Investment philosophy and performance is one of many important aspects for people to consider before signing up to work with a financial advisor.  However, the choice of investments should not be the first consideration to be made.

The first task a good financial planner should be doing is ensuring that a client is achieveing any relatively "risk-free" savings such as the reduction of tax and access to government payments.  From here, once a decision has been made to invest, the next step a financial advisor should be taking is to ensure that the asset allocation across a client's entire portfolio is suitable in relation to their income needs and risk tolerance.  Only then is it time to help clients choose the relevant investments that should be used in order to maximise the returns from the particular asset allocation that has been defined as necessary.  In the same instance advisors should also be identifying the best method of purchasing those investments to minimise costs and risks.  Once all these decisions have been implemented a financial advisor should be following up with regular and relevant reviews.

The service "A CLear Direction Financial Planning" offers clients exactly follows that path:  strategy first, then asset allocation then investments and how to invest followed up by regular reviews.

All this being said, investment strategy and performance is important.  We build investment portfolios for clients based on the best available academic research.  Take a look at our Building Portfolios page for more details.  In our view, this research compels us to use the three factor model developed by Fama and French.  In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (www.dimensional.com.au).  We do not receive any form of commission or payment from Dimensional for using their trusts.  We use them because they provide the returns clients are entitled to from share markets.

However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research.  Therefore we want to provide the historical returns of the funds that we use to build investment portfolios.  They clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist.  Please click on the following link to be taken to a list of graphs - Dimensional Fund Performance Graphs.

Regards,
Scott Keefer

The latest edition of our fortnightly email newsletter has been sent to subscribers.  If you would like to be added to the mailing list please click the following link to be taken to the sign up page - The Financial Fortnight That Was Sign Up Page.

The financial topic discussed this fortnight was value investing.  The latest edition also contained the following Market Update:

Market News

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the possible use of margin lending to build investment portfolios.

He outlines the basics to using margin loans and discusses the pros and cons of such a strategy.  Scott concludes that a thoughtful approach must be taken in weighing up the risks and rewards of using a margin loan to invest.

Click on the following link to read Scott's article - Margin loan? Think again

The latest news from the Opes Prime saga, scandal might be a better phrase, sees the ugly impact of trailing commissions raising its head.  The Australian reports today - How Opes snared its rivals' clients - that brokers were offered trailing commissions of 0.75% by Opes Prime to encourage clients to hand over shares to Opes.  This is in comparison to commissions offered by conventional margin loan operations of between 0.25 to 0.65% for books of more than $10 million.

Opes Prime claim that the major attraction of their service was the ability to get finance to enable the purchase of shares in small to medium sized companies.  Even if this was the case, the perception could easily be reached that brokers were recommending their services to clients because of the improved returns for them as brokers.  As I have grown to realise, a person's perception is their reality.

This case provides another example of where trailing commissions are not in the best interests of investors.  When the result is that advisers, in this case brokers, choose a particular service or product based on the money they will receive back from that provider rather than a pure consideration of which service is best for the client, client's are losing out.  Unfortunately in some cases, let's never forget the Westpoint disaster as another example, the impact on investors is much worse than the small percentage of trailing commissions that are being paid.

Regards,

Scott Keefer

An interesting article was published on the News.com.au website today written by Kate Perry - Women Scared of Investments.  Kate looks at the lack of confidence on the part of women to tackle investment decisions.  Of course this is a broad generalisation but it is based on a report released by the Financial Literacy Foundation - the Women Understanding Money report.

I wonder whether there may actually be a cultural dimension to this discussion.  My wife has a Chinese heritage with her family living in Indonesia for a couple of centuries.  Two of her Aunts, from her mother's side, are very much the investors in their families.  One is actually what might be referred to as a day trader.  From my brief involvement with the Chinese community in Indonesia and Australia, Chinese women are not particularly shy in making investment decisions.

However I digress, I wonder whether the issue might actually be that investment scenarios, especially in terms of non bricks and mortar decisions, are not appropriately developed or explained to women in Australia and it is this explanation that is the key to their hesitancy.

There seems to be a lot of bravado / ego in investment circles.  I imagine that this is a function of investors looking for that next best investment and the belief that they have found the answer.  My sense is that women don't respond as well to this bravado but would much prefer to have investment decisions accurately and carefully set out based on hard facts not hopes or dreams.

Some of us mere males might suggest that we can see the female approach to decision making when it comes to their  domain - shopping.  Why does it take so long?  Why do we have to check out every single store before making the decision?  Just pick up the .... and let's get going!  When it comes to purchasing decisions, women are very calculating and want all the information and possibilities on the table before making their choice.  Or at least that's what they tell us.

On this point, I actually think women also want to see value for money in all transactions that they make.  The level of fees charged by some financial institutions can make it difficult for that value to be identified.

Anecdotally, my business partner and I often comment when we meet with couples that it is the female that seems to get our philosophy before the male. (Another broad generalisation)  We have an investment philosophy that is based on academic research clearly setting out what investment returns have been through history and how best to capture those returns in an investment portfolio. I think this is what women in general are looking for rather than the "trust me, I am an expert" line.

Regards,

Scott Keefer

Today's edition of The Australian's Wealth lift out has its focus story about retiring in style.  No matter where you are in life's journey, I am confident that the concept of retiring in style is appealing.  So how best do we prepare for this time of our lives?

When planning for retirement I believe the first key is to try to identify what level of income / expenditure will be required in retirement.  No easy task!!  A useful starting point is to check out the Association of Superannuation Funds of Australia (ASFA) website.  ASFA provides some really useful guides to consider.  They, together with Westpac, produce a report on retirement living costs.  In that report ASFA break down budgets for various households (single & couple) and living standards (modest & comfortable).  The latest report, up until the end of the September quarter 2007, provides the following summary of these budgets (assuming home ownership):

This is a very useful guide, but only a guide.  We all have different approaches to expenditure and someone planning for retirement should take this into consideration before identifying a target level of income.  However, the table above provides a good starting point.

After determining the required level of income, the next step is to determine what level of assets will comfortably provide that level of income.  Our approach, as set out in Scott Francis' Eureka Report article - Tap your super, but how much? - is that assets, if effectively invested in retirement, can be drawn down at a rate of up to 5.5%.  As an example, if you thought you would require $55,000 per annum in retirement you would need financial assets of at least $1 million in today's dollars (i.e. taking out the impact of inflation between now and retirement) to be able to produce this level of income.  Our approach looks to keep retirees from selling down assets but rather living off the income provided by assets.  This is particularly important during times like now where volatile asset prices such as Australian shares, international shares and property (even direct property in the opinion of some) are falling.  In retirement you do not want to be forced to have to sell assets at such times in order to produce the cash you need to live.

Once the level of financial or investment assets needed has been determined, the next step is to determine how best to get to that magical figure.  Strategies will be heavily dependant on your current stage of life and circumstances.  This is where a financial adviser should really earn their keep by ensuring that their clients squeeze every last risk-free dollar out of their situation.

The next step is to look at the best set of investments to achieve the goals that have been set while taking on as little risk as possible to reach the intended goals.  We have a particular approach to this stage set out in our investment philosophy.  Check out our Building Portfolios page for more details.  Just as importantly though, a financial adviser will work to ensure that their clients don't suffer severe "hiccups" along the way by investing in products that may destroy wealth and in doing so destroy that "stylish" retirement.

Unfortunately, you can't sit back just yet and start dreaming of retirement, the strategies need to be regularly revisited and updated to reflect changing circumstances.  Plus you need to keep from "mucking" up the strategy along the way.

A great financial adviser will be able to help put all these pieces together plus provide ongoing support and discipline to keep to the plan.  If you would like more details or just want to discuss your planning for retirement please do not hesitate to get in contact - scottk@acleardirection.com.au

Regards,

Scott Keefer

Each year ASIC awards the "Pie in the Sky Award" to the most outrageous financial scheme that's too good to be true.

Previous winners include:

2007 - Ponzi scheme operated by Guiseppe Mercorella that offered people between 3 and 6 % per month.  The illegal scheme received $216.9 million from investors who ultimately lost $76 million. Mr Mercorella is now serving a five year jail term on ASIC charges.  Many of the investors were from South Australia, and many from the local Italian community who became aware of the scheme through family and friends. This is typical of how many people become involved in ?Ponzi' schemes. Some investors mortgaged their homes to invest with Mr Mercorella.

2006 - An illegal investment scheme promoted through wealth seminars throughout Australia. Operated by Mr Craig McKim, Pegasus Leveraged Options Group (Pegasus) lured approximately 90 unsuspecting investors and raised $3.7 million. Over $2.1 million of the funds raised were lost in personal gambling and other personal expenses by Mr McKim.

In the case of the Pegasus scheme, the NSW Supreme Court found investors were promised returns of up to 8% a week - figures described by the Court as 'astronomical'. Investors were even issued with a Certificate of Guarantee by a fictitious ?International Investment and Securities Commission'.  Mr McKim was jailed in October 2005.

And the winner for 2008:  A disturbing 'advanced fee fraud' scam.

This email scam pleaded with people to help a Togo barrister access US$17 million from the estate of a man who along with his family was killed in the Boxing Day tsunami three years ago. This outrageous offer was just too good to be true.

According to the offer, people could get a share of the wealth by claiming to be the deceased's next of kin. To claim the wealth, you would need to respond to the email. The nature of this type of fraud is that you would need to pay a fee before you would receive the money. This is an advanced fee fraud where you would pay to receive nothing.

Of course there is no $17 million estate, and people were being scammed for the upfront fees', said Ms Delia Rickard, ASIC's Acting Executive Director of Consumer Protection.

Runner Up for 2008: In Step Super

Instep Super was advertising on television, radio and online offering returns on investment of superannuation funds between 8 and 20 %.  The advertisements also claimed Instep Super was ?the best performing superannuation fund in Australia'.  Instep Super did not have an Australian financial services licence.  ASIC concluded that Instep Super did not have any reasonable basis for claiming to be the ?best performing superannuation fund in Australia'. As a result the Instep claims were found to be misleading and deceptive. Fortunately, no one invested in Instep Super.

3^rd place getter for 2008: Electroharvest

This device supposedly recycled 'ambient electromagnetic radiation back into usable household energy' promising to cut ordinary Australians' power bills by 37 per cent.  Investors were invited to invest up to $40,000 with 'guaranteed' returns of at least 30 per cent per annum.  ASIC launched this fake scam on April Fool's Day in 2007 to educate investors about how to identify and avoid financial scams. Anyone who tried to go ahead and invest was led to a page with advice about how to research investment offers and who to contact for help.  The fake website, www.electroharvest.com, has attracted more than 75,000 hits since it was launched in April 2007.

Check out ASIC's FIDO Pie in the Sky Award website for more details.

Regards,

Scott Keefer

In the latest edition of Alan Kohler's Eureka Report, Scott has added some commentary to Alan's article - Opes: Leveraged investors be warned.

In his comments, Scott explains the term prime broker and explains how the structure of Opes' relationships with its lenders and the clients whom have invested with them has lead to significant potential losses for clients.

Click on the following link to read Scott's article - Opes: Leveraged investors be warned - Eureka Report insert.

These days lawyers apparently don't chase you in your ambulance.  They chase you through google.  The following was a paid add on google - 1 day after the collapse of Opes Prime was confirmed:

OPES PRIME CLAIMS
Have you been ruined by Opes Prime?
to join class claim call 0425834000
members.liv.asn.au/

The Opes Prime collapse is a terrible collapse, and will negatively impact some good people.  If lawyers can help them recover some funds, then that would be great.  Otherwise, they need some sound financial advice on the benefits of being content to invest regularly over time, keep costs low and build a sound long term investment plan.

Cheers

Scott

The biggest story in financial markets today is the collapse of Opes Prime, a broking house with more than 1,000 clients.

Opes Prime was a 'prime broking house'.  In short this meant that it was more aggressive than a retail broker, with a focus on stock lending and borrowing to invest.

Unfortunately for the clients of Opes, their stocks actually secured some of the overall loans that Opes used.  So, with the collapse of Opes, their portfolios were put in the hands of the banks (ANZ and Merril Lynch) to sell shares to be repaid.  The clients were effectively unsecured creditors in the whole process - and now wait to see what money they will recover.

All this brings to a head the importance of being careful when you borrow to invest.  It is a risky strategy - sure it is great when asset prices are heading north.  However, when they head south it can get very ugly.  You might end up like the Opes clients - forced sellers of assets in a downward market.  This is not a pretty situation at all!

At the end of the day the simple, steady approach is pretty bulletproof.  Spend less than you earn.  Invest regularly in growth assets.  Keep short term cash needs in a cash account.  Be well diversified.  Keep costs low.

Regards,

Scott