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Goodbye to ad-hoc portfolios

Investment portfolios are often built in an ad-hoc fashion with too little thought given to taking a co-ordinated approach to investing.

         

 

Many investors, for instance, have collected “bottom-drawer”shares over the years that don't seem to have much of a useful place in their portfolios. These shares may have been inherited, bought at random from time to time or gained when a membership organisation listed on the market.

One way to go about tidying up a messy collection of investments is to think about what properly-diversified portfolio you would have created if you had started from scratch.

Perhaps put yourself in the position of a person who has rolled over large amount of super into a new self-managed super fund (SMSF).

The money in this SMSF example is in cash and is ready for investment. (For the record, recent tax office statistics show that more than 25,000 SMSFs were set up in 2017-18.)

Vanguard's approach for constructing Australian diversified funds, a research paper* by our investment strategists, gives four key principles that Vanguard uses in constructing and maintaining its professionally-managed diversified portfolios.

These principles – concerning investment goals, portfolio balance, low costs and investor discipline – are as applicable to individual investors as professional investment managers.

Goals
Have clear, appropriate and attainable goals for your portfolio. Critically, these goals should not rely on unrealistic expectations for investment returns or excessive risks.

Most individual investors have a series of goals such as saving enough for retirement, saving for a home deposit and paying off debt before retirement. Once your goals are listed, you can prioritise their importance.

Ask yourself such questions as: How much should I save in total to achieve my goals? How much should I regularly save to eventually reach my goals? How many years do I intend to keep working and saving?

Balance
Set or balance your portfolio's asset allocation to different asset classes appropriately for reaching your goals while staying within your tolerance to risk. (Asset classes include local and international shares, fixed interest, property and cash.)

And then regularly rebalance your portfolio back to its long-term strategic asset allocation to recapture its intended risk-and-return characteristics. (The portfolio of a professionally-managed diversified fund is automatically rebalanced.)

Costs
Minimise costs to improve your chances of better long-term returns. And never overlook that each dollar paid in costs, including investment management fees, is potentially a dollar less in your returns.

Repeated research, including by Vanguard**, concludes that the size of an investment fund's fees is the most-reliable and most-quantifiable predictor of future performance. This applies whether you are investing in index funds, actively-managed funds or a combination of both.

Discipline
Take a disciplined, non-emotional approach to following your investment strategy designed to meet your goals. Don't be thrown off course by overreacting to short-term market movements, the emotions of the investment “herd”and changing investment environments.

And avoid the trap of being an undisciplined performance chaser who switches to whatever is the latest highest-performing fund. Research, including by Vanguard, suggests today's performance winners have a strong chance of becoming tomorrow's losers. And today's losers could become tomorrow's winners.

* Vanguard's approach for constructing Australian diversified funds, published 2017.
**The case for low-cost index-fund investing, Australian edition, Vanguard 2018.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
15 April 2019

 

What a financial planner does to help.

Updated research from Vanguard confirms what previous research found concerning the average value added to clients' long-term wealth by a financial planner.  

         

 

The original Vanguard research covered a 16 year period and looked at how a financial planner adds value to a client’s wealth.  We reported on this in September last year, article replicated below.  Now, six months later, March 2019, further research has confirmed the original findings.  

Put simply, the use of professional financial planning expertise can add, in the long-term, around 3% to a client’s wealth.  Extra that not only adds value but also provides the funds to pay for a financial planner's services, assistance with tax issues, an expert in retirement planning and often a friend.  All helping you make decisions that are, otherwise, complex and difficult.

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What a financial adviser can add to your portfolio's returns (September 2018)

A 16-year study by Vanguard (latest report from July 2018) has found that this figure is about 3% net. 

This is over and above what might be generated by non-planner assisted investment activity.  This means that even for small investors, a financial planner will not only pay for themselves but provide the professionalism to navigate the confusion, performance and peace of mind you might not get elsewhere or if you were doing the job yourself.

A recent example:  An investor was using three stock brokers and each one thought the others were managing issues such as tax.  When a financial planner was engaged it was realised this investor had lost around $200,000 over a number of years.  This investor only has a modest portfolio.

 

Peter Graham
PlannerWeb

Limited recourse borrowing arrangements – LRBAs

Transfer of loan amounts flagged as vital compliance step for LRBAs

         

 

With greater numbers of SMSFs turning to related-party loans after several banks withdrew from the SMSF lending space, a law firm has stressed the importance of ensuring that an actual transfer of money has taken place.

In an online article, Townsends Business & Corporate Lawyers explained that, with borrowing options becoming more limited and SMSFs using related-party loans to fund property purchases, it’s vital that SMSF professionals and their clients are undertaking all the necessary compliance steps.

“When it comes to related-party borrowing, the importance of actually transferring the loan amount from the lender to the borrower, or to the vendor at the direction of the borrower, is sometimes overlooked, particularly in the circumstances where the same individual is the vendor, the lender and the fund trustee,” Townsends said.

The law firm cautioned that, if SMSFs are considering these types of transactions, just having formal loan documents noting the arm’s length loan terms may not be sufficient.

“The ATO’s current view is that there needs to be a transfer of money from the lender to the borrower as a necessary feature of a borrowing as referred to in the Superannuation Industry (Supervision) Act 1993,” it said.

“Journal entries or set-offs do not meet the requirements of a borrowing. The ATO has relied on old rulings in other contexts to distinguish loans from financial accommodation.”

The law firm gave an example of John, the sole member of an SMSF and sole director of the fund’s corporate trustee.

“After seeking financial and tax advice on the benefits of owning a property in his SMSF, John decides to sell his investment property valued at $1 million to his SMSF. As his SMSF’s available balance is $200,000 short of the market value, he will enter into a contract with the SMSF for a loan of $200,000 to fund its purchase using a limited recourse borrowing arrangement,” Townsends explained.

“In lieu of paying the loan amount to the SMSF, he received $800,000 as the vendor from the SMSF on settlement, the $1 million sale price less his ‘loan’ of $200,000 to the fund. But is that $200,000 really a loan?”

Townsends warned that, in this example, John should have actually transferred $200,000 from his personal account to the fund as an advance of the loan amount, and received the whole $1 million on the settlement of the property sale contract. 

“If the transaction is deemed to be an arrangement other than a loan, the LRBA exception under the SIS Act will not apply and this may expose the SMSF trustee to civil or criminal penalties and place the SMSF’s complying status at risk,” it said.

 

Miranda Brownlee
18 April 2019
SMSFadviser.com

 

SMSFs on ATO’s radar in cryptocurrency review

         

 

As part of its review of transaction information from cryptocurrency service providers, the ATO has said that it will be using this data to ensure that SMSF trustees or members who invest in cryptocurrency are complying with their obligations.

In an online update, the ATO stated that it has started collecting customer and transaction information from designated cryptocurrency service providers, where individuals, businesses and SMSFs buy, sell and transfer cryptocurrency. 

“We’ll collect this data and match it with taxpayer records to verify ‘purchase and sale’ information, to ensure people are meeting their tax obligations,” it said.

“We’ll then be able to identify SMSF trustees or members who may need help to understand their obligations, so we can provide further advice and guidance of the rules around the tax treatment of crypto assets.”

Following the data-matching exercise, the ATO said that it may contact taxpayers or SMSF members to verify the information it has collected. It said that it will provide individuals with at least 28 days to clarify any information.

“If you acquire or dispose of cryptocurrency, you must keep records of the transactions,” the Tax Office noted. 

The ATO also warned SMSFs that cryptocurrency can be a high-risk, volatile investment. 

“We’ve already seen incidences of SMSFs losing significant amounts of their retirement savings,” the ATO said. 

“We strongly recommend all trustees undertake their own investigation and appropriate due diligence before investing with any organisation investing super assets into cryptocurrency holdings.”

 

Miranda Brownlee
01 May 2019
smsfadviser.com

 

The proper help can be a benefit – age pension

About two-thirds of Australians are entitled to at least a partial age pension (i), so most of us need to understand how it works and determine what role we want it to play in our retirement plan.

         

 

The age pension provides key benefits to retirees. It pays an income stream until death that is adjusted for inflation, providing a bulwark against poverty and higher prices in our later years.

Even though age pension benefits may sometimes be quite small, the fact that they continue until death can help manage the risk that you may live longer than planned for in retirement. For example, a male/female couple both aged 67 today has a 50 per cent chance that at least one of the couple makes it to age 90 and a 5 per cent (1 in 20) chance that one of them makes it to age 99 (ii).

Because the age pension is means tested and personal situations and goals vary so much, this is one of the occasions when it makes sense to consider using a financial advisor to help understand the rules and factor the age pension into your broader retirement financial plan.

To decide how much age pension you are entitled to receive, the government considers your assets and your income. The level of pension received is based on which of those means tests produces the lower benefit.

On a basic level, the lower your assets and income, the more age pension you will be entitled to as its role as a safety net kicks in up to the maximum amount of $843.60 a fortnight for a single pensioner and $635.90 each for a couple, as at March 2019.

A financial advisor experienced in the interaction of the social security and superannuation systems can help you understand how these rules work and in particular the key break points where benefits reduce.

As you can see from this chart, the benefits drop off quite steeply at certain asset levels.

Understanding the impact of wealth on the age pension received

An advisor can also help you make decisions about how these breakpoints interact with your financial goals.

For example, consider the couple at Point A in the chart. If they start drawing down their assets to increase their annual spending or make a one-off purchase, they will also increase their yearly age pension benefit. This might be a wise move for some couples but not for others. Let's say this couple had identified leaving money to their children or setting aside funds for aged care as a financial goal. In those cases, the couple might do best to preserve and possibly grow, rather than spend, their assets, to achieve the goal.

Financial advisors can also guide you through other key considerations, including:

Rules on the treatment of annuities for means testing
Pension loan schemes to increase age pension using home equity
Links between age pension and related benefits, such as the Commonwealth Seniors Health Card
To learn more on the age pension and on creating financial security in retirement, check out our latest research on the topic.

 

i  According to the Australian Institute for Health and Welfare 
ii  “The role of the Age Pension in your Retirement Plan,” p. 3.

 

Robin Bowerman
Head of Corporate Affairs at Vanguard.
09 April 2019

 

Australia’s $4bn Super blackhole impacting self-employed most

While a recent research report has predicted that the ATO’s crackdown on SG non-compliance will be effective in improving the payment of super to employees, the lack of super savings among the self-employed is expected to remain a critical issue.

           

 

As part of a recent research report, Mercer has estimated that around 935,350 of Australia’s workforce, including those that are self-employed, do not receive any kind of super, accounting for an annual $4 billion deficit in super savings.

Out of this total number, it estimated that around 400,000 Australian salaried workers have not been paid superannuation entitlements.

The estimates were based on a small sample file of tax and superannuation data from the ATO’s records for 2015–16.

The analysis was based on working Australians earning more than $8,000 per year who did not make any superannuation contributions or did not have contributions made on their behalf by an employer during the 2015–16 financial year.

The report estimated that around one in 11 workers are not paid super, while two in three self-employed do not receive any kind of superannuation payments.

It noted that the ATO has been playing a significant role in ensuring that workers are paid the minimum SG rate and has implemented a number of measures to improve compliance by employers.

“A new reporting mechanism for APRA-regulated funds, known as the Member Accounts Transaction Service (MATS), was recently introduced. Contributions for each member will be recorded and reported to the ATO at the time they occur rather than annually,” it said.

“The subsequent use of data analytics to, for example, match contributions with reported salary and PAYG tax will help improve their compliance activity.”

The ATO, it said, has also made changes to improve employees’ visibility regarding their entitlements and payments, through online services and myGov.

“All these are positive moves that will ensure better compliance of SG by employers,” the report stated.

While the ATO-led crackdown on recalcitrant employers will improve the plight of salaried workers, the self-employed remain vulnerable in terms of not receiving any super.

“The debate about legislating to force the self-employed into Australia’s superannuation system remains ongoing. Many self-employed individuals run small businesses and prioritise cash flow and re-investing into their business over saving,” it said.

“Many also believe their business will be their retirement nest egg, but that is certainly not guaranteed.”

Mercer suggested in the report that policymakers could look to the scheme used by Finland which requires self-employed workers to provide an annual wage earnings estimate, upon which pension contribution calculations are made, rather than the value of their business.

“Adopting a similar model to bring the self-employed inside the regulatory environment will provide a retirement safety net and ensure they exit the workforce with savings,” it said.

“This could be achieved by extending the SG payment to cover the self-employed, at a reduced rate initially, such as 3 per cent, to avoid a sudden and a hefty impost.”

 

Miranda Brownlee
12 April 2019
smsfadviser.com

 

How the 2019 Federal Budget affects you

The following links take you to that section of the 2019 Budget that affects you most.

           

Easy to watch videos and written detail covering the four main areas of the 2019 Federal Budget, plus, for those who like to read, a link to the Budget documents themselves.

Your Budget:

Lower Taxes

Guaranteeing Essential Services

Investing in our Community

Budget Documents

 

 

Source:  www.budget.gov.au

Federal Budget 2019 – Overview

The Government’s economic plan and this Budget are building a stronger economy and securing a better future for all Australians. This Budget and our economic plan are:

  • Returning the budget to surplus
  • Delivering more jobs
  • Providing lower taxes
  • Guaranteeing essential services like Medicare, schools, hospitals and roads

The following video outlines Australia's plan for a bright and robust future for all Australians.

         

 

Source: www.budget.gov.au

 

Budget Time – How’s Australia going?

A quick look at these facts and figures and you'll be totally prepared for Tuesday's Budget.

       

 

An up-to-date snapshot of Australia's vital statistics.  

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

Consumers misunderstand types of advice

The need to be studious about our financial future never goes away and ASIC is pushing hard to help us all understand this.  Advice is very important but so to is having a good understanding of what is being proposed. 

         

 

The latest Australian Securities and Investments Commission (ASIC) research has revealed a basic misunderstanding among consumers of what constitutes general financial advice and what constitutes personal financial advice.

Commenting on the corporate regulator’s “Financial advice: Mind the gap” report, ASIC deputy chair Karen Chester said: “This disturbing gap in understanding whether the advice they are getting is personal or not means many consumers are under the false premise their interests are being prioritised, when no such protection exists.”

Results of the study showed 53 per cent of respondents correctly identified general advice and 40 per cent of those surveyed incorrectly believed the adviser had an obligation to take their personal circumstances into account when providing general advice.

The regulator has identified this lack of knowledge regarding the different types of advice as presenting significant risk to consumers as with the continued evolution of financial products.

“ASIC is seeing increased sales of complex financial products under general advice models – so not tailored to personal circumstances – leaving many consumers, especially retirees, exposed to the potential risk of financial loss. And while the financial services royal commission and the government’s response dealt with the most egregious risks of hawking of complex financial products, consumer confusion about what is personal and general advice needs to be addressed,” Chester said.

ASIC said it regards the results of the report as a reinforcement of the Financial System Inquiry findings that found the use of the term general advice is likely to lead to unrealistic consumer expectations about the value and level of protection available to them when seeking financial planning services.

“This consumer research is timely. It comes as the government is considering policy recommendations on financial advice from the Productivity Commission’s twin reports on Australia’s financial and superannuation systems. And at a time when the financial system itself undergoes much change, following the intense scrutiny of the financial services royal commission, including considering new financial advice and distribution business models,” Chester said.

The study was conducted by independent firm Whereto Research and asked participants to identify what type of advice was being provided in hypothetical situations.

 

Darin Tyson-Chan
March 28, 2019
smsmagazine.com.au

 

 

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