, Neil took over much of the practical paperwork in its implementation.”
At this point, the Cutters had little in the way of investments beyond a (fully geared) $400,000 commercial property being used by the business. Statutory contributions of 9 per cent, based on notional salaries of $50,000 meant that they also had less than $40,000 in personal super funds between them.
Super-centric
Given that the Cutters were both still in their mid-40s, much of Kendall’s core recommendations centred on superannuation as the most appropriate vehicle for future wealth creation. To ensure a large percentage of fees were rebated back to them, he suggested that their existing Symmetry super funds be rolled over into a preferred Asgard platform.
“We recommended shares be managed through a managed fund, and to reduce both risk and fees, we took an index-based approach,” explains Kendall. “It also helped us deliver on our projections that equities would continue to outperform other asset classes over time.”
The plan was to maximise super contributions – at $50,000 each annually, and once there were sufficient funds – around $400,000 – they be rolled into a self managed super fund (SMSF).
“We also showed the Cutters how they could use a SMSF fund to buy their commercial property from their family trust and use the proceeds to pay off bank debt,” advises Kendall. “In so doing, we worked with their accountant on a small business rollover to eliminate capital gains tax (CGT) on the property sale.”
Sidelining the market
By heeding Kendall’s recommendation that they ‘cash-up’ their super funds in June 2007, the Cutters effectively managed to side-step a massive hit to their net wealth – courtesy of the global financial crisis (GFC) – which kicked in later that year. While he didn’t foresee the pending 50 per cent loss in equities, Kendall says that after four outstanding years, the likelihood of share market continuing to deliver such stellar returns looked increasingly unrealistic.
Kendall recommended that all clients lock in their gains by exiting their total exposure to equities at what he considered to be as close to the top of the market as possible. Given that he expected returns from Australian equities to revert to historical levels at around 10 per cent annually, Kendall thought that the ‘price-value-gap’ with 8.5 per cent available via term deposits at the time, looked difficult to ignore.
“Admittedly, the Cutters had a substantial amount of tax to pay as result of cashing up (around $42,000), but this paled in comparison with the loss in asset value they would have experienced – had they stayed in the market,” says Kendall.
Fixing on cash
The $750,000 that the Cutters had amassed within super by this time was then reinvested in fixed-term deposits with Westpac, Suncorp and Bank of Queensland at between 7.4 per cent and 8.4 per cent for between six and 24 months. But with the $280,000 debt on the commercial property, now the only asset left within the SMSF – commanding 10 per cent interest – some proceeds from fixed-term deposits were used to pay this off completely. Despite a heavy property weighting, Kendall supported the Cutters’ plans to buy a geared rental property, and this was bought as a fully geared investment in their personal names.
Timely re-entry
With the worst of the GFC finally over, and the market awash with value, Kendall recommended that the Cutters begin ‘dollar-cost-averaging their way back into equities – again through an Asgard wrap account held inside their SMSF – in March 2009.
“By again ‘maxing out’ their super contributions, together with the rental property that’s since doubled in value, their SMSF is again worth over $1 million,” advises Kendall. “Small business provisions that allowed them to roll over profits from the sale of the commercial building into super led to $89,000 in tax savings.”
Transitioning into retirement
With the Cutters now working a three-day week, Kendall has already implemented a transition to retirement (TTR) plan that’s partly funded through their super. What particularly impressed the Cutters, recalls Kendall, was their ability to retain their super cake, while also being able to nibble at it. They’re continuing to make maximum employer contributions of $50,000 each, and drawing a minimum amount in pension to supplement their income.
“They just didn’t believe that the outcome of ‘super going in and payments coming out’ could possibly deliver such an attractive outcome,” recalls Kendall.
Unsurprisingly, having employed more staff, bedded down better systems, and watched their cashflow grow, the Cutters’ desire to retire any time soon has abated. And while an exit strategy is currently off the table, the proceeds from a future sell-down of the business will be rolled into their super at zero per cent tax. The Cutters have since sold the family home and moved to a pre-retirement house closer to the coast.
Looking back
In the eight years since the Cutters approached Kendall for financial advice, their net worth has virtually increased fourfold from $1.18 million to $4.32 million. Interestingly, over that time, the fees charged by Tupicoffs have increased six-fold. But in fairness, adds Kendall, the firm’s fee structure has evolved from the days when the industry’s notion of fee-for-service was largely without precedent.
In hindsight, had Kendall been too ‘gung ho’ with his recommendations during those tentative initial meetings, Fran doubts they would have earned his trust. She says Kendall successfully found a happy medium between proactively moving things along and becoming so pushy or pre-emptive that they felt they’ve lost control.
Net wealth position
Before Kendall:
$1.18 million (Inc family home)
With Kendall:
$4.32 million (Inc family home)
Annual Fees
First year:
$990
2010:
$6,600
Summary of assets
Family home:
$1 million
Assets held within the SMSF
Commercial property:
$700,000
Managed funds:
$290,000
Cash:
$193,000
Other investments:
Lifestyle assets including boat:
$247,000
Cash deposits:
$110,000
Residential property:
$480,000
Business Assets:
$1.3 million
The Planner
Neil Kendall
Managing director/financial planner
Tupicoffs Pty Ltd, Brisbane
Having served 17 years in numerous senior roles within the financial services industry – including general manager of a National Australia Bank-owned financial services group – Kendall bought a 50 per cent stake in Tupicoffs in 2002. He is an authorised representative under the Tupicoffs dealer license, has a Diploma of Financial Services, a Bachelor’s Degree in Business, CFP certification, and has been recognised by Masterclass three times (2006, 2008 & 2010) as one of the country’s Top 50 financial planners.
Advice structure
In an attempt to decouple ‘remuneration from product’, Kendall transitioned Tupicoffs from its origins as an AXA-based, sole-agent life insurance business into a fee-based, full-service financial planning practice. “Our refusal to take commissions recognises that investment advice only accounts for about 15 per cent of what we do,” says Kendall.Working exclusively off referrals, the firm’s core client base of high-net-worth small-business owners pay an annual retainer commensurate with complexity of the work required, the skillset required to prepare it, and the firm’s underlying risk exposure.
Quantifying the advice
The advice provided by Tupicoffs over the past eight years has delivered:
A transition to retirement strategy.
An appreciation of the role super plays as a tax structure.
A SMSF as an appropriate vehicle for asset accumulation.
Correct separation of personal cash from assets held within SMSF.
A fourfold increase in net worth.
$89,000 in savings through small business tax provisions.
Worry free money management.
*Pseudonyms used to protect clients’ anonymity.
Constantly re-weighting the asset mix according to changing market conditions provides the right tradeoff between performance and risk.
Not knowing what to do with a lump-sum payout from an unexpected ... Read moreConstantly re-weighting the asset mix according to changing market conditions provides the right tradeoff between performance and risk.
Not knowing what to do with a lump-sum payout from an unexpected redundancy with Telstra led Melbourne-based building contractor Gary Newman* to seek financial advice for the first time in 2005. Newman took up a new position as a building contractor with the Victoria state government. But given his age at the time (55), he also wanted advice on how to best position his finances so he could move into part-time employment and eventual retirement within the ensuing five years.
Based on the recommendation of a long-standing client, Newman approached Adelaide-based financial planner Brian Nash for advice. As a passive investor with a self managed super fund (SMSF) valued at $200,000 – comprising cash, a state government default fund and a few direct shares – Newman feared having insufficient funds to retire on.
A sum of $200,000 is typically regarded as too small to justify establishing a SMSF fund. But in 2003, Newman’s accountant had recommended opening one on the basis that a) funds would accelerate the closer he got to retirement, and b) the $1,600in annual fees was comparable to the amount he would incur in platform fees.
While Nash would like to have seen more assets within Newman’s SMSF fund, he concluded that it was a suitable platform on which to build his personalised investment plan and deliver stable returns.
However, we advised replacing the administration relationship with Gary’s accountant with a fixed-cost administration service, AET – which would become more cost-effective as the super balance grew,” says Nash.
With no dependents, the family home paid off, and little in the way of debt beyond lease payments on a $10,000 boat, Newman wanted his investments to deliver $40,000 in annual income once no longer working. An estimated $10,000 to $12,000 for a new car, an annual travel allowance of between $2,500 and $10,000 also needed to be provided for – without taking into account either Newman’s salary or the part-time earnings of his wife, Jolene Newman.
Reweighting assets
Following his initial consultations, Nash quickly concluded that what the Newmans needed to do was reweight their asset allocation in line with their risk profile.He expected 80 per cent of their returns to come from being in the right asset mix, regardless of fund manager and specialist stock picking.
The advantage, adds Nash, is the Newmans’ ability to measure a result that is not based against an index. And by measuring the downside, he says Newman stayed mindful of the expected negative impact to his portfolio. As a case in point, Nash says while the share market to early May was down around 20 per cent from its year-to-date high (at around 5,000 points), most of his clients’ portfolios are only off by around 3 per cent due to a higher component (around 50 per cent) being in cash.
Based on his modelling (on a modest 4 per cent return), Nash estimated that the Newmans would need to boost the value of their SMSF to around $500,000 if they were to get close to Newman’s stated $40,000 in annual retirement income (comprising investment income and draw-downs).
“Currently not factored into projected income, Jolene’s earnings are being regarded as surplus holiday funds if required,” advises Nash.
Based on Nash’s recommendations, Newman’s SMSF fund was immediately redesigned around a nominated return consistent at an annual return of 9 per cent, while downside exposure was limited to 3-4 per cent.
“What we wanted to do here was provide as much exposure to asset classes that, combined, would give up that 9 per cent (from income and growth),” explains Nash.
To deliver on this outcome meant 65 per cent of the Newmans’ portfolio needed to be skewed towards shares and property trusts and the remainder towards hybrids (20 per cent) and cash (15 per cent). Adding to the SMSF fund was an off-market transfer of cash and shares of around $25,000.
Active management
With the proceeds, Nash recommended actively managing a carefully selected basket of income bearing Australian blue-chip stocks – including Amcor, AMP, BHP, Telstra, Wesfarmers, AGL, Westfield, and Macquarie Office Trust – chosen for both capital growth upside and their fully franked dividends. Adding greater exposure to higher returns were a handful of hybrids and convertible notes – currently paying a premium above the cash rate of between 1-2 per cent, these included; Westpac First Trust (6.55 per cent fully franked), NAB Income Securities (5.8 per cent unfranked) and Commonwealth Bank (PERLS III)float rate convertible preference shares (5.45 per cent fully franked).
Between 2007 and 2008, around 50 per cent of stocks were rotated as changing cyclical conditions warranted locking in more attractive interest rates, hence reducing the reliance on more volatile growth stocks. While it hasn’t been a significant issue in recent times, especially during the GFC, Nash says gains on stocks sold are offset using capital-loss harvesting.
Asset allocation within the portfolio is also updated quarterly subject to market movements. Recent modelling by Nash suggested shifting more cash from equities into fixed interest to deliver comparable returns, while reducing overall risk exposures.
As of 1 May 2010, asset allocation within Newman’s SMSF fund – comprised of direct shares (43.5 per cent), fixed interest (20.5 per cent), cash (25.5 per cent) and property (10.5 per cent).
“While most clients are concerned about lower performance, they’re always more worried about losing money – so it’s important to continually minimise the downside,” says Nash. “In the last five years we’ve managed to grow the value of Gary’s SMSF by around 90 percent to $375,000.”
Meantime, Nash also recommended that in the lead-up to his eventual retirement, Newmans start salary-sacrificing as much as possible to maximise contributions and bring down their marginal tax rate to 15 per cent.
“In addition to the 9 percent in SGC contributions, Gary started salary- sacrificing an initial 10 percent in 2005. He has increased the amount annually while remaining within the maximum annual concessional contribution limit of $50,000 for people aged 50 and over,” says Nash.
Preserving entitlements
Further investment strategy reviews were required early in 2008 following Newman’s decision to accept an offer to leave work with the Victoria state government, which left him temporarily unemployed. Based on Nash’s recommendation, the voluntary departure payment (VDP)Newman received on exiting his job was placed directly into his SMSF fund.
Newman’s eligibility entitlements also needed to be preserved in the event that he needed to temporarily fall back on unemployment benefits while waiting to be offered ongoing part-time contract work. As a result, his funds remained in accumulation rather than being rolled into transition to retirement phase with an allocated pension.
“Protracted uncertainty within capital markets means it’s taken longer than expected to reach my stated $40,000 income into retirement,” explains Newman. “Meanwhile, I’m happy to keep working indefinitely, and in so doing will remain in accumulation phase as long as possible.”
And even with Newman’s wife working part-time, Nash still managed to claim over 90 per cent of his Centrelink entitlements while he was looking for work.
“As the family’s primary breadwinner with no other outside income, Gary was able to qualify for unemployment benefit, and this prevented him from having to prematurely dip into his super funds,” says Nash.
It was equally important, adds Newman, to keep the Centrelink door open in case part-time work dried up before stated retirement targets are met. Had it not been for Nash’s guidance, he says he would never have known he was able to qualify for Centrelink entitlements.
“Nor would I have known how to maintain this entitlement by keeping my investments in accumulation phase as long as possible or necessary,” Newman says.
Having since accepted part-time contract work, his SMSF – currently valued at around $375,000 – will remain in accumulation phase until the $500,000 target is reached and he can cease working entirely. On a growth trajectory of 4 per cent, Newman’s investment portfolio is on target to deliver an eventual annual return of $25,000 – based a notional 5 per cent distribution as income – plus $15,000 in draw-downs until age 85.
Staying the course
Going forward, Nash says it’s important to maintain an asset mix relative to the income requirements and risk appetite. He says it’s important to revisit a client’s investment portfolio regularly, together with personal goals – which can and do change – to assess asset holdings and make adjustments to compensate for market volatility.
“By constantly assessing Gary’s goals and modelling outcomes we have kept him on track to reach his target portfolio value of $500,000 – at which point he can either reduce working hours or retire permanently,” says Nash.
In hindsight, Newman believes Nash’s guidance through a turbulent financial market was particularly comforting in understanding and correctly assessing risk. He says weekly advice relating to the sale and purchase of shares is where Nash has and continues to add most value.
Nash’s input on when to buy into interest bearing deposits, adds Newman, has been equally instrumental in delivering on stated outcomes.
“Even though Brian is based interstate, I know I can contact him anytime, and that two or three face-to-face meetings will be followed up with constant reviews to manage risk against prevailing market conditions,” Newmans says.
“Compared with what others are paying for a similar service, I believe Brian’s 1.1 per cent annual fee is good value for money.”
The Planner
Brian Nash
Director
Merlea Investments, North Adelaide
An authorised Representative of Merlea Investments Pty Ltd, Brian Nash has been providing investment and financial planning advice since 1985. He holds a diploma of Financial Advising and is an affiliate member of the Financial Services Institute of Australasia. The leading force behind unique research software, Nash established Merlea Investments in 2003. His large interstate client-base, predominantly in NSW and Queensland – with net-worths ranging from $400,000 to $1.5 million – reflects the time he spends travelling throughout Australia.
Advice structure
In addition to a financial plan fee of $1,700, client fees range from a capped $10,300 to $1,820 based on complexity of advice, size of funds under advice, and the level of underlying risk required to meet stated financial goals. While trailing commissions are a rarity, they are rebated against fees wherever possible. Much of Nash’s advice structure is based on the unique modelling software he commissioned in the 1980s for monitoring risk and asset allocation. This modelling system allows clients to see when their investments are rising and to maintain or buy more of them. At the same time, the system also alerts clients to any investments that are falling, and indicates when that sector of their portfolio should be brought to cash.
“The entire modelling process is based on measuring the risk against the 10-year bond which is the risk-free rate of return. For us to deviate to gain a higher rate of return, we need to be able to measure risk versus reward,” says Nash.
Assets
Net worth 2005
Net worth today
Family home:
$250,000
$375,000
Boat:
$10,000
$10,000
SMSF
Cash:
$145,000
$90,000
Other Asset Classes:
$55,000
$285,000
Super
Joelen (Vic super)
$55,000
$280,000
Asset growth mix: 65-70 per cent
*Pseudonym used to preserve client anonymity
‘Trouble-free’ retirement solutions invariably belie the dark art of balancing tax-effectiveness with asset preservation, assurance of income – plus that all-important capital growth.
Having ... Read more
‘Trouble-free’ retirement solutions invariably belie the dark art of balancing tax-effectiveness with asset preservation, assurance of income – plus that all-important capital growth.
Having endured the ups and downs associated with running their own business over the past 40 years, the last thing Adelaide-based electrical contractors Greg and Nancy Reid* wanted in retirement was uncertainty of income. Given their limited appetite for capital market volatility – worn even thinner since losses endured during the GFC – Garry Meggison, their long-standing financial adviser, recognised that much of their retirement solution would be grounded in a tax-effective super strategy.
In addition to realising a lifetime’s goodwill embedded within the business, a partial sell-down to son Trevor in 2005 also triggered a significant re-think around the role of super for both income protection and future wealth creation.
While Greg (then aged 64) would remain working in the business part-time, he decided to receive supplementary income by converting the $549,000 accumulated in his own master trust Oasis super fund into an allocated pension. Based on an annual income of over $25,000 in allocated pension, Greg has already drawn down around $176,000 over the last six years.
Maximising contributions
To minimise marginal tax rates and pay some SGC requirements (as both employer and employee within the firm), Meggison recommended that Greg open another super fund with Statewide. Like partner Nancy whose existing super remains intact, the plan was to use these funds to salary sacrifice as much of their earnings as possible. “Both Greg and Nancy wanted to maximise their contributions to their personal super while they were both employees and partial owners of the business,” said Meggison.
The primary goal from 2001 to 2005 when they started to exit the business was to take super to a level where it could cover a healthy pension fund. “We used two years of contributions as part of the sale process to make it easier for their son Trevor and his business partner to eventually purchase the business outright,” said Meggison. “Due to the SME-owner’s discount, no tax was outstanding on employer’s super when the final sale went through.”
Due to ease of accessibility, the underlying quality of fund managers and the low cost-base associated with industry funds, they chose Statewide as an appropriate place to park cash until the Reids exited the business completely. In July 2009 the Bank of Adelaide agreed to lend son Trevor the capital needed to buy the remaining 50 per cent of the business based on the strength of the underlying cashflow. However, at Meggison’s recommendation the Reids decided to retain ownership of the $850,000 commercial premises occupied by the business as an additional asset base and income stream.
After numerous discussions with tax specialists and other interested parties, they decided that the family’s legal firm would prepare a ‘buy/sell’ agreement, including insurance and income protection for the new owners. “By doing this they were able to reduce the sum paid for the business, provide the necessary finances required to complete the deal, while facilitating the smooth transfer of funds to Greg and Nancy,” said Meggison.
The eventual business sell-down left the Statewide super fund – following lump-sum payments of $273,000 – with $366,000 which in turn could be converted into tax-effective income needed to provide for Greg and Nancy’s retirement.
Building the income
Meantime, severely hit by the GFC, the value of Greg’s Oasis fund dropped by around 30 per cent to $407,000. Despite Meggison’s outlook for an eventual recovery in markets, the Reids were reluctant to heighten their exposure to direct equities.
So based on this brief, Meggison recommended putting $100,000 from Statewide into a 10-year Challenger annuity, which provided them with $12,000 in year one and indexed at 3 per cent thereafter. An additional $231,000 was placed into an ING MoneyForLife pension fund, which guarantees a further $12,000 in annual income from its commencement. “This provides the guarantee of income for the next 10 years which at the end of the period – if markets have performed well – will have allowed Greg’s other funds to grow, without having to take too much out on the way through,” said Meggison.
Together with the $25,000 in annuities from the Oasis fund, the Reids are receiving close to the $50,000 in tax-free annual income they wanted to live on in retirement. Given that they have controllable debts (relative to investments), a relatively simple lifestyle and no great penchant for travel, Meggison said a modest $50,000 in annual income would go quite a long way. “They also have $150,000 in term deposits with ANZ should they need access to extra cash at relatively short notice,” he says.
Having this amount in annuities, Greg said it meant he did not have to work, and at age 69 he no longer had any interest in doing so beyond the transition to new owners. It also meant that Nancy’s super – now valued at $486,000 – could be left to continue growing. “While Nancy is still only 55, the decision to continue to work part-time, while maximising contributions and lowering her marginal tax rate makes a lot of sense,” said Greg.
It’s envisaged that Nancy will continue maximising her super contributions until she reaches the maximum age of 65. Reduced income from no longer working would then be replaced by rolling over into another account-based pension which provides the flexibility for future capital growth. Based on Meggison’s best estimates – assuming contributions are around $100,000 – a projected $1.2 million within Nancy’s super by 2020 will provide an annual income of around $50,000.
Eating your cake
While the Reid’s wealth creation strategy isn’t as aggressive as a gearing approach, Meggison says it still allowed them to preserve their income and asset-base, while also allowing for capital growth. “If Greg and Nancy had been geared going into the GFC they would have lost significantly more than they did,” Meggison said. “And had they been in their early 40s with a greater appetite for risk, I may have recommended a geared fund similar to that offered by Colonial First State – which is available in a super environment. But this strategy didn’t match their investment profile then and still doesn’t today.”
As super underscores the Reids’ investment rationale, he says it’s important to ensure they’re invested wisely. And to provide for adequate growth over the next 10 years, Nancy’s asset allocation is 70 per cent growth, 30 per cent cash. Greg also has a similar profile within his allocated pensions. “Meanwhile, the modest amounts being drawn from their annuities means they’ve got adequate opportunity for re-growth within the Oasis pension and super funds they both hold independently,” said Meggison.
Removing the uncertainty
At current value, following successive rollovers into annuities, Greg and Nancy still have around $1.3 million in super invested between them. While they did explore the benefits of setting up a self managed super fund (SMSF), Meggison said they had little interest in the added complexity required to continually monitor and administer them.
Interestingly, he said they very much associate the tax-free nature of annuities as ‘trouble-free’ income during their retirement. “Part of being able to enjoy one’s retirement is removing the uncertainty from income flow. So I wanted to create an environment where the Reids’ retirement income would be guaranteed, regardless of what was happening within capital markets,” said Meggison.
And while there will be capital gains tax (CTG) considerations when the Reids’ finally decide to sell one or both of their residential and commercial properties – they have no plans do so in the foreseeable future.
Having taken the Reids’ net worth from $120,000 in 1984 to $2.5 million (excluding super), Meggison questions whether he’d have been able to deliver a better performance using an alternative strategy or other asset classes.
Within an Oasis wrap account platform, Meggison said the Reids have a spread of quality fund managers providing the right exposure to direct shares who rebalance asset allocations as they see fit.
At face value, the retirement solution provided for the Reids looks fundamentally simple. But what heightened the complexity of the execution, added Meggison, was the need to provide for income without being solely dependent on markets continuing to go up. “So while income protection was paramount, we didn’t want to remove the opportunity for future capital growth.”
The Planner
Garry Meggison
Financial planner
Bailey Capital Management, Adelaide
A former manager of Security Life, Meggison has been a financial planner since July 1982. An authorised representative of independently owned Australian Financial Services, Meggison has a diploma in financial planning and joined Bailey Capital Management in November 2006.
Advice structure
Subject to its complexity, clients pay for an initial statement of advice. Ongoing fees are then set commensurate with the size and complexity of funds under advice. The firm has progressively gravitated towards a user pays model, with fees replacing commissions as clients move along the fee-for-service ladder. While straddling the entire financial spectrum, a high proportion of Meggison’s clients are high net-worth small business owners – many of whom operate their own SMSF.
Net wealth position
1984:
$120,000 (Net worth)
$5,000 (Super)
2010:
$2.5 million (Net worth)
$1.3 million (Super)
Super
Nancy:
$486,000 Oasis fund
Greg:
$840,000 Oasis/Challenger/ING.
Other investments
Holiday home: $410,000
Commercial property: $850,000
Outstanding debt on
commercial property: $340,000
Fixed term deposits: $150,000
Family home: $750,000
Current annuities
Challenger: $12,000
ING MoneyForLife: $12,000
Oasis: $25,000
Total income – annuities: $49,000
Annual Fees
1984:
Estimated at $500 (Based on a notional percentage for super contributions and life insurance arranged for the Reids at the time.)
2010:
$8,000
*Pseudonyms used to protect client anonymity
Applied Financial Planning
Daniel Liptak says that high inflation is usually associated with an economic environment that is high in fiscal deficits and reeling from severe economic shocks combined with a loss in confidence in the ... Read moreDaniel Liptak says that high inflation is usually associated with an economic environment that is high in fiscal deficits and reeling from severe economic shocks combined with a loss in confidence in the value of money. In this paper, he explores cheap hedging strategies that can protect long-term investments from the effects of inflation, such as treasury inflation-protection securities (TIPS). He also explains why these hedging strategies are at historically low cost and why this has the potential to provide an overlay solution for a fixed income portfolio, for a small cost, with significant upside potential for guarding against any future fat tail event in the next three to five years.
In the previous issue, Part I of Matt Christensen's paper, he defined Sustainable Investment as an investment philosophy that combines investors' financial objectives with their concerns about Environmental ... Read moreIn the previous issue, Part I of Matt Christensen's paper, he defined Sustainable Investment as an investment philosophy that combines investors' financial objectives with their concerns about Environmental, Social, and Governance issues. He sets out the important research into high net worth individuals (HNWIs) and sustainable investment and what they expect from advisers and product providers. In Part II, he looks into the sustainable investment products and the strategies available to investment practitioners. He the sustainable products' origins and allocations as well as the opportunities and obstacles involved to show that HNWIs can yield market rate returns in sustainable investment.
Practice Management
In the last issue, David Anderson presented the first part of his paper on the Mercer research on employee retention strategies. In this second part, he explores the issues faced by having an aging population ... Read moreIn the last issue, David Anderson presented the first part of his paper on the Mercer research on employee retention strategies. In this second part, he explores the issues faced by having an aging population and looks at how prepared Baby Boomers are for retirement and what their attitudes, beliefs and expectations are regarding leaving the workforce. He looks into how financially aware and prepared they are for this time in their life and most importantly, whether they have had, or plan to have, discussions with their employers on their plans for retirement.
Russel Hannah believes that the most valuable asset of businesses are its people, and without key individuals, most small to medium-size businesses (SMEs) are unlikely to reach their full potential. This ... Read moreRussel Hannah believes that the most valuable asset of businesses are its people, and without key individuals, most small to medium-size businesses (SMEs) are unlikely to reach their full potential. This is one important reason why these companies must have a documented contingency plan in place in the event an imporant person exits the company. He outlines the consequences of not having a contingency plan and the crucial role that financial advisers play in project managing contingency them for the different types of exit strategies possible.
Superannuation and Retirement Planning
For many Australians, retirement planning is a distant thought. According to Dr Lester Wills, many studies have already shown that a majority of us are not planning for retirement properly. In his paper ... Read moreFor many Australians, retirement planning is a distant thought. According to Dr Lester Wills, many studies have already shown that a majority of us are not planning for retirement properly. In his paper, he outlines the attitude most people have about saving for their retirement. He also lists a number of behavioural and psychological reasons why people are resistant to saving now for a comfortable future, something financial planners would be useful to take into consideration when motivating their clients to save for their retirement.
The relevance of financial planners is under increasing scrutiny from investors and regulators. APRA's June 2009 paper Investment performance ranking of superannuation firms questions the value of traditional ... Read moreThe relevance of financial planners is under increasing scrutiny from investors and regulators. APRA's June 2009 paper Investment performance ranking of superannuation firms questions the value of traditional managed funds and pose important questions for financial planners. In response to the paper, Tony Rumble stress tests different forms of capital protection and assesses their risks and benefits to demonstrate how each one can be used with maximum efficiency. He also shows how advisers can select and implement prudent protection for various client risk profiles, and why this will be key to building portfolios using a core + satellite approach; and how and why key asset classes for the next five years demand the inclusion of protection as part of prudent portfolio construction - which may involve high rotation of satellites around a longer term core.
Taxation Planning and Estate Planning
The Labour government's new R&D tax credit program seeks to motivate Australian companies with additional incentives to put more resources into research and development activities. The decision to ... Read moreThe Labour government's new R&D tax credit program seeks to motivate Australian companies with additional incentives to put more resources into research and development activities. The decision to commit $1.4 billion on the R&D tax credit program over the next four years confirms the integral role that research and development plays in encouraging businesses to be more innovative, resulting in ideas and products that enable them to prosper and increase their competitive advantage globally. Tracey Murray details how companies can position themselves to achieve maximum tax concessions for investments in innovation.
Continuous changes made to the superannuation system, limitations on annual super contributions and a backlash against complex and investment structures due to the global financial crisis are a few reasons ... Read moreContinuous changes made to the superannuation system, limitations on annual super contributions and a backlash against complex and investment structures due to the global financial crisis are a few reasons why Tony Di Girolamo believes there is a demand for clear and simple investment products such as bonds. In this article he sets out the tax advantages in estate planning and self managed super funds and why financial planners should consider investment bonds in their clients' retirement savings and estate planning strategies.
Consumer and Debt Management
The RBA believes the Australian housing market wouldn't experience catastrophic effects like those of other OECD countries, especially the US. According to their numbers, house prices are no longer overvalued ... Read moreThe RBA believes the Australian housing market wouldn't experience catastrophic effects like those of other OECD countries, especially the US. According to their numbers, house prices are no longer overvalued and mortgage repayments are back to historic averages. Their figures also show there's a housing shortage - despite the ABS figures revealing that 800,000 private homes were unoccupied on Census night. In this paper, Steve Keen digs deeper to look at the statistics to see how accurate a picture it really paints.
Risk and Life Insurances
Once upon a time, insurance lived in the realm of specialist risk advisers only. Today, through innovation, new technologies and necessity, insurance products have evolved and are simpler to understand ... Read moreOnce upon a time, insurance lived in the realm of specialist risk advisers only. Today, through innovation, new technologies and necessity, insurance products have evolved and are simpler to understand and explain, making it more accessible to advisers and their clients. ING's Mark Patterson makes a convincing argument for insurance, citing initiatives like IFSA's LifeWise campaign helping to put insurance at the forefront of people's minds and making it a valid choice for advisers looking to diversify their business in a challenging economic environment.
Applied Financial Planning
According to Christopher Burton and Andrew Karsh commodities offer significant diversification opportunities which may reduce overall portfolio risk and improve returns. Commodities pay no interest and ... Read moreAccording to Christopher Burton and Andrew Karsh commodities offer significant diversification opportunities which may reduce overall portfolio risk and improve returns. Commodities pay no interest and offer investors no share of any future profits derived from a company - the main driver of commodity prices is current supply and demand. As a result the historical risk and return characteristics of commodities have displayed little or no relationship with those of most other financial assets. Buying commodities directly is impractical and buying the stocks of commodity-producing companies may actually limit commodity exposure. Burton and Karsh believe that a simpler approach might be a fund that seeks to track returns of a diversified index.
Matt Christensen is Executive Director of Eurosif which is the premier European think tank and industry association for sustainable investment. Eurosif defines Sustainable Investment as an investment philosophy ... Read moreMatt Christensen is Executive Director of Eurosif which is the premier European think tank and industry association for sustainable investment. Eurosif defines Sustainable Investment as an investment philosophy that combines investors' financial objectives with their concerns about Environmental, Social, and Governance issues. An investor might use negative screening, thematic investing or community investing. This paper argues that High Net Worth Individuals (HNWI) are increasingly likely to seek out sustainable investments. Eurosif also believe that HNWIs are often an early indicator of where the broader investment market will move in future years. This article explores important research into HNWIs and sustainable investment and what they expect from advisers and product providers.
Practice Management
Even in these difficult economic times employers are saying that it can be hard work finding quality employees. This important Mercer research presented to us by David Anderson in his paper compares what ... Read moreEven in these difficult economic times employers are saying that it can be hard work finding quality employees. This important Mercer research presented to us by David Anderson in his paper compares what employers think employees believe is important and what employees actually think is important. With a rapidly aging population finding and retaining good employees will become more and more important. Employers of any size will find this research enlightening.
Sam Aylett tells us how to market smarter not harder and proactively not reactively. He details how the AXA Financial Advising Network has developed tools to help their advisers. AXA based advisers are ... Read moreSam Aylett tells us how to market smarter not harder and proactively not reactively. He details how the AXA Financial Advising Network has developed tools to help their advisers. AXA based advisers are able to develop a "Real Business Plan" which determines what affects business performance; it also streamlines the planning process to help a business develop a real business plan. The AXA Financial Advising Network also supports advice businesses in developing or re-defining their client value proposition.
Superannuation and Retirement Planning
This paper considers some of the key issues financial planners should evaluate if they wish to go about incorporating advice on aged care needs into their financial planning business. Aged care is more ... Read moreThis paper considers some of the key issues financial planners should evaluate if they wish to go about incorporating advice on aged care needs into their financial planning business. Aged care is more than just hostels and nursing homes; it also includes care provided in a person's home. This paper also provides details of how the aged care safety net works and some of the strategies which should be considered.
Hugh Bannister of Optimo Financial has spent most of his working life building computer software modelling tools for the energy and finance leasing industries. Through the years Bannister has also received ... Read moreHugh Bannister of Optimo Financial has spent most of his working life building computer software modelling tools for the energy and finance leasing industries. Through the years Bannister has also received personal financial advice that has not served him well. As a result, his business decided to develop a prototype to see if it could build better financial planning modelling tools than what is commonly available to advisers. Bannister believes you won't find the best strategy "by just fiddling with a few numbers and looking at the outcome". He says he and his colleagues have a profound respect for the challenge of what financial planners are supposed to do. But "we retain some doubts as to how many actually do it properly", he says.
Taxation Planning and Estate Planning
Dylan Greenway provides a brief introduction to agricultural schemes which have recently had such bad press. Greenway argues that agricultural schemes which typically last from 6 to 25 years have low or ... Read moreDylan Greenway provides a brief introduction to agricultural schemes which have recently had such bad press. Greenway argues that agricultural schemes which typically last from 6 to 25 years have low or negative correlation to traditional investments. He provides us with an outline of 8 client circumstances which might be assisted by agribusiness schemes. He concludes with a brief description of recent developments in the agri-business MIS sector.
Alex Denham is a well known technical analyst at Challenger. This paper describes what options small fund trustees have when the complying pension they have been paying is not able to get actuarial sign-off ... Read moreAlex Denham is a well known technical analyst at Challenger. This paper describes what options small fund trustees have when the complying pension they have been paying is not able to get actuarial sign-off as being financially viable. She particularly looks at these structures from the point of view of government Social Security benefits and the concessions which are available to unviable pensions.
Risk and Life Insurances
Helen Mentiplay and Peter Riddell are lawyers at TurksLegal. In this paper they explore the implications on income protection policies of a 2008 NSW Supreme Court case (Carolyn Philips (née Durrand) ... Read moreHelen Mentiplay and Peter Riddell are lawyers at TurksLegal. In this paper they explore the implications on income protection policies of a 2008 NSW Supreme Court case (Carolyn Philips (née Durrand) v Tower Australia Ltd). The case involved an insurer reducing income protection policy payments because Philips was receiving Centrelink's Disability Support Pension. However as our authors note the decision may not have application to other Centrelink type benefits.
When Ross Higgins joined Austock, he was asked to develop a new type of Insurance Bond. As Ross points out the Insurance Bond market has been moribund for many years because, "the Life Industry failed ... Read moreWhen Ross Higgins joined Austock, he was asked to develop a new type of Insurance Bond. As Ross points out the Insurance Bond market has been moribund for many years because, "the Life Industry failed to move insurance bonds with the times by introducing modern multi-optioned investment platforms with switching facilities to higher performing equity and property options". Ross explains many of the reasons why product offerers are once again looking at this product. He provides a comprehensive comparison between Insurance Bonds and other investment vehicles.
Applied Financial Planning
Lester Wills discusses research originally written by James Montier. Montier has
developed a list of 10 perilous errors people make when investing. Wills says that when
you consider Montier's list, they ... Read moreLester Wills discusses research originally written by James Montier. Montier has
developed a list of 10 perilous errors people make when investing. Wills says that when
you consider Montier's list, they seem pretty obvious. "Too many things that are
obvious are overlooked simply because people just don't think about them. Things can
all too easily be 'obvious' in hindsight," said Lester. Behavioural finance can make you
realise that market efficiency is in reality nothing of the sort.
Diana Beal is a retired academic. Her paper comes from research she conducted while Associate Professor in personal finance at the University of Southern Queensland. The
research sought to answer the ... Read moreDiana Beal is a retired academic. Her paper comes from research she conducted while Associate Professor in personal finance at the University of Southern Queensland. The
research sought to answer the question about how much older Australians intended to
financially assist their offspring and whether this assistance led to profligacy. The survey's
results are split between higher and lower electorates and between higher and lower
socio-economic groups in those electorates. Beal found that recipients of these gifts
were more likely to be savers than not, however, the savers reported significantly higher
incomes than the non-savers.
Practise Management
Jocelyn Furlan is the Acting Chairperson of the Superannuation Complaints Tribunal.
In this role she sees many super fund death benefit cases. This gives her an excellent
insight into common issues that ... Read moreJocelyn Furlan is the Acting Chairperson of the Superannuation Complaints Tribunal.
In this role she sees many super fund death benefit cases. This gives her an excellent
insight into common issues that arise which could more easily and effectively be dealt
with. Her paper deals with three typical myths about death benefits, concluding with
an excellent case brought before the SCT where there was conflict between
documentation the deceased had completed and his Will.
Natalie Sillar uses this paper to provide a diverse range of marketing and sales ideas
about generational marketing. Natalie is at BT Financial Group which has developed
three toolkits to empower financial ... Read moreNatalie Sillar uses this paper to provide a diverse range of marketing and sales ideas
about generational marketing. Natalie is at BT Financial Group which has developed
three toolkits to empower financial planners who use its Wrap Platform to better
understand and tap into the next generation of wealth clients, Generations X and Y, as
well as better service the changing needs of Baby Boomers.
Superannuation and Retirement Planning
Graeme Colley delivers some excellent research on how the Better Super accountbased
pensions provide a sound basis for retiree clients. It should be possible to place
"restrictions on an account-based ... Read moreGraeme Colley delivers some excellent research on how the Better Super accountbased
pensions provide a sound basis for retiree clients. It should be possible to place
"restrictions on an account-based pension with carefully worded conditions attaching
to it," says Colley. The appealing features of a standard account-based pension include
the timing of the payments, the ability to commute the pension at will and the ability
to continue the pension with death benefit dependants. Graeme also believes that in
most cases the account-based pension provides greater advantages than the allocated
pension.
Ross Clare works at the Association of Superannuation Funds of Australia. In this paper
Ross takes data published by the Australian Bureau of Statistics to determine the level
and diversity of superannuation ... Read moreRoss Clare works at the Association of Superannuation Funds of Australia. In this paper
Ross takes data published by the Australian Bureau of Statistics to determine the level
and diversity of superannuation balances across both the self-employed, wage and salary
earners. He finds that some self-employed are on track for a comfortable standard of
living in retirement, however, the majority will fall well short of achieving this. Ross
also reveals who the self-employed are - their gender, industries they work in, income
levels and, most importantly, their current retirement savings.
Taxation Planning and Estate Planning
Helena Gibson is at Perpetual in their platform division. Initially she details an important
innovation that Perpetual has created called the WealthFocus Investment Advantage.
This innovation has three ... Read moreHelena Gibson is at Perpetual in their platform division. Initially she details an important
innovation that Perpetual has created called the WealthFocus Investment Advantage.
This innovation has three capital gains tax benefits that other platforms may not be able
to access. In the second half of this paper, Helena reveals some of the technical issues
about investing for children and how the new Perpetual product may provide some
benefit.
Peter Gandolfo heads up the legal division of Partners Group. In this paper, Peter
argues that succession planning is critical. He then details a 12-step program to
implement orderly succession. A succession ... Read morePeter Gandolfo heads up the legal division of Partners Group. In this paper, Peter
argues that succession planning is critical. He then details a 12-step program to
implement orderly succession. A succession plan "should be done in conjunction with
solicitors, accountants and financial planners where applicable," says Gandolfo. Finally
Peter concludes with an exit strategy checklist.
Consumer and Debt Management
Julie McKay works for Leveraged Equities. Her paper provides excellent background
research on why using gearing to build wealth over the medium- to long-term remains
a valid strategy. "Even in today's ... Read moreJulie McKay works for Leveraged Equities. Her paper provides excellent background
research on why using gearing to build wealth over the medium- to long-term remains
a valid strategy. "Even in today's financial environment not all debt is bad. We need to
distinguish between borrowing to pay for consumption and borrowing to acquire
wealth creating assets," she says. Julie concludes by noting that her analysis is based
upon a broad market index.
Robert Deutsch works for The Royal Bank of Scotland (RBS). He details how and
why many self funded instalments were largely withdrawn from the market during
2008. One of the reasons was the spike in ... Read moreRobert Deutsch works for The Royal Bank of Scotland (RBS). He details how and
why many self funded instalments were largely withdrawn from the market during
2008. One of the reasons was the spike in financial market volatility. Robert then
describes how RBS have been able to bring some margin-loan-like features to the self
funded instalment market. It has done this by introducing a stop-loss mechanism into
their product.
Risk and Life Insurances
Alex Wagner is the claims manager at Zurich. In this paper Alex shows that insurers
assess claims under the spotlight of two competing objectives - the need to assess claims
quickly because of potential ... Read moreAlex Wagner is the claims manager at Zurich. In this paper Alex shows that insurers
assess claims under the spotlight of two competing objectives - the need to assess claims
quickly because of potential commercial reputational damage and the prudential
requirement to only pay valid claims. Alex shows that insurance claims are nearly
always determined after relying on third parties for relevant information. For example,
doctors, aacountants, hospitals and so on. Alex concludes by providing guidance on
how advisers can assist both their client and the insurer during the claims process.
Jon de Fries argues that "well-structured business insurance helps keep your business
functioning and protects the value of your business in the case of unplanned events."
His paper points out the chronic ... Read moreJon de Fries argues that "well-structured business insurance helps keep your business
functioning and protects the value of your business in the case of unplanned events."
His paper points out the chronic under-insurance across Australia, especially amongst
small business people. The second half of his paper shows which life insurance products
can be used to fulfil the asset, revenue and ownership protection issues that arise in a
small business.
Applied Financial Planning
In this article Dr Lester Wills reviews work by two US-based academics, Robert Arnott and Anne Casscells. Lester considers the Arnott and Cassells' proposition that a stable dependency ratio rather than ... Read moreIn this article Dr Lester Wills reviews work by two US-based academics, Robert Arnott and Anne Casscells. Lester considers the Arnott and Cassells' proposition that a stable dependency ratio rather than a stable retirement age is the only way a society can cope with ageing when we will have more retirees than workers. Wills concludes that increasing the minimum retirement age is probably inevitable. Such an outcome would have a very big impact on many wealth accumulators' strategies who are probably planning to retire in their early 60s and then living until their mid to late 80s.
Running a successful business and managing the growth of personal wealth is not easy for business owners of small to medium-sized enterprises (SME). Most business owners are so busy working within their ... Read moreRunning a successful business and managing the growth of personal wealth is not easy for business owners of small to medium-sized enterprises (SME). Most business owners are so busy working within their business that they do not have many opportunities to look outside their business for wealth creation. Market research and independent interviews confirm the challenge time-poor business owners have in balancing professional and personal wealth management. This article explains how this situation arises and outlines steps business owners can take to regain control of their financial future. The solution is a new form of partnership which constantly reassesses best financial directions that brings accountability to best achieve financial objectives and increases capabilities and options with appropriate expertise and that is built upon a trusted relationship. This is the role of a SME's principal adviser.
Practise Management
Running a successful business and managing the growth of personal wealth is not easy. This paper looks at some of the challenges faced by new business owners when they purchased an older life insurance ... Read moreRunning a successful business and managing the growth of personal wealth is not easy. This paper looks at some of the challenges faced by new business owners when they purchased an older life insurance practice from their parents. They decided to completely change the business but to do this in a strategic way. Once they had determined the business' vision, mission and values they moved onto identifying who their ideal client would be and decided on the services they intended to offer and the client value proposition. The final step was to work out the brand name and image.
During bear market periods, anyone in the business of giving financial advice is in a position of greater risk from clients who end up with disappointing outcomes. Often this is a case of individuals not ... Read moreDuring bear market periods, anyone in the business of giving financial advice is in a position of greater risk from clients who end up with disappointing outcomes. Often this is a case of individuals not accepting responsibility for their own wealth creation strategy and where investment products or companies collapse, finger pointing can quickly turn into legal action. Financial planning firms need to be supported in these difficult times by some solid risk management mechanisms which enable them to continue to do business with confidence. Recent experience indicates that there are three key areas financial planning firms should be focusing on to increase their protection against claims from investors when financial markets get rough - professional indemnity insurance, internal compliance regimes and authorised representative agreements.
Superannuation & Retirement Planning
There are many market myths in the superannuation industry. This paper shows that fund choice is alive and well and constitutes a multi-billion dollar competitive battlefield. This competition augurs well ... Read moreThere are many market myths in the superannuation industry. This paper shows that fund choice is alive and well and constitutes a multi-billion dollar competitive battlefield. This competition augurs well for the retirement of individual Australians. However, it must be viewed within the context of major demographic change placing added pressure (and responsibility) on Government, super funds and every individual Australian. The 2006 Federal Budget announcements have taken much of the recent media attention in the superannuation space. Industry participants have been deluged with older Australians contributing large amounts and restructuring their entitlements into tax efficient forms. It is now time to focus on fund choice. The battleground and the prize is membership and this increasingly involves retired members.
The increase in popularity of contracts for difference (CFDs) has been one of the hottest topics in personal finance over the past few years. From a standing start just six years ago, CFDs have grown to ... Read moreThe increase in popularity of contracts for difference (CFDs) has been one of the hottest topics in personal finance over the past few years. From a standing start just six years ago, CFDs have grown to be the most popular retail derivative product available in the marketplace today. This article takes a closer look at CFDs, how they work and whether there is a place for them in the financial planning community. It covers two popular CFD strategies, Short Selling and Hedging, both of which can help clients to manage and limit risk. David also reviews guaranteed stop losses, which put an absolute limit on liability without restricting profit potential, and how SMSFs can use CFDs following the ATO's decision to allow their use under certain circumstances.
Taxation Planning & Estate Planning
Managed accounts are not new - they are an evolution in money management in Australia - retail unit trusts, master trust, wrap and now managed accounts. They have been used in the US for many years and ... Read moreManaged accounts are not new - they are an evolution in money management in Australia - retail unit trusts, master trust, wrap and now managed accounts. They have been used in the US for many years and were adopted early on by brokers who had a discretionary and/or non-discretionary advisory relationship with their clients. Technology has progressed the offering to the point where they are now allowing access to retail clients. Managed accounts are unique and increasingly popular investment vehicles providing the benefits of professional portfolio management in direct shares, in a low cost environment with a range of available advice models available to retail and wholesale clients. This paper briefly explains what a managed account is and also explains why they may be a popular investment vehicle for small super funds.
Can superannuation investments be attacked when a person becomes bankrupt? The critical points of attack in relation to superannuation are potentially contributions, a superannuation account balance, pensions ... Read moreCan superannuation investments be attacked when a person becomes bankrupt? The critical points of attack in relation to superannuation are potentially contributions, a superannuation account balance, pensions and fund control. Financial planners typically are always keen to know what they can do to preclude such an attack or make such an attack less likely to be successful. This paper also briefly explains other laws that might be used to attack superannuation contributions.
Consumer and Debt Management
As is well known the Baby Boom generation is nearing retirement age. With much of their wealth tied up in residential real estate, the boomer generation need to work out how that large investment helps ... Read moreAs is well known the Baby Boom generation is nearing retirement age. With much of their wealth tied up in residential real estate, the boomer generation need to work out how that large investment helps or hinders their retirement lifestyle plans. The pre- Boomer generation also has a great deal of wealth tied up in their homes. However unlike the Boomers, the Depression and World War II generation will look to use their home to provide their living costs when all else has failed. Kevin Conlon provides a thought provoking insight into the practice of senior Australians using reverse mortgages to overcome the trap of being asset rich but cash poor and confront the challenge of living longer and living well in retirement.
In the final days of the Howard Government new laws were passed which allow super funds to borrow using a specific type of structure. These new laws have been quite broadly drafted but there are traps ... Read moreIn the final days of the Howard Government new laws were passed which allow super funds to borrow using a specific type of structure. These new laws have been quite broadly drafted but there are traps for the unwary. In April 2008 the ATO released several documents, including a Taxpayer Alert, which detailed some of the issues which it believed investors interested in using the new law should be careful about. This paper looks at the new rules and how to correctly implement them. It also briefly looks at some of the tax aspects of the transaction when it is and isn't implemented correctly.
Risk and Life Insurances
Trauma insurance commenced on 6 October 1983, when Dr Marius Barnard helped launch the first policy in South Africa. The policy was designed to help clients pay for medical expenses associated with heart ... Read moreTrauma insurance commenced on 6 October 1983, when Dr Marius Barnard helped launch the first policy in South Africa. The policy was designed to help clients pay for medical expenses associated with heart surgery (Marius and his brother Christian performed the world's first heart transplant). Marius realised that he could repair a man physically, but only a life insurance company can repair a patient's finances. Twenty- five years later, trauma insurance has transformed significantly. Most life insurance companies in Australia now cover more than 40 conditions including cancer, stroke, and paralysis. In Australia, Medicare and private health insurance is available to cover a fair portion of medical expenses. This paper answers the significant question, "Why do we need trauma insurance?" It also looks at where the insurance should be held - inside or outside superannuation.
When analysing the proposition of holding insurance in super it's tempting to focus on tax - the tax treatment of premiums and the taxation of claims paid in the form of super benefits. While we can't ... Read moreWhen analysing the proposition of holding insurance in super it's tempting to focus on tax - the tax treatment of premiums and the taxation of claims paid in the form of super benefits. While we can't ignore the significance of tax aspects of policy ownership, this article looks at some other issues such as protecting the claim proceeds, the general lack of insurance in Australia, the contribution caps before looking at some of the tax issues that might arise.
Appropriate Advice
The collapse of the Westpoint group and the loss of many millions of dollars of investors' funds has been the subject of much publicity. ASIC has recently announced that it will commence legal action to ... Read moreThe collapse of the Westpoint group and the loss of many millions of dollars of investors' funds has been the subject of much publicity. ASIC has recently announced that it will commence legal action to recover damages on behalf of investors in respect of various Westpoint developments. That proceeding is but the latest in a series of actions ASIC has taken in the mop-up of the Westpoint debacle. ASIC has thus far commenced investigations into 13 licensees and 28 authorised representatives who advised on Westpoint products. ASIC's investigations in relation to Westpoint are obviously not over and questions therefore arises on what can ASIC do to obtain information and what should you do if you receive such a request?
Over the next 40 years, but predominately the next 30 years, Australians will experience the greatest intergenerational transfer of wealth ever known. Estimates indicate about $600 billion will be transferred ... Read moreOver the next 40 years, but predominately the next 30 years, Australians will experience the greatest intergenerational transfer of wealth ever known. Estimates indicate about $600 billion will be transferred to and from the Baby Boomer generation (1946-1964) during this period. To transfer wealth to the next generation without adequately preparing them can do great harm. People can, however, purposefully plan the nature and type of impact they want to have on future generations by creating a structured legacy. My research has concluded that everyone who is loved by someone will leave a legacy in some form, but few people experience the power of a structured living legacy.
Policy
Reinventing financial planning was commissioned by the Institute of Chartered Accountants (in Australia) in March 2007 to examine future directions for the financial planning industry. In the paper it ... Read moreReinventing financial planning was commissioned by the Institute of Chartered Accountants (in Australia) in March 2007 to examine future directions for the financial planning industry. In the paper it is suggested that the basis for professionalism requires a range of issues including serving the public interest, agreement of a remuneration model, ongoing development of a pro bono culture and the education of financial planners. Following release of the paper the Institute hosted an industry forum, where delegates represented a wide cross-section of the financial planning industry and included industry associations, product manufacturers, regulators, dealer groups and practitioners. At the forum delegates discussed the issues raised in reinventing financial planning, where a wide range of views were expressed. All agreed that professional advice is paramount. These views are outlined in a white paper key observations section.
Insurance
Ask the average small business owner whether they insure their key people and they'll probably look at you blankly. That's because less than half will have ever even heard of the cover and only one in ... Read moreAsk the average small business owner whether they insure their key people and they'll probably look at you blankly. That's because less than half will have ever even heard of the cover and only one in 14 taken out life insurance for this purpose, sometimes for all the wrong reasons. Meanwhile, key person risk insurance is misunderstood as many still perceive it be for the purpose of helping a firm's principals buy out each other's share of the business in the event one of them dies, suffers a traumatic illness or becomes totally and permanently incapacitated. So what are the issues and how should appropriate policies be put in place to ensure the business is protected and maintains it strategic advantages?
Practise Management
Whether you're a Generation X or Y financial planner or a current financial planning business owner, a great deal of planning is required in order to be successful in your succession strategy. As a specialist ... Read moreWhether you're a Generation X or Y financial planner or a current financial planning business owner, a great deal of planning is required in order to be successful in your succession strategy. As a specialist provider of banking services to the financial planning industry National Australia Bank has provided business finance to over 500 financial planning practices around Australia across a wide range of licensees. Over the past five years we have seen an increase in the number of financial planning business owners looking to secure their own retirement and the future of the businesses they have spent considerable time building. Even where finance is sought to expand the business, ultimately the strategic management and planning in the business will affect the value of the business and make the practice more saleable in the longer term.
Australian businesses and financial advisory firms in particular face the most radical transformation in leadership and work practices in decades as they prepare for the impending "war for talent". In ... Read moreAustralian businesses and financial advisory firms in particular face the most radical transformation in leadership and work practices in decades as they prepare for the impending "war for talent". In recent years insightful business leaders have understood this sense of urgency and responded to the forthcoming exit from the workforce of the Baby Boomer generation. This, combined with the punishing pace of change in technology and changes in work practices, requires the business leaders of the future to do more than be mere observers, they must understand these changing times and the implications for their businesses. But more importantly, they must develop new "non traditional" solutions that encompass a comprehensive understanding of social trends, human behaviour, and much different consumer and employee expectations.
There is no formula for a successful referral relationship in the nascent science of practice management. This is because the "X" factor plays a major part even though it is too often left out in Referral ... Read moreThere is no formula for a successful referral relationship in the nascent science of practice management. This is because the "X" factor plays a major part even though it is too often left out in Referral 101 guides. Yet without the motivation or desire of the relationship holder to refer the best referral systems will fail. Responding to this need, this article presents a list of common issues that impact on the willingness, or otherwise, of a relationship holder to refer. By reflecting on your existing relationships that may not be producing the referral flow you believe possible and by making yourself sensitive to the emotional desire of the relationship holder to refer, you will be able steer your discussions to uncover blockages to creating successful client
"A business operating model describes the capabilities that exist within an organisation including customer facing, infrastructural and management components". This is typically how a business operating ... Read more"A business operating model describes the capabilities that exist within an organisation including customer facing, infrastructural and management components". This is typically how a business operating model is defined in "consulting 101". However in the experience of Advice Centre Consulting (ACC) the development of a business operating model provides much needed clarity for the leaders of an advice business as to their priorities in transitioning to a business that will dominate this industry within the next five years. The operating model provides a clear picture explaining why specific capabilities, structure and management are required if the business is to deliver real value to clients. So what does this operating model look like? And how does it impact on the future growth and success of an advice business?
Applied Financial Planning
The concept of 'simple super' has significantly shifted the goal posts for consumers and for everyone in the industry. It has also helped eliminate some of the complexity which has built up around superannuation ... Read moreThe concept of 'simple super' has significantly shifted the goal posts for consumers and for everyone in the industry. It has also helped eliminate some of the complexity which has built up around superannuation over the past 20 years. It is to be hoped that over time, this complexity isn't rebuilt. But while initially there were suggestions that 'simple super' would eliminate the need for financial advice for many, advice is now moving on to dealing with finding the best investment strategy for the client and the best way to implement that strategy. In this context new advice needs are emerging which are creating an increased demand for financial advice, yet there is still the issue of whether the existing regulatory environment will allow all those who need it, to be able to get it.
Most outcomes in life are impacted by skill (or a lack of it) as well as noise (random chance or luck). What do we mean by this in practice? We mean that a portion of any outcome is likely to relate to ... Read moreMost outcomes in life are impacted by skill (or a lack of it) as well as noise (random chance or luck). What do we mean by this in practice? We mean that a portion of any outcome is likely to relate to the process that was put in place to produce it whilst another portion is likely to relate to random factors, or noise. In turn this means that if a particular event is heavily impacted by noise then the associated outcome may not be consistent with the process that was put in place to produce it. More simply, a bad result may arise even if the process behind it was actually quite sound.
Conventional wisdom suggests that attempting to add value through the active management of currencies is doomed to failure due to the efficiency of the currency market. However, this assumption is not ... Read moreConventional wisdom suggests that attempting to add value through the active management of currencies is doomed to failure due to the efficiency of the currency market. However, this assumption is not entirely correct because the currency market is large, multi-segmented, and made up of participants with diverse objectives. Active currency management is also not a zero-sum game because the different parties transacting in the currency market, such as central banks and corporate hedgers, have different objectives, thus these parties can take opposite sides of a trade and still "win." In addition, the majority of currency market participants are not attempting to profit explicitly from their transactions.
The 20th century British economist John Maynard Keynes has said "Markets can be wrong for longer than you can be solvent." This sentiment resonates very well with investors who have faced the highs and ... Read moreThe 20th century British economist John Maynard Keynes has said "Markets can be wrong for longer than you can be solvent." This sentiment resonates very well with investors who have faced the highs and lows of stock markets across the world. But let's start at the beginning and look at people who manage money professionally. What are the skills that a fund manager is expected to have? Fund management is generally perceived as an art form where talent is beyond analysis and where the connection between skill and alpha is vague to say the least. Yet we know from the work that we do with some of the leading fund managers and their clients that skills can be identified and are capable of objective analysis. So what are these skills and what use is it to know whether you possess them?
Practice Management
There are a broad range of business models that are considered "successful" in the financial advice industry at the moment. These range from the two to three person firms with annual revenues of $400,000 ... Read moreThere are a broad range of business models that are considered "successful" in the financial advice industry at the moment. These range from the two to three person firms with annual revenues of $400,000 to $500,000 and a 15-20 per cent profit to revenue ratio after market rate salaries are paid to the principals, to the 7-15 person firms with revenues of $1.5-3.0 and profit to revenue ratio of 25-30 per cent after all expenses. However, if we are to believe a number of the US Advice Industry's opinion leaders, these models will be severely challenged and new approaches will be needed. New models able to experience this transition and prosper are the Advice Centre Model, the Integrated Financial Services Model and the Advice Partnership Model.
So you own a business specialising in financial advice and services. You're busy. Your staff members are busy. The industry is in great shape. Every day, there's always lots to do with clients to see ... Read moreSo you own a business specialising in financial advice and services. You're busy. Your staff members are busy. The industry is in great shape. Every day, there's always lots to do with clients to see, strategies to write, people to manage, compliance to meet, research and technical information to absorb, bills to pay, emails to read, paperwork to complete. But how often do you really take the time to step back and look at your business through your 'big picture' lenses? Can you articulate - without warning - what your vision is for your business, the steps you need to focus on to get there and where you currently are in your journey? One way to achieve this is with the help of an advisory panel.
A new regulation has been recently introduced in relation to AFSL holders' compensation requirements under section 912B of the Corporations Act while ASIC has released a consultation paper on how it intends ... Read moreA new regulation has been recently introduced in relation to AFSL holders' compensation requirements under section 912B of the Corporations Act while ASIC has released a consultation paper on how it intends to administer the compensation requirements, primarily through professional indemnity insurance. This papers explains how the consultation paper seeks feedback on ASIC's proposed policy on what is adequate professional indemnity insurance cover, some challenges to the regime and some practical options responding to these challenges, ASIC's proposed guidance on how licensees should approach the new requirements, and ASIC's policy for approving alternative arrangements to professional indemnity insurance.
Super and Retirement Planning
Group Insurance has always been a tremendous platform for making insurance more accessible to more people, but increased competition and strong economic conditions have meant Group Insurers have had to ... Read moreGroup Insurance has always been a tremendous platform for making insurance more accessible to more people, but increased competition and strong economic conditions have meant Group Insurers have had to re-asses their mantra and it is becoming commonplace for Group Insurers to tailor more innovative insurance solutions to suit the needs of the Trustee's members. While Trustees' insurance needs can differ widely Trustees should consider what types of insurance arrangements they are looking to provide their members. Insurance has increasingly become a significant part of their offer to members. Accordingly, choosing the right insurer is one of the more important decisions they need to make.
Taxation
Most performance surveys for Australian sector funds are presented in gross terms, before fees and particularly before tax. But both fees and taxes are important for most investors in Australia. In this ... Read moreMost performance surveys for Australian sector funds are presented in gross terms, before fees and particularly before tax. But both fees and taxes are important for most investors in Australia. In this paper we estimate the impact of taxes for various classes of investors and at various turnover levels using historical performance of the All Ordinaries Index over the past 10 years to 30 June 2006. We vary turnover levels to get an idea of the sensitivity of after tax returns to different styles of active management, assuming turnover is a key differentiating feature. Not surprisingly we find that the impact of taxation depends on the tax status of the investor, with high tax paying investors needing to pay particular attention to the tax efficiency/turnover of their active equity strategies.
Before 1 July 2007, employment termination payments and payments from superannuation funds were both 'eligible termination payments' which received similar tax concessions to encourage individuals to save ... Read moreBefore 1 July 2007, employment termination payments and payments from superannuation funds were both 'eligible termination payments' which received similar tax concessions to encourage individuals to save for their retirement. Due to the significant tax concessions now available for superannuation benefits (removal of limits on concessionally taxed benefits and tax free benefits for individuals over 60) it is no longer appropriate to treat employment termination payments as retirement payments. This paper explains, using a range of case studies, how the new rules work at a practical level.
All Articles
Many everyday investors do not use options as part of their investment strategy; it is viewed as either too risky or too complex. There are numerous advantages in using options strategically in a portfolio. Read moreMany everyday investors do not use options as part of their investment strategy; it is viewed as either too risky or too complex. There are numerous advantages in using options strategically in a portfolio. Mainly, they can be used to generate an income stream without having to assume higher risk than a typical share-only portfolio. The inherent obligations, risks and limitations of these option strategies are managed up-front, prior to the option contracts being entered into. The strategy discussed in this paper, the Options-Enhanced Portfolio Strategy, could be more widely used by everyday investors - it is a very powerful tool in generating income to enhance the return of share portfolio. Exchange traded options (options) were first listed by the Australian Stock Exchange (ASX) 30 years ago. There are now over 100 listed shares and three indices with options issued over them. Despite this, the use of options is still shunned by everyday investors as being highly risky. More often than not they are viewed as a tool for the professionals rather than what an everyday investor would use. Even when used, they are often used by traders as a tool to "punt" or trade for a small outlay. Options are certainly not often thought of as a tool to generate an income stream from a portfolio of shares.
After more than three years of exceptional returns from Australian equities, financial advisers and the research houses and fund managers that serve them are asking - 'is it time to switch more capital ... Read moreAfter more than three years of exceptional returns from Australian equities, financial advisers and the research houses and fund managers that serve them are asking - 'is it time to switch more capital back to international equities?' Anecdotal evidence suggests this switch is already occurring in the institutional market. Advisers who have seen their bottom line and their client lists boosted by their weighting to Australian shares, may be reluctant to embrace this shift. But some are already rebalancing towards international equities, if only because history says Australian equity performance must revert to the mean at some point. Van Eyk's Sector Overview, International Equity Review, March 2006 highlighted the case for this switch. "Now is a good time to be overweight internationally. The main drivers of Australian equity market return - commodity prices and interest rate expectations - leave home-biased Australian investors overly exposed to the risk of disappointing global growth and falling commodity prices."
Everybody's talking about hedge funds, but a lot of what they're saying doesn't make much sense. Some of the nonsense emanates from within the hedge fund community, where marketing people sometimes make ... Read moreEverybody's talking about hedge funds, but a lot of what they're saying doesn't make much sense. Some of the nonsense emanates from within the hedge fund community, where marketing people sometimes make exaggerated claims about the strategies and managers that they are selling. These exaggerations naturally arouse scepticism among thoughtful listeners, which leads in turn to an opposing set of negative exaggerations. The positive myth says that hedge funds can solve all your investment problems, while the negative myth says that hedge funds are the source of all your investment problems. The challenge is to steer a prudent course between the opposing myths.
The days of investors and planners relying on fund managers' track records to judge their performance are over. Inalytics introduces a new approach to measuring their investment skills. Skill is at the ... Read moreThe days of investors and planners relying on fund managers' track records to judge their performance are over. Inalytics introduces a new approach to measuring their investment skills. Skill is at the heart of all active investment processes, yet identifying it up to now has largely been an art rather than a science. But this is changing. Investment skill is capable of being identified in a quantitative and measurable manner, and although the techniques may be in their relative infancy the results speak for themselves. Pension fund managers and trustees are becoming better informed and more confident in their ability to identify skill and ultimately identify those capable of generating much sought after alpha. In the past the first place investors turned to when trying to identify skill was the track record, but in reality it simply tells us how funds performed and whether they had met their targets or benchmarks. They say next to nothing about the investment process that produced the numbers or the manager's strengths and weaknesses. No wonder track records are notoriously volatile and are now subject to the inevitable risk warnings that they are no guide to the future. They are right, they are no guide to the future.
Your business depends on the trusting relationship you and your staff have with your clients. So when do you know your staff are ready to take a hands-on role with your clients and honour that trust? How ... Read moreYour business depends on the trusting relationship you and your staff have with your clients. So when do you know your staff are ready to take a hands-on role with your clients and honour that trust? How do you make sure new staff can take a 'prospect' to a committed client of your business? Do you have the time, patience and skill to train them yourself ? With the start of 2007, it's time to think about the goals and challenges for the year ahead. One of the key challenges faced by all businesses is the attraction, development and retention of talented people, who will be able to help deliver on the business' vision. For several years, the financial services industry has been experiencing a well, recognised skills shortage - competition for talented staff is high, and consequently remuneration rates for advisers have been steadily increasing.
As a practice manager imagine all your conversations with your planners were positive. No criticism, no negativity, no weaknesses. What if you only focused on what was right, not what was wrong? What would ... Read moreAs a practice manager imagine all your conversations with your planners were positive. No criticism, no negativity, no weaknesses. What if you only focused on what was right, not what was wrong? What would our personal and professional development plans look like? How would our performance appraisal discussions change? Could we help our people reach their full potential? Traditional approaches to development in the financial planning industry have focused on fixing a problem, rather than achieving personal excellence. So how should leadership and people performance programs need to change to correct this imbalance? Following is an exploration study on the practice of positive psychology as a professional development tool; why it can improve high potential planners and, when applied, how it can assist organisations to attract, develop and retain the best financial planners.
Until 11 May 2004 it was possible for all types of superannuation funds to provide defined benefit pensions to members. At the time the definition of a defined benefit pension was any pension except for ... Read moreUntil 11 May 2004 it was possible for all types of superannuation funds to provide defined benefit pensions to members. At the time the definition of a defined benefit pension was any pension except for one determined by reference to life insurance policies and an allocated pension. A defined benefit pension included a lifetime, life expectancy or non-complying flexi pension. The Superannuation Industry (Supervision) Act 1993 (SIS Act) required an actuarial investigation to be made each year as to the ability of the fund to provide the defined benefit pension. In the 2004 Federal Budget the government announced that there were to be no more defined benefit pensions paid from funds with less than 50 defined benefit members from 11 May 2004. After some healthy lobbying by various groups the government introduced a transitional rule which eventually permitted those who were members of funds with less than 50 members as of 11 May 2004 to commence defined benefit pensions up until 31 December 2005. The rules relating to the payment of defined benefit pensions are contained in SIS Regulations 9.04A to 9.04I.
The choice to set up one's own selfmanaged superannuation fund (SMSF) is becoming an increasingly popular one for many Australians in the lead up to the Federal government's reforms to simplify and streamline ... Read moreThe choice to set up one's own selfmanaged superannuation fund (SMSF) is becoming an increasingly popular one for many Australians in the lead up to the Federal government's reforms to simplify and streamline superannuation from 1 July 2007. The major attraction of an SMSF is that the individual members become, as trustees, their own fund manager. Ultimately, they are responsible for both the investment decision-making and the administration of the fund. An SMSF provides its members with many benefits, such as the opportunity to actively decide upon the fund's investment strategy and to select appropriate asset classes.
Clearing houses are not just for corporate super funds, they are also very important for advisers who need super funds to be more efficient. Clearing exchanges would be something you would expect to be ... Read moreClearing houses are not just for corporate super funds, they are also very important for advisers who need super funds to be more efficient. Clearing exchanges would be something you would expect to be as far from the advisers "concern" as north and south pole. Advice concerns with the delivery of high value advice to its customers. Clearing exchanges seek to efficiently exchange high volume transactions between their customers at lightning speed. In most commoditised industries, efficient transaction exchanges underpin the very consumer "confidence" which allows lower volume, higher value advice to thrive.
The substitution of employment income, which has been salary sacrificed into super, with pension income, is a strategy that has received significant attention following the introduction of the transition ... Read moreThe substitution of employment income, which has been salary sacrificed into super, with pension income, is a strategy that has received significant attention following the introduction of the transition to retirement rules. In this article, we explore the strategy in detail, with reference to a case study to illustrate the potential tax implications. The impacts as a result of the Federal Budget are also considered. The transition to retirement rules allow individuals who have reached their preservation age to access their superannuation in the form of a noncommutable income stream. These rules came into effect on 1 July 2005.
One often thinks of challenges and opportunities as opposites, but according to the latest research from AMP Capital Investors and Investment Trends, the growing self-managed super funds (SMSFs) market ... Read moreOne often thinks of challenges and opportunities as opposites, but according to the latest research from AMP Capital Investors and Investment Trends, the growing self-managed super funds (SMSFs) market appear to be offering up both to accountants. Over the past three years, AMP Capital and Investment Trends have undertaken extensive research into the characteristics, motivation and behaviours of SMSF investors and their advisers. March 2007 saw the release of the latest survey, which looked at the role of accountants in the SMSF market. In the year to September 2006, SMSF assets grew 19 per cent to $218.4 billion (APRA), driven largely by the strong performance of equity markets. Of the accountants surveyed, 36 per cent reported an increase in enquiries about SMSFs following the introduction of super choice, in contrast with financial planners, who only reported a 23 per cent increase. While 90 per cent of accountants see the ongoing growth of SMSFs as an opportunity for their business, it was interesting to note how different firms are responding to that opportunity.
Traditionally, financial planning has ignored the client's most basic asset - the family home and associated mortgage. The family home and mortgage debt are the 'elephants in the corner' of the financial ... Read moreTraditionally, financial planning has ignored the client's most basic asset - the family home and associated mortgage. The family home and mortgage debt are the 'elephants in the corner' of the financial plan - a looming, powerful presence that should not be ignored. In my experience of reviewing investment plans, financial planners address the implications of the family home, mortgage debt and other personal debt in less than 50 per cent of cases. Why might this be so? The family home is not income producing, therefore technically it is not an asset. It does not have a benchmark as an "asset class". It does not generate fee income to the adviser. It cannot be modelled on financial planning software. It is too time consuming and difficult to manage - fees would be prohibitive. Clients and advisers are afraid of risk affecting this emotional asset and debt.
Changes announced in last year's Budget have removed some of the complications of pension planning. The Assets Test taper will be halved, increasing the number of people who are eligible for a part-pension ... Read moreChanges announced in last year's Budget have removed some of the complications of pension planning. The Assets Test taper will be halved, increasing the number of people who are eligible for a part-pension, while the partial assets test exemption enjoyed by some income streams (lifetime and life expectancy annuities, term allocated pensions) will cease to be available after 20 September 2007. After these proposals become law, the only major exempt asset will be the family home. This will mean that one of the major pension planning challenges will be accessing wealth in the family home without affecting pension entitlements. The Department of Family and Community Services argues that 'very few [age pension] recipients are directly affected by the Assets Test, which is primarily designed to exclude high wealth individuals with low cash incomes'.1 While largely true, there are instances where retirees are sensitive to the Assets Test, such as where they own valuable non-income producing assets such as a beach house or a second motor-car.
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Australians have always been savvy investors, scrutinising investment options and tailgating the trends. Yesteryear it was large pooled super funds, which then moved to self-managed super funds with products ... Read moreAustralians have always been savvy investors, scrutinising investment options and tailgating the trends. Yesteryear it was large pooled super funds, which then moved to self-managed super funds with products being created to facilitate market demand, streamline the process and exploit market expertise. Today direct share investments are the investors' choice but with the plethora of investment options available which way should the expert investor turn - a managed fund or discretionary account? The SuperRatings survey of balanced funds completed in April shows an average return of 15.9 per cent. This matches similar returns in 2004-05 and 2003-04, yet is much healthier than the dark years of 2001-03 where single digit averages, and some individual fund negative returns, were the norm. The dark years went a long way to alerting the average Australian that superannuation was not a given, but a risk business like anything else. Suddenly Australians were questioning whether large pooled super funds were the only place to keeps one's retirement nest egg and whether other opportunities existed.
Direct property investments are unlisted managed funds investing in properties built for business, such as office, retail, industrial and other specialist sectors like hotels and hospitals. A growing number ... Read moreDirect property investments are unlisted managed funds investing in properties built for business, such as office, retail, industrial and other specialist sectors like hotels and hospitals. A growing number of investors are recognising that the income returns generated by direct property make it a highly desirable investment option. In fact, the direct property sector has grown on average 38 per cent each year over the past 10 years and now totals $17.1 billion under management. A select few are also recognising the capital growth potential of investing in the right real estate sector at the right time. In this paper we explain why direct property has been such a consistent performer. We've also provided a snapshot of the current property sector cycle so you can see which sector is expected to outperform over the coming years.
Financial advisers have a new way to improve after-tax investment performance for higher taxed clients. By using imputation bonds, they can combine the long-established taxation benefits of an insurance ... Read moreFinancial advisers have a new way to improve after-tax investment performance for higher taxed clients. By using imputation bonds, they can combine the long-established taxation benefits of an insurance bond with an innovative, re-engineered investment structure offering 19 investment options. This radically changes the bond's performance capabilities working a bit like a mini-master fund, enabling access to a menu of specific managed funds under a tax-paid investment environment. These include a range of wholesale managed funds offered by Perpetual, UBS, Tyndall, Credit Suisse and Vanguard. The bonds are growth accumulation investments. They do not distribute income - all gains (both income and capital) from the underlying managed funds are automatically reinvested in each of the bond's 19 investment portfolios. This means the pool of investable funds is bigger (due to the personal tax savings) and investment compounding benefits are amplified in each portfolio's tax-paid investment environment.
Employee share ownership plans (ESOPs) provide participating employees with an ownership stake in their company and an opportunity to reap the rewards emanating from that ownership. ESOPs also provide ... Read moreEmployee share ownership plans (ESOPs) provide participating employees with an ownership stake in their company and an opportunity to reap the rewards emanating from that ownership. ESOPs also provide the sponsoring employer with an invaluable source of new investment funding for the business and a highly effective means of repaying geared lending arrangements undertaken by the trustee of the ESOP. Since the end of the 1980s, when the Federal Government legislated to restrict complying superannuation funds to a maximum investment of 5 per cent of the issued shares of the sponsoring employer company, ESOPs have provided the prime opportunity for the sponsoring corporate employer to invest in its own shares. This article examines how qualifying ESOPs can be used as effective remuneration and incentive benefits for employees and also provide valuable corporate finance, estate planning and succession planning opportunities, especially for current shareholders of unlisted, closely held companies.
Many financial advisers associate succession with selling their business and exiting the industry, rather than with building a business that will live beyond its current owners. This lack of planning may ... Read moreMany financial advisers associate succession with selling their business and exiting the industry, rather than with building a business that will live beyond its current owners. This lack of planning may stem from the common misconception that succession simply involves selling your business shortly before you want to retire and then hanging up your boots and leaving. In contrast to this approach, good succession planning is a journey that starts years in advance, potentially enabling you to work less, earn more and increase the value of your business.
It's often said that plumbers have the leakiest taps in the street and cobbler's children have no shoes. Likewise, from my experience, many financial planners have shortcomings in a major issue connected ... Read moreIt's often said that plumbers have the leakiest taps in the street and cobbler's children have no shoes. Likewise, from my experience, many financial planners have shortcomings in a major issue connected with their long-term financial well-being. That issue is succession planning. It's thought about quite a bit and the various options debated hotly. But it's all too often put on the planning backburner. There are many reasons for this, chief of which is most planners are too busy dealing with client issues to worry about themselves. The result is when the time comes for the principal or principals to move on, a less than ideal result is achieved. Succession planning is something that should be undertaken early in the life of a small business. It's a process rather than a single event and any plan should be flexible enough to take account of changing circumstances of the business owner(s) and the business itself (along with legislative and tax changes).
As a segment of the superannuation industry, self-managed superannuation funds (SMSFs) display a wide range of characteristics. Some have investment portfolios with highly diversified arrangements traded ... Read moreAs a segment of the superannuation industry, self-managed superannuation funds (SMSFs) display a wide range of characteristics. Some have investment portfolios with highly diversified arrangements traded on a regular basis. Others invest within a limited range and have investments which stay in the fund for a long while. Provided the fund investments fall within the requirements of the fund's governing rules, the relevant legislation and earn sound returns for members then everyone should be happy. One of the main reasons for having an SMSF is the control and flexibility trustees/ members have over the fund investments. Control allows the trustees to determine the type of investment and the timing of purchases and sales of those investments to maximise returns to members. Another reason for having an SMSF is the ability to buy and sell particular investments directly rather than invest indirectly via a managed fund arrangement. Examples include listed and unlisted shares, fixed interest investments and real estate.
Essentially, the plan remains as previously announced, but the new details do indicate a change of position on some proposals as well as a welcome clarification of other proposals (albeit in some cases ... Read moreEssentially, the plan remains as previously announced, but the new details do indicate a change of position on some proposals as well as a welcome clarification of other proposals (albeit in some cases with an unwelcome result). The announcement is supported by a 31 page document entitled A Plan to Simplify and Streamline Superannuation - Outcomes of Consultation, which is available at www.simplersuper. treasury.gov.au/decision/decision.pdf. The press release from the Treasurer and Assistant Treasurer is available at www.t rea surer.gov. au/t s r/content/ pressreleases/2006/093.asp. Key elements of the package, including abolition of Reasonable Benefits Limits (RBLs) from 1 July 2007, removal of tax on all benefits paid to members aged 60 or more and removal of compulsory cashing requirements, will remain (the latter has already been legislated for the period before 1 July 2007).
The word "challenge" has several connotations. For many investors, the challenge of running a self-managed super fund (SMSF) is one to be relished. The challenge is to beat the professionals at their own ... Read moreThe word "challenge" has several connotations. For many investors, the challenge of running a self-managed super fund (SMSF) is one to be relished. The challenge is to beat the professionals at their own game. In this article, however, we look at the challenges for trustees in managing their SMSF and the difficulties they face when they choose to take control of the investment of their retirement savings. During 2004 and 2005, AMP Capital Investors and Investment Trends undertook extensive research into the characteristics, motivations and behaviours of SMSF investors. The research found that while many SMSF investors are finding it easier to manage their SMSF than they did a year ago, keeping track of rule changes is now the biggest challenge they face.
The Treasurer's 11th Budget was headlined by the announcement that the top two rates of tax are to be cut by 2 cents in the dollar and the tax brackets are to be uplifted. However, there were only minor ... Read moreThe Treasurer's 11th Budget was headlined by the announcement that the top two rates of tax are to be cut by 2 cents in the dollar and the tax brackets are to be uplifted. However, there were only minor changes to the Family Payments system. This means that for families who receive Family Tax Benefit Part A (FTB-A), Family Tax Benefit B (FTB-B) or a Child Care Benefit (CCB), investing is still fraught with planning complications. These family payments have been keenly debated in Parliament, in the newspapers and on the radio. In fact, the House of Representatives' Families Committee is currently holding an inquiry on the impact of tax in balancing work and family. This inquiry's focus is on the issues of "Welfare to Work" and the incentives for women to return to the workforce. But what is often overlooked is that the design of these payments means that many families who invest also face very high effective marginal tax rates (EMTRs) on their investment income.
Australia's generation X and Y are now getting married and having children later compared to their parents' generation. From 1975 to 1980 the average age for mothers having their first child was 24.55 ... Read moreAustralia's generation X and Y are now getting married and having children later compared to their parents' generation. From 1975 to 1980 the average age for mothers having their first child was 24.55 years of age. From 2000 to 2005 the average age was 30.02 years. Birth rates for Australia during these periods have also increased by 10 per cent to 250,485 per annum. These figures indicate that Australians are still having children but are just leaving it later in life to start a family. This means that in theory today's families should have more time to save money to start a family compared to their parents. Many young Australian couples are concerned about whether they can afford to have children let alone two or even three children, given their level of debt including a home mortgage, personal and credit card debts. They are also concerned about their cash flow position moving from a dual income family to only one income, and how long one parent can take time out of the workforce to spend with their child while retaining a comfortable lifestyle. It's important that individuals understand what government support is available to assist with the extra costs associated with having children.
What are "anti-detriment benefits"? On the death of a superannuation fund member, certain death benefit recipients may be eligible to receive a top-up amount on their share of the benefit amount of account ... Read moreWhat are "anti-detriment benefits"? On the death of a superannuation fund member, certain death benefit recipients may be eligible to receive a top-up amount on their share of the benefit amount of account balance and any insurance. This is, effectively, a contribution tax refund, and is referred to as an "anti-detriment payment". However, not all super funds pay antidetriment benefits. Superannuation funds have only had to pay tax on deductible contributions from July 1988. The then Labor Government had become concerned that the revenue flowing from ETP tax was not meeting its expectations, following the introduction of that tax from 1 July 1983, and brought forward 15 per cent of it. This 15 per cent is the tax we are familiar with, on these contributions and on fund investment earnings.
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This paper addresses some of the key issues and benefits of altern at ive investments from SELECT's perspective. We hope that it will assist advisers and investors in better understanding alternative investments ... Read moreThis paper addresses some of the key issues and benefits of altern at ive investments from SELECT's perspective. We hope that it will assist advisers and investors in better understanding alternative investments and, importantly, how to incorporate them into a portfolio. The following topics are addressed: What are alternative investments? Alternative strategies defined. Alternative assets defined. Why consider alternative investments? What returns and risks are involved with alternative investments? Constraints in accessing alternative investments. Listed versus unlisted alternative investments. Is there an optimal allocation to alternative investments? Combining alternative investments with mainstream investments. Conclusions. What are alternative investments? Alternative investments encompass a wide variety of generally less accessible investment opportunities outside the more "mainstream" equities, fixed interest and property areas. However, there is no precise definition as to what is 'alternative' (or what is 'mainstream'). In addition, the definition changes over time (as some alternative sectors become accepted as mainstream) and also may change from one country to another. For example, in some markets real estate is seen as an alternative investment whereas in Australia it is generally seen as mainstream.
What is a CFD? A contract for difference, also commonly known as a CFD, is defined as an agreement between two parties to exchange the difference between the opening value and the closing value of a contract ... Read moreWhat is a CFD? A contract for difference, also commonly known as a CFD, is defined as an agreement between two parties to exchange the difference between the opening value and the closing value of a contract, with reference to the underlying security or financial instrument.CFDs are traded over the counter (OTC), where one of the two parties is typically a broker. Simply put, a CFD is an equity derivative that allows investors to gain exposure to share price movements without the need for ownership of the underlying shares. CFDs efficiently allow inve stors to take long or short positions, where the investor provides a cash deposit (known as margin) as collateral rather than the payment of the full value of the underlying position.Trades are conducted on a margin basis, which means the investor does not pay the full purchase price of the share. Unlike other equity derivatives, CFDs do not have an expiry date. So as long as the investor's account can support any variation in margin and interest incurred, a CFD position can be held indefinitely.
I was standing in a corner store queue in South Africa during a recent trip to see my family. While I was waiting my turn to pay, a sign hanging above the checkout caught my eye: "It is with great sadness ... Read moreI was standing in a corner store queue in South Africa during a recent trip to see my family. While I was waiting my turn to pay, a sign hanging above the checkout caught my eye: "It is with great sadness and re gret that we inform you of the passing of Mr Credit, who died recently from acute bad debt". No shopper was going to leave that store without paying in full! Gone are the days when one could actually get a shopkeeper to "write it in the book" or "put it on the tab" until the next pay day.Running a tab at the pub is about the longest you can get that type of credit these days and you will have to hand over your credit card as security. Credit cards, home equity loans and overdraft facilities have really taken over as modern society's "tab". The main difference between getting credit from the friendly shopkeeper and from Visa is this: the user pays. Herein lies one of two key points from the story about Mr Credit that I'd like to elaborate on: credit has a price and that price varies with the credit worthiness of the borrower. In this paper we will take a look at the various new aspects of credit and analyse credit risk in the contemporary context.
Financial planning in its broadest terms is now in the spotlight as it draws interest from a wide range of groups, including consumers, regulators, government, the financial services industry, accountants ... Read moreFinancial planning in its broadest terms is now in the spotlight as it draws interest from a wide range of groups, including consumers, regulators, government, the financial services industry, accountants and most importantly educators. The emergence of specialist degrees in financial planning at both undergraduate and postgraduate level is a compelling indicator that academic institutions are now beginning to recognise financial planning as a distinct discipline.This is further evidenced by the fact that the Financial Planning Association (FPA) is effectively lifting the bar for education by requiring a Certified Financial Planner to be degree qualified by 2007. In other words, an undergraduate degree in financial planning will be the preferred and most direct pathway for entry to the CFP professional education program. Attaining the CFP designation will then depend upon completion of this educational program as well as satisfying a certification assessment examination, fulfilling relevant experience requirements and adhering to an industry code of ethics. This article provides a point of re f e rence for the future with the purpose of providing an easily accessible summary of university financial planning programs currently available. Data for this article was collected via the ASIC Training Register, web searches and telephone inquiries with re l evant organisations. It will meet the objective of assisting prospective university students and dealers in selecting the most appropriate university program.
One of the policy objectives of the financial services licensing regime is to ensure the competency of the licensee and its representatives to provide the financial services authorised under an Australian ... Read moreOne of the policy objectives of the financial services licensing regime is to ensure the competency of the licensee and its representatives to provide the financial services authorised under an Australian Financial Services License (AFSL). This objective is reflected in two core statutory obligations of a financial services licensee: to maintain the competence to provide the financial services covered by its license, and to ensure that its representatives are adequately trained and competent to provide those services. Representatives include the employees of the licensee, as well as other persons providing financial services on behalf of the licensee, such as an authorised representative.
In 2004 MLC organised a study tour in the US for Australian financial advisers to experience the challenges and opportunities facing financial planning communities in the financial services capital of ... Read moreIn 2004 MLC organised a study tour in the US for Australian financial advisers to experience the challenges and opportunities facing financial planning communities in the financial services capital of the world. One of the main themes that emerged during this study tour was the difficulty many advisers face when they want to transform their business from a $1 million business (gross revenue) to a $3 million business over a three to five year time frame. There seems to be a natural ceiling for businesses that have successfully achieved $1 million in revenue per annum. Many find that once they have reached this milestone their growth plateaus and they are only able to achieve incremental growth at best. Could it be that the very factors that allowed the business to reach this level are the ones that are now holding it back?
The law expects particular requirements to be met when an adviser is providing personal advice to clients.To summarise, when providing personal advice a financial adviser must follow five basic principles ... Read moreThe law expects particular requirements to be met when an adviser is providing personal advice to clients.To summarise, when providing personal advice a financial adviser must follow five basic principles (Section 945A and 945B of the Corporations Act 2001) : Determine the relevant personal circumstances. Make reasonable enquiries. Consider and investigate the information. Provide appropriate advice. Warn the client if the advice is based on incomplete or inaccurate information. To provide the advice, or as a means of recording the advice, the adviser then must prepare a statement of advice (SoA) document. An alternative statement of additional advice (SoAA) document may be produced in some situations where an SoA has already been provided. Also, in certain circumstances, when neither of these documents are required, the advice can simply be recorded and maintained in the adviser's client file, with certain disclosures being provided to the client. Over the last couple of years the disclosure requirements when providing personal advice have fundamentally changed. Now that the dust has settled somewhat, this paper reviews the options an adviser has for preparing advice documents for clients.
While most practices may not have a written succession plan, many principals would have an idea about how they plan to sell their business. These theories or myths often end up in a disappointing outcome ... Read moreWhile most practices may not have a written succession plan, many principals would have an idea about how they plan to sell their business. These theories or myths often end up in a disappointing outcome with the reality being very different to the hopes. Myth one: the next generation is ready to take over There are many examples of the son or daughter taking over the family business. When it works it can work well but some principals who pinned their hopes on the next generation have come unstuck. In these cases, the next generation did not have the desire to run the business or the money to pay what it was worth. Suddenly the retirement plan of the principal is in tatters. The average sale price for a purchase by a family member is generally lower as there is often no goodwill factored into the sale. The upside is that the deal can generally be done quickly and there is scope to continue working part-time if you wish. There are many examples of the simple sale becoming a testing experience for all parties once money is involved. This paper takes a look at many more of the myths of succession planning.
Over the past two decades a handful of issues have emerged in Australia which affect the retirement system: An ageing Australia. Inadequate super savings. Steady rises in living expenses for retirees. Read moreOver the past two decades a handful of issues have emerged in Australia which affect the retirement system: An ageing Australia. Inadequate super savings. Steady rises in living expenses for retirees. Labour market skills shortages. These issues have placed new demands and pressures on financial advisers in developing sound retirement plans for clients. The Government has recently introduced policies and legislation aimed at helping Australians increase their superannuation savings as well as assisting employers to retain the skills of older workers. For financial advisers, the legislative changes present significant opportunities to create new retirement plans by combining strategies. This article explores ideas on how financial advisers can combine the Government's "transition to retirement" rules with the superannuation contribution splitting legislation.
For clients contemplating establishing a selfmanaged superannuation fund (SMSF) one of the key considerations will be whether the trustee should be a company or two or more individuals. We estimate that ... Read moreFor clients contemplating establishing a selfmanaged superannuation fund (SMSF) one of the key considerations will be whether the trustee should be a company or two or more individuals. We estimate that around 60 per cent of SMSFs have individual trusteeship and 40 per cent have corporate trusteeship. There are pros and cons of each arrangement. Some SMSF specialists fervently promote corporate trusteeship while others unflinchingly support individual trusteeship. However, the picture is not necessarily so black and white. Certainly recent reports have suggested that the Australian Taxation Office's (ATO) interpretation of the legal requirements where individuals are trustees might tilt the balance heavily in favour of corporate trusteeship. In order to weigh up the pros and cons of each approach,a range of issues need to be considered including: Does an individual trustee fund need to be a pension-providing fund? What are the administrative burdens of changing trustees? The impact of changing trustees on fund control. The costs associated with corporate trusteeship. Trusteeship and personal liability. FSR requirements. Members who are minors.
There were significant changes to aged care planning that came into effect last year. We look at the opportunities they create. Accommodation bond balances for accommodation bonds paid on entry to low ... Read moreThere were significant changes to aged care planning that came into effect last year. We look at the opportunities they create. Accommodation bond balances for accommodation bonds paid on entry to low level care (hostels) and extra service places in high level care (nursing homes) are now exempted from the assets test.Along with these changes, the way the principal home is assessed under the assets test has changed. Those entering low level care and extra service places may not need to sell their homes to fund this care. Instead, they can use their existing assets, rent from their homes, the proceeds from a reverse mortgage or a combination of all three to pay for residential aged care.
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There are numerous income support payments and allowances payable by the Department of Veterans' Affairs (DVA), each with their own set of qualification rules and thresholds.The article provides a snapshot ... Read moreThere are numerous income support payments and allowances payable by the Department of Veterans' Affairs (DVA), each with their own set of qualification rules and thresholds.The article provides a snapshot of the more common income support payments paid by DVA. The income support payments covered in the article are: Service pensions These are means tested pensions paid to eligible veterans on the grounds of age or invalidity. They may also be paid to eligible partners including widows and widowers. Disability pensions Disability pensions are paid to individuals who have injuries or diseases caused or aggravated by war or defence service on behalf of Australia. They are not means tested and are non taxable pensions. The pension rate is generally based upon the level of incapacity suffered. War widow's/widower's pension This pension is paid to compensate widows and widowers of veterans who have died as a result of war service or eligible defence service. It is not a means tested pension and is non-taxable. Income support supplement (ISS) The ISS is an additional payment payable to eligible war widows and widowers with limited means. The payment is income and assets tested, though the thresholds are different to the service and Centrelink aged pension. The article also includes a table outlining the rate payable for the various payments, the income and assets test applicable and their treatment for tax purposes.
A term allocated pension has its own set of complexities. An understanding of how a TAP works, the implications on social security and RBLs and the strategies that can be applied may mean the TAP could ... Read moreA term allocated pension has its own set of complexities. An understanding of how a TAP works, the implications on social security and RBLs and the strategies that can be applied may mean the TAP could have a core place in a client's retirement income stream portfolio. The rules for selecting the term of a TAP provide some flexibility to choose time frames beyond a client's statistical life expectancy. This is of great consequence as the term selected also impacts the dollar amount of regular payments that must be paid in a year. It is essential to understand the investment behaviour of the TAP portfolio. Given that the TAP facility is designed to provide access to investment markets, a TAP generally contains a broad range of market-linked options.The capital gains or losses from underlying investment options impact the account balance, bur more importantly the impact is then manifest in the regular income payments. Reaching the right asset mix is therefore vital and standard portfolio construction techniques, such as the cash reserving strategy,may be a useful option. Clients with existing allocated pensions may benefit by rolling funds into a TAP due to the TAP's social security compliant status. The amount to convert will require a calculation of the client's situation and impact on Centrelink payments. Using a TAP to access social security may not be a blanket strategy for every client, especially due to commutation restrictions, however for those clients that are close to the asset test threshold some social security support may be preferable.
Without precedents to follow, the implementation of FSR has been driven by legal interpretations of the legislation.There is a need for a more practical approach to the production of Statements of Advice ... Read moreWithout precedents to follow, the implementation of FSR has been driven by legal interpretations of the legislation.There is a need for a more practical approach to the production of Statements of Advice (SoA) when providing to clients recommendations that are "hold" or have no material impact. No adviser who truly cares about clients would argue against the intent of FSR. However, for advisers with an ongoing advice offer following the letter of the law places significant strain on client relationships as well as resources. In practice, it could result in an extra 40 plus letters per day to clients (10,000 per annum) and the potential for a client to receive a letter every week. In ipac's view, it is questionable that clients value or appreciate receiving additional correspondence that merely confirms the 'hold' advice or advice that is about small amounts, possibly receiving this letter many times during the year. This is particularly the case when any transaction will be confirmed direct to the client within the month by the fund manager. Submissions have already been made to ASIC by industry participants requesting a more flexible approach to documenting advice for clients.To contribute to this discussion, ipac has suggested a framework for providing an SoA that could be considered in any review of the implementation of FSR. The framework would mean advisers were not required to provide a further SoA where a 'hold' recommendation constitutes the reiteration of an existing strategy. Further, the concept of "materiality" could be introduced to determine if an SoA should be produced for relatively minor transactions where the client has an ongoing relationship. In addition, ipac has developed a technology solution to automate the production of SoAs. This solution, known as iDesk, is currently being piloted and is expected to deliver efficiency gains while maintaining the quality and personalisation of advice.
Examining the business of self managed superannuation funds (SMSFs) investing in Property from which the members can run their business. Over the last couple of years, one of the issues giving rise to ... Read moreExamining the business of self managed superannuation funds (SMSFs) investing in Property from which the members can run their business. Over the last couple of years, one of the issues giving rise to technical queries for advisers with SMSF clients was the transfer of business premises into their client's fund from a related party under a sale and lease back arrangement. Not only was there a substantial appetite for property from an investment perspective, there are also considerable tax and estate planning benefits to be gained from sheltering business assets in the superannuation environment. However, advisers need to be mindful of some of the regulatory impediments which need to be considered. This paper outlines the benefits that trustees of SMSFs can avail themselves of by pursuing such a strategy, as well as some of the regulatory challenges (together with suggestions for circumventing these impediments). Also considered in this paper are the options for trustees for whom this sort of strategy is appealing but which may not have accumulated sufficient funds to permit the fund to acquire the asset outright.
With the introduction of term allocated pensions (TAPs), introduced in September 2004, the strategy of converting existing retirees' allocated pension arrangements into a combination of TAPs and allocated ... Read moreWith the introduction of term allocated pensions (TAPs), introduced in September 2004, the strategy of converting existing retirees' allocated pension arrangements into a combination of TAPs and allocated pensions is becoming increasingly common where social security or RBL implications suggest this would be favourable. This article explores various strategies available in rearranging your clients' current allocated pension arrangements with much of the focus being on the long-term planning implications, as well as the impact on current year income. The article will also examine latest rules on how much income must be paid out of any pension being commuted and any new pension. These rules can have current year income tax and age pension ramifications. While it is important to be aware of current year income issues and the strategies to address them, typically pension rearrangement strategies are pursued with significant long-term benefits in mind.The article discusses various strategies, but also reminds you to keep one eye on the longterm goals of any plan.
This paper explores the planning issues and resulting opportunities from the superannuation rule changes effective 1 July 2004, including the following: No work test for under age 65 contributors All people ... Read moreThis paper explores the planning issues and resulting opportunities from the superannuation rule changes effective 1 July 2004, including the following: No work test for under age 65 contributors All people aged under 65 are now free to make super contributions following the removal of the "within last two years" work test - providing increased contribution (and potential tax deduction) opportunities for many Australians. New flexible contribution work test for people aged 65-74 A new "40 hours within 30 days" test replacing the "10 hours every week test" may provide increased contribution eligibility for many individuals in this group, since working 10 hours each week is no longer mandatory. New flexible retention work test for people aged 65-74 seeking to retain benefits in super A new rule (replacing each week work test) allows people that had been gainfully employed for at least 240 hours in the previous year to keep their benefits in super until the end of the current year, providing greater ability to accumulate benefits longer without being forced out of the super system, as was previously the case. Analysis, implications and strategies The two new work tests are differentiated, legislative anomalies are examined and strategies are offered to increase the benefits, now that super's tax effective structure is more accessible.
This article looks at the window of opportunity for self managed superannuation funds (SMSFs) to commence the payment of a defined benefit pension on or before 30 June 2005. Superannuation law was amended ... Read moreThis article looks at the window of opportunity for self managed superannuation funds (SMSFs) to commence the payment of a defined benefit pension on or before 30 June 2005. Superannuation law was amended in the May 2004 Federal Budget to stop small funds such as SMSFs from paying defined benefit pensions. Legislation was then amended in June 2004 to allow existing members of self managed funds to pay a defined benefit pension prior to 30 June 2005 providing that they had reached 55 and retired (or indeed turned 65) before that date. At the time of writing, the Government is in the middle of a review. A possible consequence of this review is that SMSFs will either be restricted or prohibited from paying a defined benefit pension after 1 July 2005. Should clients of yours commence a defined benefit prior to 1 July 2005? Or indeed are there other solutions that would be better at meeting the client's needs. Many high net worth clients will be well advised to set up a lifetime pension (either complying or commutable) in order to meet their needs in a very tax effective way. Furthermore, some may also consider other defined benefit pensions such as a fixed term pension. Careful consideration of the client's needs together with good modelling will provide clients with the optimal solution. This article provides two detailed case studies to help clarify in a practical way the issues and variables that you may encounter when dealing with clients under different circumstances.
The recent Federal Budget 2005 has given the superannuation and retirement income industry a significant boost with proposed tax cuts, abolition of the superannuation surcharge and superannuation split ... Read moreThe recent Federal Budget 2005 has given the superannuation and retirement income industry a significant boost with proposed tax cuts, abolition of the superannuation surcharge and superannuation split between spouses. The intended beneficiaries are, of course, individuals particularly the baby boomers and their spouses, many of whom are struggling to contribute sufficient amounts today to allow them to save enough in the superannuation system to buy a reasonable lifestyle at retirement. The tax cuts will increase the disposable income of all taxpayers, some of which will hopefully be channeled towards their retirement funding as opposed to being fully consumed with nothing to show at the end of the day. It provides a break for many Australians to catch up on their contributions that never quite made it to their superannuation accounts during the last few years. With more incentives now than ever for ordinary Australians to make contributions to superannuation and subsequently to draw a retirement income stream, it is essential to pause for a moment to consider the impact of the new changes on superannuation and retirement income streams. In order to achieve the best planning outcome, all new and old strategies must be considered and be put to work together in harmony to achieve the objectives of the client. Failing to consider all relevant strategies and the interaction between them may result in us not meeting fully our clients' objectives - to get the best outcome, certainly we must resort to all known strategies - new, old or otherwise forgotten ones.
This paper focuses on how bond investments can assist financial planners meet all their clients' objectives by incorporating bonds into their client's financial planning strategies. Bonds offer investors ... Read moreThis paper focuses on how bond investments can assist financial planners meet all their clients' objectives by incorporating bonds into their client's financial planning strategies. Bonds offer investors a tax paid investment vehicle which is taxed within the fund at a maximum rate of 30 per cent.During the investment period no earning and capital growth is assessed against the investor's assessable income. Where the investor has held the investment for a full 10 year term without any additional contributions greater than 125 per cent of the previous year's investment, the withdrawal will be tax free. If the bond is redeemed within 10 years some or all of the investment will be taxable to the investor but they will also receive a rebate of tax.The rebate will be 30 per cent on the assessable amount. The other benefits discussed regarding bond investments are: Protections from creditors in bankruptcy as the bond is considered an insurance policy under bankruptcy legislation. Alternative tax effective wealth accumulation strategy besides superannuation and there are no accessibility restrictions. Child savings accounts which can be tax effective and also allow the original investor to place age restrictions on the accessibility of funds by the child. Keeping assets outside estate. Bonds can be owned jointly or have an elected beneficiary which retains the assets outside the estate, which reduces the risk of family maintenance proceedings. Accumulate estate and surplus cash flow as an investment held for the estate or for a specific beneficiary.
In July 2004 the Australian Taxation Office (ATO) issued draft determination TD2004/ D22.This draft determination presented a view that tax advice given in a non-representational capacity,which was incidental ... Read moreIn July 2004 the Australian Taxation Office (ATO) issued draft determination TD2004/ D22.This draft determination presented a view that tax advice given in a non-representational capacity,which was incidental to another service or advice, would not be in breach S251L of the Income Tax Assessment Act 1936 (ITAA36).On 18 May 2005 the ATO released TD2005-16 which confirmed the views expressed in draft determination TD2004/D22. The purpose of this paper is to examine the implications of this determination, in particular in consideration of S251L(1)(b). The paper addresses the issue of the provision of tax advice, in respect of the tax legislation and not from the perspective of the Corporations Act 2001. The determination, TD2005-16, will allow financial advisers to give incidental tax advice. There are significant differences between the educational requirements of registered tax agents and financial advisers, with respect to tax law. This presents two issues: the quality of the advice; and the issue of what constitutes incidental advice. Here,we look at the various situations providers of advice may find themselves in which may be affected by this determination, as well as some of the areas we see as being intrinsically problematic. It is our contention that the ATO, and not ASIC, has the necessary expertise to ensure the quality of tax advice.
Understanding the various provisions for life insurance and death benefits under the tax act can minimise a Self Managed Super-annuation Fund's (SMSF) taxable income, maximise payments and ensure the correct ... Read moreUnderstanding the various provisions for life insurance and death benefits under the tax act can minimise a Self Managed Super-annuation Fund's (SMSF) taxable income, maximise payments and ensure the correct reporting and taxing of death benefits. This article explains the interaction of the four sections of the tax act that will allow a superannuation fund to claim a deduction for the provision of life insurance and death benefits and the impact this has on the final benefit. An overview of superannuation deductions and associated tax issues will be explored, including an assessment of sections within the tax act that SMSF trustees can benefit from with regard to the provision of superannuation death benefits and life insurance. The article also constructs a detailed case study to explain, in practical detail, how the four sections of the tax act relate including the various circumstances when claiming for a life insurance and death benefit deduction. Specific reference is made to the legislative requirements and how to construct a plan which meets these and addresses all the issues at hand. Understanding the operation of these provisions, the opportunities and strategies available to the planner, can make all the difference when it comes to minimising the fund's taxable income, maximising payments and ensuring the correct reporting and taxing of death benefits.
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