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
