I am in the process of studying towards my Masters of Financial Planning.  The past week has been spent completing a theoretical case study about a couple approaching retirement.  After years of working in an educational institution you would think that I would have listened to the sound advice I gave my students - get started on your assignments early and don't leave everything till the last few days!!  Of course not, where's the fun in getting an assignment done early!!!

However, even though the time to reflect on my responses was not extensive, the plain and simple message was clear - smart investing and planning within the new super environment will provide even greater advantages come age 60.  Let's go over the two basics:

• After 60, all withdrawals from funds established within a complying superannuation fund will be tax free.  There are no limits (now know as RBLs) or distinctions about whether the funds were defined as being coming from pre-July 1983 or post-June 1983 employment.
• If you choose to work past 60, the transition to retirement income streams become even more powerful.  You can purchase a pension using your superannuation account and receive regular payments, tax free.  This will allow you to re-contribute more money into super by way of salary sacrificing with these contributions being taxed at 15%.  This also reduces the amount of marginal tax paid, assuming you are in the 30% or higher tax bracket.

For those who can take advantage of these rule changes it could make a world of difference come the day you want to put your heels up and enjoy a well deserved retirement.

Regards,

Scott Keefer

Fincorp and Westpoint collapses have bought investing in mortgages to the front of the minds of many thoughtful investors in Australia.

There has been a recent mortgage related disaster in the United States.  The disaster came from a rash of lending to consumers who had poor credit levels - 'sub-prime' lending they call it.  (I marvel at the way the financial services industry manipulates language.  Rather than describe the lenders as 'poor credit quality borrowers' they are actually only 'sub-prime'.  It does not sound nearly as bad.)

The lending was to investors who used the money to buy houses to live in.  The lending was from 'mum and dad' investors who were attracted by the high investment returns.  Unfortunately there are up to 2 million homeowners who will lose their properties, and many investos who will lose their investments.  A significant part of investors losing their money is that house prices are falling, which means that when they are forceably sold there is not enough money to return to investors.

In a different context the lesson is simple - be careful of mortgage as an investment, and the associated risks.

Regards,

Scott Francis

An article in The Age newspaper published on the 18^th of April highlighted the great performance of industry funds over the past 5 years up to 31^st December 2006.  The article used data from SuperRatings regarding "balanced" funds.  These funds were used on the basis that the majority of people have their superannuation savings invested in balanced funds.  The results are very flattering for industry funds with them picking up 8 of the top 10 results.

(Source - http://www.theage.com.au/news/superannuation/industry-funds-dominate-field/2007/04/17/1176696767356.html)

The article goes on to suggest that the common characteristics of these industry funds are that they are low cost, the funds' trustees adjust their asset allocation in response to market conditions and they have embraced "alternative asset classes" like private equity, infrastructure funds and hedge funds.

The results are indeed impressive so I took the opportunity to find out more about these funds from their web sites.  All but one fund, AMIST, had detailed information about the funds in question.  As I read through the PDS for each fund, I became intrigued with the reporting of alternative assets by some of these industry funds.  Some fund managers treated these assets, or a healthy percentage of them, as defensive assets (like cash and fixed interest) whereas they seem to have greater levels of risk and could be better classified as growth assets.

Based on this contention I re-classified some of the top 10 funds to reflect the more aggressive and risky nature of their "alternative assets", and then compared them with the portfolios that we develop for clients at ?A Clear Direction'.  The following table includes the returns for our portfolio plus funds on a portfolio size of $100,000, after all fees have been deducted.  These results would improve for larger portfolios as % fees start to reduce for larger portfolios.

As you can see, we are very impressed with the results of the portfolio plus portfolios, beating all of SuperRatings top 10 ?balanced' options on the basis of growth asset allocation.

Of course, past performance is no prediction of future performance and we would not expect such returns to continue to occur but we do expect our investment philosophy to remain competitive amongst equivalent fund managers.

Regards,

Scott Keefer

Up here in Queensland a debate between recreational fisherman and professional fishermen often flairs up.  The recreational fishermen often say that pro's are taking too many fish and depleting resources.  Similarly, the recreational fishermen are blamed by the pros for taking too many fish.  However, I wonder that the real problem might be the destruction of breeding habitat for fish through constant development? 

At least with my fishing abilities you can be sure it is not me depleting fish stocks.

In the same way the debate in the financial services industry might be too focussed on whether a fee based model or commission based model is the best for clients - and might overlook the fact that too many clients of the financial services industry (and not just clients of financial advisers) might be paying too much in fees!

I often see prospective clients paying fees of 2.5% or more in their financial situation.  Many people think that in low inflation times the returns from growth assets will only be 9% to 10% a year.  A fee of 2.5% gives away a quarter of the expected returns from a portfolio!

The reality is this - if you are paying too much in fees you will not have a successful investment experience.  It is possible to overlook the importance of costs when markets are booming as they are at the moment.  The reality is that these times won't last forever, and fees really matter!

Cheers

Scott Francis

My wife and I regularly watch Channel 7's Sunrise program as we eat breakfast.  A recent issue they have been covering (placed on the ROSwall for those that follow the show) is the non-payment of superannuation entitlements by employers.  News reports have suggested that the amount was $352.9 million dollars in the 2005-06 financial year.

If you are concerned that you may not be receiving your entitled contributions you should follow these quick steps:

• Confirm what your entitlements are:
• On what exact salary components is your employer required to make the 9% superannuation guarantee payments
• Does it include overtime payments, allowances, salary sacrifice and the like?
• Check your pay slips to see if the contributions have been recorded correctly.
• If you have access to your account online, check that the payments have been received by your superannuation fund.
• If you don't have that access, check your statements from your superannuation fund to see that the correct contributions have been made.
• If you think something is not quite right double check with the payroll department / manager / owner.
• If you still have concerns call the Australian Tax Office - Superannuation Enquiries - phone service on 13 10 20

The Australian tax Office hold the responsibility for chasing up non-payment of superannuation entitlements by employers.

I hope that this does not involve any readers of our blog.  However, even if you think everything is above board it is worth checking - every extra dollar contributed now will lead to a more comfortable experience in retirement.

Regards,

Scott Keefer

The front page of this morning's Courier Mail had the headline. 'Superannuation Heist'.

The article discussed the number of very small companies that were failing to pay superannuation benefits to employees.

This is, of course, a real problem for the employees.  The article discussed the effectiveness (or lack of it) or the ATO in chasing up what are often very small amounts - which is a pretty cost ineffective activity. 

The basis of the deception was that employers were filing 'pretend' pay slips that showed superannuation contributions being made, with the contributions not actually being made into their fund.

Probably the best prevention is for employees to keep an eye on their superannuation funds.  Sometimes this can be difficult with funds that only post a statement once a year, however people should not be shy about ringing the relevant funds.  They all have well set up call centres that are used to deal with queries.  Don't lose sight of the fact that you are paying good money to have your superannuation managed, so make sure you are getting your money worth.

Regards,

Scott Francis

I have taken interest in a couple of newspaper and magazine articles published in the past few weeks, one from Bina Brown in the Australian and another from Leng Yeow in Asset magazine.  Both look at the issue of rebates offered by the providers of Wrap services and make some subtle and not so subtle comments about the response of financial planners to these rebates.  Neither of the articles paint financial advisers in a particularly pleasant light.

The crux of the story is that the big wrap account providers are providing rebates on the fees that they charge investors to use their services.  One mentioned provider, MLC, have actually taken the bold step of not providing rebates but instead reducing the direct cost of their service to investors.  The difference, compared to rebates offered by other providers, is that this takes the financial planner out of the picture.  With other styles of rebates it is the financial planner's decision as to whether the rebate is passed on to the investor in full, partially or not at all.  Leng Yeow's article actually suggests a financial planning firm are leaving the MLC wrap because they no longer have the right make this choice.

Our Response to Rebates

Our dealer group, FYG Planners, gives each financial planning firm the choice as to what to do with rebates.  We at A Clear Direction receive a significant rebate from our preferred wrap provider, Macquarie, and have decided to pass on this rebate in full thus reducing the cost of investing for our clients.

Regards,

Scott Keefer

I am a regular viewer of ABC's Four Corners program.  Last night's edition had a story relevant to investors across Australia, that of agricultural managed investment schemes.

These schemes have covered a variety of agricultural products in recent times including wine grapes, olives and forest plantations to name a few.  Basically these schemes have been given encouragement by the federal government through favourable tax treatments.  This has encouraged investors to invest in the planting of crops.  Without the favourable tax treatment, investors would not receive any benefits until the crops or plantations bore fruit (for want of a better term).  This could be up to 20 years in some cases.

The federal government has however made recent changes to this industry by announcing the removal of favourable tax treatment for many of the schemes except forest plantations.

The Four Corners program raised a number of investment issues regarding some of the remaining forestry schemes including:

• High commissions (up to 10%) for financial planners to ?sell' the products
• Over-supply risk - so much money is being pumped in that there is a significant risk of over-supply (as seen in the wine grape industry) to further reduce possible returns
• Agricultural risks, some schemes are planting in regions where the climate is not sufficient to meet growth expectations

(Not to mention some of the socio-economic issues that are being debated.)

It also became clear that the promoters of the schemes had a fairly risk-free business model, their job was to encourage investors into the scheme helped along by favourable tax deductions.  The investors bore the risk of the actual returns to be gained from selling the end product.

Our Philosophy

We treat these types of schemes as highly speculative and not something that we have ever used in our recommendations to clients.

My previous employment was in the education sector and to my knowledge my previous employer did not offer choice of super.  It was my understanding that as a part of the relevant enterprise bargaining agreement, the choice of super was bargained away.

Since moving back to the finance sector I have come across the portability of superannuation benefit provisions which effectively give the opportunity for some employees who believe they do not have choice of super, the ability to re-arrange their superannuation investments into a fund that they, and hopefully their financial adviser, believes better meets their needs.

There are a range of specific conditions that must be met:

• The fund that you want to transfer into is willing to accept the amount
• If it is not the full balance of the current fund, and employer contributions are still being made into the fund, than at least $5,000 must be left in the current super fund
• A 12 month period must expire between rollovers or transfers before another rollover or transfer can be made

The compulsory portability of benefits rules do not apply to:

• Unfunded public sector superannuation schemes (Eg Q Super), Self Managed Super Funds or to member benefits paid as a pension
• Defined benefit components of a superannuation interest in a defined benefit fund

Basically, if you hold an accumulation account and have a balance of more than $5,000 you can continue to receive regular employer contributions into the fund but once a year make a lump sum transfer into another fund which you feel better meets your needs.

I have since contacted my previous superannuation fund provider and they have confirmed that this is the case.  They also suggested that if a superannuation fund account holder was no longer having contributions paid into the fund but wanted to keep the insurance benefits they could do so by leaving $3,000 in the fund.

This provides a lot more choice and flexibility for people who may have thought that choice of super was not available to them.

Have a great Easter,

Scott Keefer

The information I have used has come from the 2006/07 Australian Master Superannuation Guide published by CCH Australia Limited.

In the Australian Newpaper, in the Wednesday 'Wealth' section they publish 1 and 5 year returns for Australian managed funds.

The data makes interesting reading - and supports our use of indexing, and the use of Dimensional small and value funds.

The average annual return from Australian share funds to the 30th of March 2007 has been 14.25% a year.  The return from the Vanguard index fund has been 15.4% a year for the past 5 years - comfortably beating the average managed fund return.

There are 57 Australian share funds with 5 year returns listed in the newspaper.  The Vanguard index fund ranks 17th of the 57 funds.  (For clients - the Vanguard index fund and Dimensional large companies fund will have very similar performance).

The Dimensional Small company and Value companies trusts that we use have performed as we expected (or a little bit better).  The value company trust has returned 19.78% a year over the past 5 years and the small company trust 20.97% a year over the past 5 years. 

The results clearly support our investment philosophy.  Indexing is a powerful investment approach, systematically exposing portfolios to small and value trusts makes it even more effective!

Cheers

Scott Francis