This recent article in the Australian Financial Review provided an insight into how some retail and industry super funds are marketing their products as “Balanced” when in reality the profile of the funds looks more like a “Growth” product.

This is misleading in the extreme and something worthy of exploring given a “growth” portfolio carries more risk but will, all things being equal, outperform a “balanced” alternative over the investment horizon more often than not, yet “growth” is marketed as “balanced”.  This has escaped media attention…until now.

The article further supports a fact one of our advisors established earlier this year when a client questioned the performance of the balanced portfolio we constructed and managed with the returns of a “balanced” super fund, which were superior.  Some investigative work revealed the “balanced” super fund was indeed “growth” oriented and more appropriate for the risk tolerant investor.  It was hardly comparing “apples with apples”.

In the low interest rate environment that seems like has been around forever, the returns investors are able to generate from the defensive asset class have been front & centre as a topic for discussion.  The income investors have been able to generate from this asset class has been belted, which has seen an increase of flows into “passive” or index-based investments as investors chase better returns.  However, this “passive” index-based investing artificially inflates the share price of a company whose fundamentals otherwise might suggest they are not performing quite so well.  When global interest rates normalise as has started to happen, all things being equal, companies with poor fundamentals will get sold off, and quickly.  To quote one of the greatest investors in history, “only when the tide goes out do you discover who’s been swimming naked”.

Back on the article…it lists the top 60 performing super funds with an asset allocation of 61-80% into growth assets i.e.; Australian & international equities, commercial property and infrastructure assets.  Some of the funds listed are designed to “hug” the index to keep administration costs down.  Fees are an emotional issue and under the spotlight given the revelations provided at the ongoing Royal Commission.

The problem with index hugging is it involves no active stock picking but rather, capital is deployed into each company comprising the index in line with their weighting thereof.  As indicated above, this can artificially inflate the share price of a poor company you might otherwise not invest in.

The returns shown in the article are net of investment fees & tax but before administration fees and are provided over 1, 5 & 10 years.  The median return of those top 60 “growth” super funds over 10 years is 6.6%, before admin fees.

I thought that was an interesting number as the portfolios I’ve seen since I started with The Investment Collective stacked up very well against that 6.6% median return for “growth”.

Digging into PAS, our portfolio management system, the first growth profile I randomly selected has achieved a return net of fees since inception of 11.26%, the second 7.68%, the third 13.58%, the fourth 7.89%, the fifth 7.54%, the sixth 8.31%, and the seventh 13.96%.

I then wanted to “compare the pair” with how some of our truly balanced portfolios have performed since inception.  The first portfolio has returned 6.18% net of fees, the second 7.35%, the third 7.27%, the fourth 7.25%, the fifth 6.47%, the sixth 6.82%, and the seventh 6.55%.

Whilst the social agenda these days in this instantaneous world concentrates on the “here & now”, with investing, long-term returns are what matter most.  The effect of compounding returns on wealth accumulation over time warrants the need to take a long-term view.

We actively manage client portfolios as many of you already know.  Whilst we don’t get it right 100% of the time, I’ll let you make your mind up on “comparing the pair”…especially so given we provide full transparency around what we do and how we do it.

Please note that this article provides general advice. It has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

There are strategies to ensure your children get the maximum benefits.

Since its inception, many baby boomers have accumulated big super balances. In some cases, their super balances may be approaching, or even exceed, the value of the family home. But unlike the home, which is free of death taxes, super’s 17% death benefit tax applies to adult children. There are, however, strategies to reduce its impact. First, you need to understand;

• Which beneficiaries will be taxed;
• How they will be taxed; and
• What you can do about it.

Basically, no tax is payable on super death benefits directed to your spouse, including de facto, someone financially dependent on you, a child under 18 (or older if a financially dependent student) or someone you have an interdependency relationship with. The rest get taxed.

When your money goes into super, it is broken down into a taxable component and a tax-free component. The taxable component is comprised of all pre-tax contributions (i.e. your employer’s super guarantee, salary sacrifice or any contributions you have claimed a tax deduction on) and the earnings generated on the taxable component. The only proportion that is tax-free is your after-tax non-concessional contributions.

Death benefits tax will only apply to money in the taxable component of super. Tax payable on the taxable component is 15% plus the 2% Medicare levy. The Medicare levy can be avoided if the death benefit is paid through the deceased estate.

One common strategy to minimise the tax is to withdraw an amount from super and recontribute it as a non-concessional contribution. By doing so you, you are converting the taxable component into a tax-free component. The rules are complex so it’s recommended you seek advice. It all comes down to whether you are eligible to take out a lump sum and then whether you are eligible to recontribute it.

Other strategies involve pulling money out of super and into your personal bank account. It is then paid out to the beneficiaries as per the distribution of the Will and there is no tax. This option can be useful especially if you have been diagnosed with a terminal illness. Again, be careful, as there can be tax consequences of pulling large amounts of money out of super and leaving it in your own name.

Given the complexity of the rules, it is vital you get professional advice first.

Please note the above is provided as general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

Previously, I highlighted the findings of the Australian Securities and Investment Commission (ASIC) report after reviewing 250 self-managed super funds (SMSF). ASIC does not regulate SMSFs, the Australian Tax Office does and trustees are held directly accountable.

At The Investment Collective, we assess the appropriateness of an SMSF, provide tailored written advice in the form of a Statement of Advice and present the recommendation where you are encouraged to ask questions to better your understanding.

Why should you set up at SMSF?

A client of mine established an SMSF to take back control of their superannuation by removing any influence from large financial institutions and unions. They wanted more investment choices and to be involved when choosing the underlying investments that are appropriate for their risk profile. Both members are now benefiting from the additional income from franking credits.

Another client established their SMSF once we conducted a fee analysis of their previous super fund provider. We highlighted all the fees and additional transaction, operational, borrowing and property costs they were paying. With their new SMSF the client has a very transparent fee structure and is now saving thousands each year. This client had a share portfolio in their name that we were able to directly transfer to their SMSF, increasing their superannuation benefit. We managed their capital gains over a few financial years and transaction costs were cheaper than going through a share broker.

In many instances, our clients’ are surprised how stress-free maintaining their SMSF is. We assist clients to look after and oversee almost all of the administrative tasks. We also connect our clients’ to professional SMSF administrators to complete the annual compliance obligations.

As you can see, there might be benefits to establishing an SMSF depending on your circumstances. The Investment Collective can assist you in an analysis of your current superannuation provider. Please contact us to arrange a review.

Please note this article provides general advice, it has not taken into consideration your personal or financial circumstances. If you would like more tailored advice, please contact us today.

Teaching your kids about money and how to manage it can be daunting. Between internet banking, cards, and pay wave – money doesn’t really exist. Approximately 68% of Australian parents show some reluctance to talk to their children about money and believe that digital money is making it harder for kids to understand. Open up the conversation, encourage them to save, teach them about cash, savings and budgeting. Here are 5 tips to get started:

1. Start with a piggy bank or money box

Encourage your children to save their money until the money box is full! Whether the money comes from helping around the house, birthdays or even finding spare change. Once the money box is full, go to the bank together and open up a savings account. Then encourage them to start all over again!

2. Savings goals

When your kids really want that new toy or game or whatever it might be, encourage them to save up for it. Use a separate jar/money box to save up for that specific thing. Whenever they find or earn money they can decide how much of it to contribute to their savings goal or their regular money box so that they learn to make a choice as to whether to spend or save.

3. Keep track of their money

Make a savings goal chart. A good place to start is the price of whatever they’re saving for or a general goal, ask them how much they want to save. Then as they add money to their money boxes and savings jars, they can update the chart. Together, you will know how much they’ve saved and it will encourage them to see progress.

4. Talk to them about money

Have an open discussion about money and savings. Explain the benefits and disadvantages to cash, the difference between bank cards and credit cards, the variance between a salary and wages. Talk about how much products and services cost, about the average wage and how they can save. This type of open dialogue will help their understanding. Actually encourage your children to use their money to pay for something they want. This will help them learn how to count out the money required for the purchase and remind them to check their change.

5. Look for good deals together

It might be comparing prices at different stores and online for what you or they are looking to buy. Or maybe comparing brands and sizes for prices at the grocery store. Encouraging your children to look for good deals and specials is something fun for them to do, but also a good lesson on not spending money unnecessarily.

Please note, this article is for general advice purposes only. It has not taken into account your personal circumstances or financial goals. If you would like to learn more about how The Investment Collective can help you, please contact us today.

Australian Securities and Investments Commission (ASIC) recently released a report after reviewing 250 self-managed super funds (SMSF) files. These SMSFs were randomly selected based on Australian Taxation Office (ATO) data.

The report highlighted a poor standard of advice provided on SMSFs. They found 91% of the files reviewed were non-compliant. Non-compliant advice included process failures, poor record keeping and increased risk of financial loss for lack of investment diversification mainly due to a single investment property.

An SMSF allows a member to purchase property within the superannuation environment and I am often asked about how to facilitate this. However, what most clients do not realise is that property is capital intensive, costly to maintain and tends to offer a very low income. An SMSFs sole purpose is to provide retirement benefits for the members or their dependents. Therefore I have to ask my clients, is property appropriate for your retirement when you need to draw an income?

At The Investment Collective, we assess the appropriateness of an SMSF for every client.  We look at many factors and alternatives and then provide a detailed analysis for our clients’ to make an informed decision. If you have thought about establishing an SMSF you should consider the following:

• The balance of your superannuation
• Costs involved to set up and running an SMSF
  • According to ASIC a starting balance below $200,000 the setup and operating cost are unlikely to be competitive with other options
• Willingness and ability to manage the SMSF and meet trustee obligations
• An investment strategy that suits the needs of members
• Members Insurance needs
• Lack of government compensation available for SMSFs

Please note this article only provides general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

Why did you go into business? To become a bookkeeper?

Chances are your answer is no, yet the hours you spend ‘balancing the books’ tell a different story.

In 2018 there is no need for bookkeeping and business compliance tasks to take up a significant amount of time. Further, your accounts payable and receivable can be updated daily with very little effort. Consider what this means for you and your business in real terms. What if your business expenses could be automatically coded by taking a photo? What if reminders to customers for overdue accounts were automated? How much time would you have back if bookkeeping took less than an hour a week? And what would you do with all your new-found free time?

The technology exists for all of the above to easily become your reality. The hours you save can be invested into growing your business or spending more time with your family. At this point most business owners say changing and learning new software is ‘too hard’ and ‘what we do has always worked in the past’. That may be true but at what cost? 10 hours per week vs 1 hour. In terms of cost and efficiency, the difference is hard to ignore. Then there are the advantages of having real-time business financial reports at the touch of a button.

A word of caution – seek advice to ensure the settings are correct from the start so you can enjoy the benefit of accurate up to the minute figures and reporting for your business. Of all the work that comes to our bookkeeping team; fixups are the most common and usually the most expensive.

Please note that the above is provided as general advice and not taken your personal, financial or business circumstances into consideration. If you would like more tailored advice, please contact us today.

In any review of a client’s circumstances and strategy, as their adviser, I am invariably going to ask the following question, ‘how much are you spending’? What I’m trying to confirm is whether a client has enough money coming in to pay for what they tell me is important to them, now and into the future.

You may find this strange, but most people don’t really know how much they are spending. Sure, most will have an idea (often the wrong idea), and some (the minority) will have detailed it out on a spreadsheet.

However, an accurate and truthful answer to the question is critical. Without it, we have no real way of knowing how successful, or otherwise, the strategies we’ve put in place are likely to be. We also have no real way of identifying additional resources that may be applied to help to achieve outcomes we’re looking for.

So, what’s the best way of working it out? Well, as noted above, some people maintain detailed spreadsheets. This is fine, but generally more than required. A simple review of monthly credit card and bank account statements (over say a 6 month period), will give most people a sense of where the money is going. Personally, I use Quicken software in which I record all credit cards and banking transactions to help me monitor the cash flows of my little household (my wife hates this!).

Knowing where the money’s going, may not sound particularly exciting, however, it’s absolutely a fundamental part of planning for your financial future.

If you would like to learn more about our personal financial planning services, please contact us today. One of our advisers would be delighted to speak with you.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

“What’s the matter Joe, you look upset?” I asked. Joe is a longstanding client of The Investment Collective. He’s a sharp minded, sprightly nonagenarian who still lives in his own home and is fiercely independent.

“Well,” Joe said forlornly, “I recently received a letter telling me that the NBN was coming down my street. I was trying to work out what I needed to do, when a very helpful gentleman from ‘Telstra Platinum’ service called me. He told me that he could have me connected to the NBN in about 30 minutes. All he needed was remote access to my computer, and I gave it to him.”

Within 30 minutes $9,000 had been withdrawn from Joe’s bank account. He’d fallen foul of a telephone scammer. Joe managed to get down to his bank on the same day. They closed his bank account and assured him he would receive his $9,000 back.

Joe isn’t out of pocket, however, his confidence has been severely shaken. He’d asked himself, how could he, of all people, have been so gullible as to unquestionably pass over control of his computer to a ‘voice’ on the other end of the telephone line?

That ‘voice’ was friendly, courteous, helpful, and beguiling. It was able to disarm Joe’s otherwise critical faculties. Also, it belonged to a person that had no qualms whatsoever in stealing from Joe. If it can happen to Joe, it can happen to me, it can happen to you.

Be careful!

Who should see a financial adviser?

“I don’t have any money to invest so there is no point in my seeing a financial adviser.”

“We manage our own finances so we don’t need to see a financial adviser.”

“We struggle to make ends meet, so we haven’t got any spare income to do anything else so we won’t be seeing a financial adviser.”

“I’m only in my 20s, 30s, I don’t need to see a financial adviser.”

“It’s too late for me to see a financial adviser as I’m retiring in 6 months’ time.”

All of these thoughts are far from the truth.

When should I seek financial advice?

There is a general perception that financial planning is only for people who have money to invest. That if you don’t have any spare cash and are having difficulty in making ends meet, financial planning isn’t for you.

Having a personally tailored financial plan will assist you in every facet of your financial lives regardless of your current financial situation.  In fact, your financial plan will help you achieve other personal goals simply because these goals are planned for.

Your financial adviser will assess your entire current financial situation. This means the adviser will be obtaining information on your earnings, what it costs you to live, the value of all your assets including superannuation, and of course, what you owe.  The adviser will also assist you in identifying what you want to achieve, both now and into the future.  We consider your life risk requirements so that your family and wealth are protected in the case of death, serious injury or illness.

Once the data has been collected and analysed, the adviser will write your financial plan.  The plan will include a summary of the current situation and this in itself can be an eye-opener for the client because many of us do not take stock of our overall financial picture.  Taking into account your goals and objectives and the things that have been identified during the collection and analysis step, the adviser will make recommendations to improve your situation and to help you to meet the goals you have identified.

Sometimes the recommended strategies can be confronting, but always valuable.  For example, if cash flow is a problem for you, the plan will include budgeting advice and strategies.  If you have surplus funds for investment, the plan will include recommendations as to how those funds should be invested.  If you are nearing retirement, the plan will address streamlining and consolidating your financial affairs ahead of retirement and strategies to maximise potential Centrelink payments.

There will be recommendations to adjust the investment option in your superannuation if it does not match the risk profile identified during discussion. If you have debt, there will be advice as to how best to manage that debt and if a restructure is required. If your life risk protection is inadequate, we will include recommendations to bring this protection to the correct level.

Your financial plan will also contain information on any ongoing costs you may incur if you accept the proposals, and there will be comparisons and projections between the current situation and the recommended strategies, including current and future costs.

So, when you should see a financial adviser? The answer is – as soon as possible!

For young people, a tailored financial plan will set them on a path to growing their wealth, perhaps via a savings plan.  For pre-retirees, it is essential that you consult with an adviser to ensure that what you have worked a lifetime for will support you in the way you want during retirement.  Centrelink payments and health care cards are very important and this is a major part of the planning for those either in or nearing retirement.

If our recommendations are accepted and you proceed with the plan, we manage the implementation of the plan and if there is an ongoing component, this activates. Centrelink management is part of the ongoing work and it can be invaluable to retiree clients to have this onerous task managed.

Beginning the process of seeking financial advice is very simple.  It is a matter of contacting either our Rockhampton or Melbourne offices with a request to see an adviser.  Your meeting confirmation includes a list of things to bring with you. From there the adviser will lead and guide you through the process.

What are you waiting for?

Interest only loans have been a popular choice for property investors for tax purposes, and first home buyers and other borrowers looking to minimise the repayments on their debt.  Many purchasers use Interest only loans to ease the financial burden of servicing their loan.

Due to the growth of the property market in recent years, the average loan size has increased, and Interest only loans can be a short-term option to reduce the repayments and improve affordability.  This type of loan is a popular choice for property investors to lower the repayments, while hopefully the value of the property increases in value over the longer term.  Many lenders offer Interest only options on their products for up to 5 years.

On a loan of $300,000, the monthly repayment on an interest loan would be approximately $500 less per month than an equivalent Principal and Interest product at the same rate.  There can be significant savings on repayments for an Interest only loan in the shorter term, but there are also some longer-term issues:

• As the name suggests, you are only paying back the interest on the debt. You are not making any progress on your mortgage!  At the end of the Interest only term based on the example above, you still owe $300,000.  If you selected a Principal and Interest loan (at the same rate), you would have reduced your loan by nearly $30,000.
• Property investors and homeowners expect that the property will increase in value over time. With an Interest only loan, you will have equity in the property without paying any principal.  However, if your property doesn’t substantially increase in value over the Interest only term, you will not have gained any equity in the property.
• At the end of the Interest only period, the loan repayments will ‘rollover’ to an increased Principal and Interest repayment. Many borrowers may be unprepared for the additional financial commitment, and will experience ‘Mortgage Stress’.  If the borrower’s circumstances have changed since the loan was established, and they cannot extend the Interest only period, it may be difficult to refinance to another Interest only loan.  The only option may be to sell the property.

As of 2015, Interest only home loans represented approximately 40% of the residential loans in Australia.  From March 2017, the lending regulator, Australian Prudential Regulation Authority (APRA) introduced restrictions on new Interest only loan business.  APRA has limited Interest only lending to less than 30% of new loans written.  The restrictions were imposed In order to limit riskier forms of lending practices, which allow borrowers to pay for escalating property prices, while not reducing their debt.

The restrictions introduced by APRA have led to rate increases on Interest only loans, and tougher requirements for customers applying for Interest only loans.  Interest only loan applicants may be subject to increased scrutiny such as more thorough income verification and higher loan servicing standards.

There have been several headlines recently in relation to the issues with Interest only home loans ‘rolling over’ to Principal and Interest loans after the interest-only period expires.  The Reserve Bank of Australia has estimated that over the next 3 years, approximately $360 billion of Interest only loans will convert to Principal and Interest Loans.  This will increase the repayments by approximately 1/3 or $7,000 p.a. on average for a $400,000 loan.

The rollover to Principal and Interest repayments may leave many borrowers struggling to meet higher repayments.  The most vulnerable will be homeowners with a high Loan to Valuation Ratio (LVR) who will find it harder to refinance or sell the property to extinguish the debt.

If you need assistance with your home loan or lending needs, please contact one of our lending specialists to determine the costs and benefits, and to discuss your options.

Please note that the above has been provided as general advice. It has not taken into account your personal or financial circumstances. If you would like more tailored advice, please contact us today, one of our friendly advisers would love to speak with you.