Skip to main content
rss feedour twitterour facebook page linkdin

Financial Happenings Blog
Tuesday, November 17 2009

In my scanning of the internet I have come across a really simple yet handy website put together by the Victorian government - MoneyHelp.

The site covers the following major topics:

- I just lost my job what do I do now?

- How do I manage my bills and debt?

- Options to deal with debt

- Planning for the future

- Budgetting tool

The site is well worth a look.

Scott Keefer

Posted by: AT 10:10 pm   |  Permalink   |  Email
Monday, November 16 2009

A key job of a financial adviser is to warn clients from investments they should not be touching.  One aspect of this is to highlight possible scams that seek to defraud investors. published an article on Saturday providing insights from the Australian Competition and Consumer Commission (ACCC) - Falling into the jaws of deceit.

Some of the more common scams around at present include:
"emails related to the deaths of Patrick Swayze and Michael Jackson, another offering non-existent prizes to Pink fans, a fake Visa Europe survey offering $50 in return for credit card details, and others offering jobs."

The first rule of thumb should always be - If it sounds too good to be true it probably is.  But how do we know?

A website well worth a look every so often is the ACCC's SCAMwatch site.  The sub-headings on their site listing possible scams include:

The site is well worth a look to help protect yourself against these scammers.

Scott Keefer

Posted by: Scott Keefer AT 09:53 pm   |  Permalink   |  Email
Sunday, November 15 2009

ABC's Inside Business program hosted by Alan Kohler this week has taken a look at the recent take over moves by AMP for AXA.  This program was prepared in the context of the upcoming parliamentary report looking at the financial services industry in the wake of the Storm Financial collapse late last year.

Scott Keefer was interviewed for the program and shared his views on what the AMP - AXA combination means for the financial advice industry.  To take a look at the program online please click on the link - AMP makes $12b AXA bid.

This page provides the transcript from the program along with the link to the video.  Please note that the transcript contains some errors and you are better placed listening / watching the video.

In the program Scott suggests that the further consolidation of financial planning firms at the big end of town provides an even more stark point of comparison for investors looking for advice - the big end of town peddling their own products compared to the independent planners working hard at providing advice prepared with the individual in mind and not for the purpose of selling products.

Posted by: AT 09:06 am   |  Permalink   |  Email
Sunday, November 15 2009

With the experiences of 2008 and early 2009 still fresh in our memories, it is no wonder that investors are looking hard at the attractiveness of capital guaranteed investments which promise that worse case scenario you will get your money back when investing in riskier asset classes.

Unfortunately there are no free lunches in the investment world - if there was you would have to seriously question the validity of the returns - just ask the investors in Bernie Madoff's ponzi scheme rip off.  Capital guaranteed products sound great but you need to carefully dissect the terms and conditions to know what you are really getting.  The key concerns for me are:

  • costs - providers are well known to take large percentage fees out of your returns
  • third party (counter party) risk - the risk that the party that is providing the guaranteeing will be there when you need them
  • "knock out" events" - investments perform so poorly that your investment is effectively locked into assets that will get you your money back but no more even if investment markets improve

Jim Parker from Dimensional explains these issues in a little more detail in his latest Outsid ethe Flags posting which I have copied below.

Scott Keefer

This Year's Model

A financial market trend is like those in fashion. By the time you latch onto one, the world has usually moved on. And if you act on it, you just end up with expensive stuff that doesn't suit you and that no-one wants to buy.

A couple of years ago, the big trend on the catwalks of the fixed interest markets were exotic numbers like collateralised debt obligations, hybrids and other fancy instruments that were sold to investors as "high yield". Well, we know how that one turned out.

Trying to sell someone those funky fixed interest products in 2009 is like trying to clear a fashion warehouse full of leg warmers, stonewashed jeans and parachute pants. For sure, someone, somewhere once liked this stuff. Trouble is no-one now, apart from '80s revivalists, can remember why.

The fashion industry survives by exploiting a desire in consumers for certain "looks" based on what the rich and famous are wearing. By the time products based on this look hit the mass market, they are no longer fashionable. This guarantees continued turnover.

Likewise, much of the financial services industry profits by making products that cater to whatever emotion investors are feeling at any one time. When those products no longer fit the zeitgeist, a new set is rolled out.

Two or three years ago, with investors focused more on return than risk, the industry had a ready-made market for complex products whose attractive yield was achieved through often hidden levels of credit risk and leverage.

As the Reserve Bank of Australia noted at the time, a long period of low interest rates and relative economic stability had lulled many investors and sent them exploring remote territories in the search for yield.1

The consequences of that lack of attendance to risk, not just by ordinary investors but by major financial institutions that should have known better, were seen last year in the global financial crisis.

Scarred by that experience, many people have now swung in the other direction and are more focused on risk than return. So the financial services industry has obliged by creating products that appeal to that need.

These include new types of structured products that guarantee your investments against loss for a specified number of years. Additionally, there are products that lock in any capital growth you achieve for specific terms.

The marketing line for these "capital guaranteed" products is that investors can get exposure to higher return assets without the associated risk. After the crisis of 2008, this sounds particularly appealing and is an easy sell.

But just as people three years ago were buying structured products not fully aware of the risks they were taking, are they now buying structured products not fully aware of the fees they are paying?

In one such product currently being promoted on the Australian market, the annual fees for the most expensive option are said to be as high as 9 per cent.2 This includes contribution fees, administration fees, manager fees, advisor fees and guarantee fees. That is one expensive insurance policy.

Bear in mind, also, that many of these products are guaranteed only at maturity. If you sell at a loss before the agreed maturity date, you lose your capital protection. In the meantime, you have paid all those fees for nothing and inflation has eaten into the purchasing power of your original investment.

And no investment can ever be truly guaranteed. Even the promoters of these schemes admit that they cannot predict what rates of return will be achieved. As well, investors are exposed to the financial soundness of the organisation issuing the guarantee and the risk that the guarantee will be terminated.

Most of all, there is the question as to whether investors really understand what they are investing in. In some cases, the conditions are such that the "guarantee" is not as solid as it appears.

One Australian investment bank offered a capital guaranteed structured product that offered headline rates of return of 12 per cent or more by investing in equity derivatives. But this was conditional on there not being a number of "knock-out" events. When these occurred, investors were left locked up in a very expensive six-year savings account that paid no interest.3

In Britain in the past month, three providers of capital guaranteed structured products have been placed into administration. In one case, investors in the scheme had exposure to complex products backed by the now defunct US investment bank, Lehman Brothers.4

Even when the investments are understood, there is still the question of cost. Research by the UK's Department of Work and Pensions last year found guaranteed products were "too expensive to be attractive to most people".5

In the final analysis, it is completely understandable after the events of 2008 that investors worried about the return of their capital would be searching for products that give them greater peace of mind.

But this need has to balanced against cost of the products, the lack of liquidity, the multiple conditions, the lack of transparency around the underlying investments and the fact that nothing ever can truly be guaranteed.

An alternative approach is to maintain a diversified pool of assets (cash, fixed interest, listed property and small, large and value stocks in local, developed and emerging markets) commensurate with your own risk appetite.

These investments should be in a low-fee managed fund that controls risk through broad diversification, is mindful of costs and taxes and that seeks to tap the long-term returns of various assets in a transparent, disciplined way.

Those investors who are older, particularly risk averse or anxious to preserve their balances can opt for more defensive portfolios with a greater proportion of assets in cash and high quality, short-term fixed interest.

This is a very straight-laced, some might say boring, approach. But it's effective, easy to understand, low cost and it never goes out of fashion.

1Stevens, Glenn, 'Risk and the Financial System', Reserve Bank of Australia, March 2006.

2Dunn, James, 'Invest in What You Understand', The Australian, Oct 14, 2009

3Kavanagh, John, 'Defying Gravity', The Sydney Morning Herald, Oct 14, 2009

4Vincent, Matthew, 'Arc Capital & Income Placed Into Administration', The Financial Times, Oct 26, 2009

5McArthy, David, 'Investment Guarantees for Personal Accounts', UK Department of Work and Pensions, Working Paper no 62, May, 2009

Posted by: Scott Keefer AT 08:50 am   |  Permalink   |  Email
Thursday, November 12 2009

When we in Australia talk about Emerging Markets it is common place to first think about China and maybe India or even Indonesia as countries that are in the Emerging Markets designation.  A nation that is often over-looked yet becoming a stronger force in world markets is Brazil.

Today I have read a special report completed by the Economist magazine.  For those interested in learning a little more about Brazil and its economy this article is well worth a read - Getting it together at last.

The following extract paints the scene:

"Despite the financial crisis that has shaken the world, a lot of good things seem to be happening in Brazil right now. It is already self-sufficient in oil, and large new offshore discoveries in 2007 are likely to make it a big oil exporter by the end of the next decade. All three main rating agencies classify Brazil's government paper as investment grade. The government has announced that it will lend money to the IMF, an institution that only a decade ago attached stringent conditions to the money it was lending to Brazil. As the whole world seemed to be heading into a long winter last year, foreign direct investment (FDI) in Brazil was 30% up on the year before?even as FDI inflows into the rest of the world fell by 14%."

Scott Keefer

Posted by: Scott Keefer AT 11:24 pm   |  Permalink   |  Email
Thursday, November 12 2009

The recent takeover play by AMP for AXA has focussed attention back on to the issue of ownership bias in the financial services industry.  By this I mean where a financial planning firm or adviser / dealer group is owned or strongly supported by a major financial institution such as the big four banks / AMP / AXA and through those ownership links advisers are encouraged to promote the investment and insurance products developed by those large institutions.


A recent article in the Sydney Morning Herald provided details from a report that showed these financial planning groups tied to the big end of town have been allocating 73% of their sales to their own products in the past 12 months. - Financial advisers mostly a sales force, report says


Just this morning news has filtered through that Hillross Financial Planning (owned by AMP) have bought Rabo Financial Advisors - the financial planning arm of Rabo Bank - so you can expect that AMP products will feature more heavily on recommendations to clients going to Rabo Bank for financial advice into the future.

So it seems the move for these large institutions to grow through acquisitions and then pumping products out to clients continues with strong momentum.


But how do you know who is owned by whom?


The Association of Independently Owned Financial Planners provides a starting point on their website with their page Who owns who? But as the introduction of the page suggests, it is easy to know the links between the large adviser groups but not necessarily the smaller ones.


Therefore it is a really important question to be asking before going too far ahead with a particular adviser.


Are the big financial institution products unsatisfactory?


I am not saying that the products that have been developed by these large financial institutions are not going to provide a good outcome for investors and financial advice clients.  However there is some evidence to suggest care needs to be taken.  For me the problem is that you can't be sure that you are getting advice that is in your very best interests or are you just being sold a product.


This to me seems just as big if not bigger issue than that raised by the use of trailing commissions.



Scott Keefer

Posted by: Scott Keefer AT 05:12 pm   |  Permalink   |  Email
Sunday, November 08 2009

One of the toughest and probably one of the more crucial questions to answer when looking at your financial plan for the future is how much will I need / want to live on in retirement?

One approach is to estimate that you will require 75% of your pre-retirement income in retirement.  There in itself is another problem, what will my pre-retirement income be?

To assist with the process of defining what will be enough, the Association of Superannuation Funds of Australia in conjunction with Westpac publish a report every 3 months looking at what is the cost of a modest and a comfortable retirement.  The latest results to the end of June 2009 and suggests that costs in retirement have risen 0.7% over the June quarter for a couple wanting to live comfortably.  As a result, in general, a couple looking to achieve a comfortable retirement needs to spend $51,132 a year, while those seeking a ?modest' retirement lifestyle need to spend $27,695 a year.

These numbers differ depending on your location with Perth the most expensive city followed by Brisbane and Melbourne the least expensive.

An interesting comment in the report is that the cost of living in retirement has risen more than the inflation figures across the board as explained by this statement:

"This is because retiree households on average have somewhat different spending patterns to the rest of the population. Along with generally owning their own home outright (so cost increases for housing and financial services are less important for retirees), they don't tend to spend much on education services. In contrast, food, health, transportation and recreation spending form a large part of retiree budgets."

As with anything financial, these numbers are useful starting points but your own specific requirements will be different depending on your plans.  To see the media release and supporting data please click on the following link -

Media Release

Scott Keefer

Posted by: Scott Keefer AT 06:18 pm   |  Permalink   |  Email
Sunday, November 08 2009

The financial meltdown of 2008 has led to many looking for someone or something to blame.  Some common culprits are - greed, sub-prime loans in the US, financial engineering of sub-prime loans, US investment banks and the list goes on.

In academic circles a heated debate is going on about the place of the Efficient Market Hypothesis, a core theory taught in finance courses around the world.

Professor Eugene Fama has been closely associated with the development of the efficient market hypothesis and has faced some fearce criticism.  Professor Fama responds to one of those critics in his latest Fama/French Forum posting - Is market efficiency the Culprit?

Worth a read for those who are keenly interested in finance theory.

Scott Keefer

Posted by: Scott Keefer AT 06:26 am   |  Permalink   |  Email
Friday, November 06 2009

2009 has been a tumultous year for the global economy and more specifically investment markets.  Interest in our approach to financial and investment planning has driven strong growth for the business with a side effect being a less than consistent delivery of our email newsletter.  In order to rectify this situation we will be reducing the number of newsletters published to one per month.


A consequence of this decision is that the name of our newsletter needs to change.  For the time being the newsletter will be titled Clear Directions.

The latest edition of the newlstter has been sent to subscribers this afternoon.

In this edition we look at one
particular area of interest at present - the strength of the Aussie dollar.  We look at this issue by looking at Currency Hedging.


Also in this edition we:

  • provide updated market return data in our market news section,
  • consider the use of debt recycling,
  • provide a link to Scott Francis' latest Eureka Report articles,
  • outline changes to the definition of income in relation to government payments income tests,
  • link to Vanguard's updated Index Chart and their latest series of video pieces, and
  • provide evidence of the three factor model in action.

Please click on the following link to be taken to A Clear Direction's Email Newsletter Archive.

Enjoy the read!!

Posted by: Scott Keefer AT 01:38 am   |  Permalink   |  Email
Thursday, November 05 2009

I have just finished watching the new documentary series on the ABC - Addicted to Money.  For those interested in all things financial it was well worth watching.  The following is a synopsis of the program on the ABC website:

Addicted To Money is THE program for anyone who wants to know how the financial crisis came about, what it means for us now, and what we can do to create a sustainable economy. Biting and punchy, this three-part series is a survival guide for the ?New Economy', presented with wit, charm and incisive appeal by David McWilliams, a young economist who talks just as candidly to the most influential and powerful players in the global economy as he does to ordinary people.

In the first episode of this polemical series, David McWilliams establishes that we have not just been living through a global recession, but what amounts to a coordinated economic crime. The banks were not only in control, but also out of control. The financial industry established what was effectively a drug syndicate, pushing the most dangerous addiction of all, easy credit. "When even the suburban bank manager has become a drug pusher, things are seriously unhinged," says McWilliams.

For next week's episode:

In episode two of Addicted To Money David McWilliams reveals how Australia and many other nations have become ?one-trick' economies, vulnerable to the inevitable sudden shocks that are a by-product of a fragile, globalised economy.

In Australia's case, we have become totally dependent on Chinese resource demand, putting our future in the hands of "a party-state dictatorship with a very big cheque book" says McWilliams.

China in turn has marched itself up an economic cul-de-sac, becoming overwhelmingly dependent on demand for its exports and in the process accumulating masses of potentially volatile US dollars.

McWilliams predicts that the US is headed for de facto default of its sovereign debt, and this has consequences for all of us.

Keep an eye on the ABC's webpage for further updates -

Scott Keefer

Posted by: Scott Keefer AT 05:31 am   |  Permalink   |  Email
Thursday, November 05 2009

Scott's latest article in the Eureka Report looks at how listening to three key pieces of advice from Warren Buffett would have helped investors over the past year:

  • Always know what the other guy is making.
  • If it seems too good to be true, it probably is.
  • Stay away from leverage. No one ever goes broke that doesn't owe money.

    Please click on the following link to be taken to the article - Buffett's three commandments - Eureka Report article
  • Posted by: AT 05:22 am   |  Permalink   |  Email
    Sunday, November 01 2009

    For those investors who are open to using debt in their situation to build wealth the implementation of a debt recycling strategy may be of value.

    A Debt recycling strategy is where home owners with a mortgage transfer debt from the non tax deductible home loan to a tax deductible investment loan through the course of paying down the home loan.

    The benefit of the strategy is that interest payments on the investment loan are able to be deducted from investment income when it comes to income tax time each year.  In essence, by doing this you are seeking the assistance of the federal government to help build your pool of financial assets.

    Is it a good idea for everyone?

    Definitely not.  The first key step is to undertake a stress test of your current debt position.  In its simplest form this means looking at the impact on your your cash flow should interest rates rise.  Will you still be able to make loan repayments if interest rates rise to certain levels.  This is very pertinent at the moment as more and more commentary suggests that the Reserve Bank will lift interest rates by 2% over the course of the next 12 to 18 months.  i actually think you should stress test your situation in case rates rise by 3 or 4% to be even more comfortable that you are not holding too much debt.  See the problem becomes that should interest rates rise to levels where you are unable to make loan repayments you will most likely be forced to sell.  If interest rates have risen by significant amounts there is a good chance that this will be exactly the time you do not want to sell.

    (To add another layer of complexity, it is also worth contemplating what would be the situation if you lost income for whatever reason for a period of time - cut back in hours, ill health, retrenchment - how long could you continue to make repayments on a particular loan value - but lets leave this for another blog.)

    Once you have gone through this exercise and decided that you could afford to maintain $X amount of debt even if interest rates rose to a level well above say 10%, you could possibly be looking at a strategy of once paying down so that you home loan is now less than $X every extra dollar you pay off the loan is used to increase an investment loan which is used to invest in other growth assets like shares and listed property.

    Is it a good time to invest in shares and listed property?

    The next question that should be asked is whether now is a good time to loan money to invest in shares.  With interest rates at between 5 & 6% the odds are in your favour because over the long term shares have provided a return of between 6 & 7% above inflation.  So if the Reserve Bank is targetting inflation of 2 to 3% this suggests that shares should provide a return of 8 to 10% over the long term.  Wo this comparison looks pretty positive.  However as interest rates start to rise in the economy the differential between the cost of the loan and the likely return from the investments starts to narrow and the likelihood of success also narrows.

    Now in the interests of providing a full and frank viewpoint, some will suggest that maybe the risk premium for investing in shares is higher than historical levels.  This is saying that the current risks involved with investing in shares, which we have been all clearly reminded off through 2008 and early 2009, may be more than usual and therefore investors expect a higher return than the 6 or 7% premium above inflation.  The period March to September 2009 would suggest this has been the case but we can not be certain that such conditions will continue going forward.

    On the opposing side are those that suggest that the world economy is in the middle of an L or W shaped cycle where there is at best a long period of little growth ahead of us or at worst we are in a bear market rally with bad conditions still to be faced.

    What do I think?

    I claim no ability to predict the future so for me it comes down to this question -

    Do you need to take on extra risks to reach your financial goals or are there other strategies at your disposal through cost reductions and the like?

    If you don't need to use debt than don't.  If you do, then seriously weigh up the possible outcomes and limit the use of debt to the minimum.

    As always the decision comes down to each person's individual circumstances.  If you are thinking of using this strategy it would be very wise to first consult a financial adviser for guidance.

    Following up from my previous blog - MLC have a useful case study on their website which explains the strategy of debt recycling.  It is worth a look for those who might be contemplating this approach - MLC Debt Recycling page.


    Posted by: Scott Keefer AT 12:00 am   |  Permalink   |  Email
    Request for Information 
    If you have questions, or would like more information, please go to our Contact page and leave your name and contact information.