Friday, December 16, 2011

News Update

As another year draws to a close, we thought it might be useful to sign off for 2011 with a summary of some key announcements that we can all look forward to in 2012, or not, as the case may be.
The Legislative Amendment Bill to increase Superannuation Guarantee (SG) contributions passed the lower house on 23rd November.  
This bill also abolished the upper age limit (currently age 70) applying to SG obligations on employers.  The increases to the SG rate are as follows:
  • 1 July 2013 to 30 June 2014  9.25%
  • 1 July 2014 to 30 June 2015  9.50%
  • Then an increase of 0.50% each financial year
  • From 1 July 2019  12.0%
The current 25% pension drawdown relief for minimum payments from account-based, allocated and market-linked (term allocated) pensions will continue for the 2012/13 financial year.
The superannuation concessional contribution limit of $50,000 for people aged 50 and over will be halved to $25,000 for 2012/13 under current legislation, though the Government is considering legislative change to retain the current (2011/12) $50,000 limit.  Under 50's will continue with the current $25,000 limit for concessional contributions and this won't be indexed until 2014/15 when it is expected to rise to $30,000.

The maximum government co-contribution will be halved to $500 from 1 July 2012.  People with incomes up to $31,920 will be eligible for the maximum with the amount phasing down for incomes up to $46,920.

The tax concessions available on employment termination payments (ETP), as well as the ability to direct all or part of the payment to a superannuation fund under transitional arrangements, will cease on 30 June 2012.   From 1 July 2012, all ETP's will be taxed at the standard rate with no ability to direct these amounts to superannuation.

The Australian Tax Office (ATO) has recently released a draft ruling (SMSFR 2011/D1) defining key concepts that relate to self managed super funds borrowing to invest. This draft ruling clarifies the meaning of a 'single acquirable asset' and confirms that borrowing can be used for repairs and maintenance on the acquired asset but cannot be used to pay for improvements.

Revised impairment tables have been introduced from 1 January 2012 for the assessment of new claims for the Disability Support Pension (DSP) and for current DSP recipients undergoing a medical review.  As a result of this change, it will be potentially more difficult to gain or retain a DSP from 1 January 2012.financial advice
So that's it from us for 2011 and we'll see you back here early next year.  From everyone here at The Trusted Adviser, we wish you the most wonderful Christmas and prosperous 2012! 

Thursday, December 8, 2011

Superannuation is NOT an investment!

If we had a Twitter ‘follower’ for every time someone said "super is a bad investment" we'd be as popular as Ashton Kutcher. Seriously, it's frustrating to hear this line at the BBQ's, in the cab and over the Christmas turkey because super is not an investment and none of these social opportunities give us enough time to set the record straight.

Super is a structure, a vehicle within which you can invest, and there are many compelling reasons to do so.

So why are so many Australians disengaged from their super?  Perhaps it's a symptom of the super rules being so complex (this is a common reason), or perhaps it's a feeling of "no control"? I think we'd have to be honest here and throw apathy in the mix and the very unfortunate and too familiar attitude of "I can't have it now - so I’ll worry about it later".

Let's see if we can redirect your thinking.

Whilst super on its own won’t drive your investment returns, it definitely has the potential to improve them.  Your returns will be driven by the investments you choose, more specifically the asset classes you invest in like cash, property or shares.  Fees and taxes also matter and we will be talking more about these in future blog posts.

So superannuation is a structure, just like a Company or a trust is a structure, and each of these structures have their own rules and offer different tax outcomes.

Take Barry for example, his marginal tax rate is 38.5% (incl. medicare levy). He has $10,000 pre-tax income available for investment and he wants to invest defensively, targeting 6%pa.  He can choose to do this inside or outside of super.

If he pays tax first and invests outside of super in his own name, he has $6,150 to invest on day 1.  However if he salary sacrifices the $10,000 into superannuation, he has $8,500 to invest from day 1.  Remember, he is investing in the same assets – targeting 6%pa.  This means his super asset gets a head-start of more than 38% over his non-super asset and this advantage compounds over time.

Just last month, the current Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten MP, addressed Financial Planning Professionals in Brisbane and discussed the impact of compulsory super savings in Australia.  He said

 “Superannuation savings in Australia are in excess of 1.3 trillion dollars, the size of our Gross Domestic Product.  If the American economy had made the same decisions that we made, they would have had 12-13 trillion dollars in savings! The most recent turmoil in North America, I suggest to you, would have been far less drastic, their economic recovery far quicker, the problems they’ve had far more shallow, if they had that pool of national savings.”

We Australians are so fortunate.

These are compelling arguments and when you couple this with our Government about to step-up the compulsory contribution level from 9%pa to 12%a, we must invite all Australians to re-connect with their super.  IT IS our future.

Image: Salvatore Vuono / FreeDigitalPhotos.net

Sunday, November 27, 2011

I forgot my parachute!

"That is amazing" .... "I just can't believe this" ....

The tears in his eyes welled up but I could see he was trying hard to not let them start rolling down his face.  This was a 40-something man in my office and his real-life story goes like this:
I took an appointment that sounded like it was going to be fairly standard. A man calls the office concerned about his financial position and he wants to talk.  The appointment rolls around and we chatted for about 15 minutes during which he tells me that he and his wife and are under some financial pressure.  His wife may need to go back to work and the prospect was making him very unhappy.


I asked him why he was unhappy about his wife returning to work.  He tells me that three years ago she was diagnosed with non-Hodgkin's lymphoma, the treatment has been hell and it was amazing she survived and came through it at all.
He goes on to explain that he probably feels this way because he was so close to losing her and since then they have been living beyond their means - taking lots of holidays, saying yes to the kids more than they should and they are now feeling pressure to pay down the mortgage and start saving for their retirement.
As he continues telling me about his wife's traumatic treatment plan and recovery, I am flicking through their insurance documents.  He owns a trauma policy on his wife which covers, amonst other things, a range of cancers, heart attack and stroke.  Non-Hodgkin's lymphoma is a cancer of the lymphatic system.  There was $110,000 worth of cover, just sitting there, waiting to be claimed to help them manage the costs of treatment and recovery.

I said to him "you know you have this trauma policy - why haven't you claimed on it?"  After a brief pause, he quietly says "to be honest, I didn't even think about it".  I contact the insurer, process the claim and within four weeks I am handing them the cheque for $110,000.  And yes, I'm pleased to report that they have made the most of it - significantly paying down their mortgage and leaving enough to make some great family memories on their next "guilt-free" holiday.

This story has a happy ending but of course this isn't always the case.  Not everyone recovers and not everyone seeks the financial safety of insurance. Given the likelihood of being diagnosed with cancer (some statistics below), let alone any other major medical trauma, take this as a timely reminder to think about your own real-life story.


The Trusted Adviser.
 



Lifetime Risk
Cancer Type
45 year old Male
45 year old Female
All Cancers
1 in 3
1 in 4
Breast Cancer
-
1 in 11
Prostate Cancer
1 in 11
-
Colorectal Cancer
1 in 17
1 in 26
Melanoma
1 in 25
1 in 35
Lung Cancer
1 in 22
1 in 45
Non-Hodgkins Lymphoma
1 in 66
1 in 88
Cancer of the Uterus
-
1 in 75
Cancer of the Kidney
1 in 76
1 in 143

Statistical data provided by IRESS: Risk Researcher 2011

Image: Michelle Meiklejohn / FreeDigitalPhotos.net

Wednesday, November 23, 2011

Trick or Treat?


Did you have children knocking on your door for Halloween on October 31st?   It seems to have become quite popular in our neighbourhood over the last few years and again this year we had a few groups of kids knocking on our door, bags at the ready.  I never say "Trick" because I don't fancy washing eggs off the front windows of my house.  So we had our stock of treats in preparation for the hungry hordes and by treats I mean chocolate and lollies, not a piece of fruit, fresh or dried thankyou very much.  I understand the whole "healthy snack" principle but if I am a kid, I'm not getting all dressed up and running around looking for fruit!

Anyway, in the spirit of Halloween, The Trusted Adviser will make a habit each year around October 31st of asking a "Trick or Treat" question about investing.  

This year, we are going to talk about a certain type of "property educator" that promotes investing in property, often, but not always, through "wealth-creation seminars".  I will kick off by quoting directly from one of these "investment mentors":

"Our earnings come through property developers.  This means we can offer our advice and support free to clients.  We are not here to "sell you a property" - we are here to help you build a property portfolio and achieve financial independence."
OK, so how much do they receive from property developers for finding you "the best investment property": 4% - 6% of the property sale price.  That doesn't sound like "advice and support free to clients" does it. You don't have to be Einstein to work out that this is all about selling a property and it is being dressed up as financial advice ....... and it certainly isn't free!  

These property investment gurus sell these development properties for a commission and their sales angle is emphasize the tax benefits.  Principally, they show the "magic" of claiming depreciation allowances to reduce your personal income tax bill.

My advice to you if ever you find yourself getting the hard sell from one of these "property educators" - remember these three things:


  1. More than half of the purchase price of these development properties can be attributed to the building and yet we know that the building depreciates.  When buying investment property, you want to be putting most of your money into the land component because it is the land on which the house is built that goes up in value over time.
  2. The building depreciation allowance that is being used to promote these properties is deducted from the purchase cost (i.e. cost base) when it comes time to sell, resulting in a higher capital gains tax assessment.
  3. When the tax benefits of an investment are being heavily promoted, think twice about the quality of the investment.
So next time you are invited to a seminar selling development property and you are offered advice for "free", I would suggest that you give it a miss or at least take some eggs with you!  

financial advice
Image:  A Jack o' Lantern made for the Holywell Manor Halloween celebrations in 2003.  Photograph by Toby Ord on 31 October 2003.

Sunday, November 6, 2011

Word of the year?

If I asked you to name the top word for each of the last five years, what would you say?  I’m guessing that you are thinking along the lines of Global Financial Crisis (GFC), or perhaps the gravity-defying rise and rise of Apple (contrary to Newton's law), or even the Social media phenomenon.  If this is where your mind was taking you, then you would be right – at least according to the American Dialect Society (ADS).

For the record, the ADS chose the following over the last four years:

2007:  Sub-prime
2008:  Bailout
2009:  Tweet
2010:  APP  (and surely an honourable mention must go to “Vuvuzela”)

My guess for a front-runner in 2011:  Austerity

In essence, “austerity” means lower spending and at the moment, its utterance is so closely connected with the word “Greece” that the two could almost be hyphenated.  But the Greeks don’t have this urge to over-spend all to themselves do they.  And I’m not just talking about other governments.  It has become part of the human condition.  And at the very heart of the problem – spending on credit!  Which brings me to my point.

Cash is King and managing your cash-flow is paramount to financial success.

If you want to make smart choices with your money, then you need a cash-flow plan just as all successful businesses do.  You need to know what's coming in, what's going out and have a plan for the surplus. If you don't have a surplus, more work needs to be done on the first step to ensure you don't live beyond your means.

People that need credit cards, do so because of poor money management - they've had something unexpected come up and don't have emergency funds, or they are constantly spending more than they have available and keep thinking they'll clear it next month!

Or the marketing con of frequent flyer points has won them over – paying a surcharge of 1-3% (or even 10% in the case of taxi fares) for the privilege of using credit. There is your free flight each year, if you weren't using credit.  And then there are the higher annual credit card fees if attached to a frequent flyer program.  We know, because we see it all the time.  People managing cash-flow on credit cards spend more than they planned to each month and end up paying more than it would have cost for the trips that they are earning for "free".  It’s a false sense of benefit!

The convenience argument is now gone, as debit cards provide the same convenience and you are spending your own money.

The emotional impact is known – you will always think a little longer if you are paying in cash, versus whacking it on the credit card.

Avoid your own taste of “austerity” by making a smart financial decision – develop a cash-flow plan that works without credit.financial advice

Monday, October 24, 2011

Who would you trust your husband or wife with?

Now before you start to wonder where this question is going, let me tell you about a conversation I had with a friend the other day. My friend and I were having lunch and he has recently re-married and we were talking about relationships in general. Both being in the financial advice profession, we got to talking about who we would trust our respective wives to seek advice from (present company excluded), if we prematurely met our demise. We had a bit of a hard time nominating someone and yet we both know a lot of quality advisers. We didn’t analyse this in depth at the time (it would have been too D&M over a steak sandwich), but I did reflect on it later that day and here are some of my thoughts that you may also wish to ponder.

Getting financial advice is not like seeing a brain surgeon. If you need brain surgery, you only really care about the technical skill of the surgeon (though it is nice if he or she has a personality too). This led me to think that in financial advice, trust has more than one dimension:

  1. Trust that the Professional is competent and will perform their job with due skill and care;
  2. Trust that there are no impediments to the objectivity of the professional’s advice; and
  3. Trust that the person is a warm, caring and thoughtful human being.
Now remember, we are talking about your nearest and dearest here, so all of these points carry some serious weight. Points 1 & 3 are pretty self-explanatory but let me clarify what I am saying in point 2.

Two factors that may influence the advice provided by your adviser are:

A. How your adviser charges for their advice, and

B. If the advice business is self-licensed or licensed by a subsidiary of a product manufacturer.

Want to know more?  These examples will help:

A. How your adviser charges
Let's say you want to build an investment portolio and you are tossing up between buying an investment property or starting a managed share portfolio. Your current adviser charges 1% of any assets that they manage. No prizes for guessing which option you will be encouraged to take. A true fixed-fee adviser would talk you through pros and cons of both options without an inherent bias as to the outcome.

B. How your adviser operates
Let’s say your adviser’s business is licensed by a company, known as a “dealer group”, that is majority-owned by an investment product manufacturer (think of household names in superannuation). The dealer group has an “approved product list” which effectively controls what products the adviser can recommend to clients. Which products do you think receive preferential treatment? In fact the only reason that product manufacturers own dealer groups is to create a captive audience of advisers to sell their products. Product manufacturers refer to advisers in these dealer groups as their “distribution channel”. Annette Sampson’s recent article "In search of advice instead of sales pitches" in the Sydney Morning Herald sums this up pretty well.
So you see there are a few things to consider when you are selecting an adviser ….. it was with these things in mind that The Trusted Adviser group was born.

Friday, October 14, 2011

When the markets let us down.

Just listening to the recent news of world markets, got us thinking. 

We can’t control what happens in the markets – we can have an opinion, we can listen to others opinions but there’s nothing we can do, to affect the outcome.  So when the news is so depressing, what can we do?

In times like this, when our investments are heading south, we have to focus on “what we do” and “why we do it”, more than “what we have”.  What I really mean, is that we need to be more grateful.  Australians are very fortunate.  We have an exceptional lifestyle of choice, fine weather, supportive health system and although it’s not perfect, a better economic environment than most others.

In the last few weeks, we’ve had some sad news from a few of our clients suffering from life changing illnesses.  It’s a reminder of how precious life is and how we have to enjoy every day and spend quality time with our loved ones.  If we wait for the markets to improve, or we wait until we “have enough money” to fully enjoy life, then we may miss out.

Somehow, we all need to find happiness and joy in the every day life we live.  As Trusted Advisors we take our role in this very seriously.  How do we provide peace of mind, encouragement and support to clients, so that they can find happiness in their daily life?  We help them to find perspective.  We help them to make the most of what they do have.  We put the steps in place to make it easy.

Don’t wait for the markets to improve to find your happiness

There’s what the markets can do for you, there’s what you can do for you and there’s what a Trusted Adviser can do for you.  When the markets are letting us down, focus on what you can do and find out what a Trusted Adviser can do for you.

Tuesday, October 11, 2011

An investment not worth paying for

When you’re making any purchasing decision, you make a judgement about whether you believe you’re getting value for money.  Along with price, other things that may come into the calculation include convenience, great service or in the case of luxury goods, the perceived effect on your social status.  

But when it comes to money management, the one factor that should not sway the decision is the promise of “great investment returns”.  As alluring as this sounds, we know that this is a very bold promise and you should know how to check if your money manager (read: stockbroker, fund manager or financial adviser) delivers.

So here is a proposition for you:
 
If these stock-picking pros promise great returns, their performance should be measured against the market in which they are investing.  If they are picking Aussie shares for your portfolio, then you should know if they are getting a better return than the market itself.  Why?  Because you can buy the market yourself at a much lower cost!

Don’t get me wrong, these stock-picking professionals are trying to beat the market.  It’s just that it is really hard to do.  You don’t want to pay extra if the result is more due to chance than skill.  And that is what the evidence from Karaban & Maguire (2011) is telling us:  
The S&P/ASX 200 Accumulation Index has outperformed approximately 70% of active Australian equity general funds over the last five years, increasing to approximately 77% over the last year (mid year 2011).  At least 69% of active international equity funds underperformed relative to the benchmark over every time horizon. Over the last year, the index has outperformed approximately 80% of actively managed international equity funds. 
So if the odds of beating the market are that bad, why would you pay more for the promise of better returns? 
 
The Trusted Adviser.

Thursday, October 6, 2011

DIY Share Investing: Prudent Management or False Economy?

Now that you know a bit about us at The Trusted Adviser, it's time to ask you a question - if you are a serious do-it-yourself share investor, why are you going it alone?  For many of you, the answer will be “So I don’t have to pay management fees” or it may be about something more fundamental like trust, or a lack of it, in the advice of others.  Whatever the reason, if you are serious about managing your money (and I am guessing that you are), it is essential that you know how you are tracking compared to the performance of the sharemarket index.  Why?  How else will you know if you are doing a good job?  And if you heed this advice, brace yourself, it could be a very humbling experience.

But investing is not just about return. There is the other small matter of risk to consider.  Now you may not agree with me on this, but I reckon hanging your hat on a handful of stocks is risky
  • It lacks diversification, and
  • It risks significant under-performance compared to the market.

What?  You don’t care if your returns aren’t as good as the market, as long as the return is positive.  If you think that and you’re serious about making money, stop reading now.

For those of you still with me, let’s get back to diversification.

A dozen stocks sounds diversified enough doesn’t it?  And where’s the risk in owning BHP, RIO, the banks, Wesfarmers, Woolies and Woodside?   Shareholders in General Motors thought the same way before the GFC didn’t they? But I hear you saying “GM was having trouble way before the GFC and everyone could see it.  I would never have invested in a stock like that”.  Hhmmmm….Wesfarmers went from $42 to $14 as investors nervously watched them negotiate with their bankers while chewing on a gob-full of debt from the Coles acquisition.  And what about RIO?  $124 to $24 as they carried the can (and debt) from their ambitious acquisition of the aluminium giant, Alcan.

Anyway, enough tripping down memory lane.

Under-performance relative to the market costs real money and that’s ignoring your hours of research.  Wouldn’t it be just a little bit disappointing if you were getting a less-than-market return for all your time and effort?  But I really enjoy it, I hear you protest.

Well if stock picking is one of your hobbies, here’s my advice
  1. Pick a relatively small sum to play with – say no more than 10% of your investment capital 
  2. Take less risk with the rest (check out our post on trying to beat the market - “An investment not worth paying for”).
financial advice
Our main message here is that successful investing is about only taking risks that are likely to compensate you with added return over time.  It is best summed up by our friends at Dimensional when they say: 
Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, and speculating on “information” from rating services.  To all these, diversification is the antidote.”1
For an academic perspective on diversification, you can also view this video:




The Trusted Adviser