What’s an ideal financial planning client?


Not all prospective clients suit our financial planning approach
Whats an ideal financial planning client?

Financial planning and financial planners come in for a fair amount of, often deserved, criticism. Hardly a week goes by without a story about how a “dodgy financial planner” took advantage of a trusting, but ignorant, client.

But turning that usual story around, since the beginning of this year we have noticed an increase in inquiry from what we have come to realise, through experience, is the “dodgy” or, more politely, unsuited client for our style of financial planning.

Within a couple of weeks of each other, I had meetings with two prospective clients that superficially appeared to fit our ideal client criteria. Both had net worth in excess of $5 million, no debt and significant investment wealth. But in response to the question, “Why have you come to see us?”, the similarity of their responses was uncanny and set off alarm bells.

Both were concerned that their “money wasn’t working hard enough”. They were hoping we could assist. What they really wanted was for us to give them increased investment returns without taking additional risk. Given our core belief that risk and return are related, it was immediately apparent that their expectations were unrealistic.

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Investment Yield versus Return for Risk

Investment Yield versus Return for Risk
What to do when cash rates fall?

With interest rates on cash in Australia falling to record lows, in absolute terms, there seems to be a scramble by investors to chase higher returns for their capital. Cash, which often ends up as the investment of choice by default, seems no longer a palatable option, with cash rates at a level that is now causing significant pain for many investors.

With cash rates so low there are numerous alternatives that offer a higher income return, or yield, than cash. For example, Australian Bank shares offer investors a grossed up dividend yield of close to 7.0% per annum – that’s a significant uplift on the Reserve Bank ‘s 2.25% per annum cash rate. This appears as an appealing alternative to investors who can no longer stomach the opportunity cost of holding cash.

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How much investment risk can you bear?

How much investment risk can you bear?
Your allocation to growth assets is a key measure of investment risk

In our previous article in our series on the Personal Financial Dashboard – a graphic format that succinctly captures the journey to, arrival at and maintenance of financial independence – we discussed the need to be tax aware when investing. Financial independence is harder to achieve if there is an unnecessarily large tax leakage.

But tax shouldn’t be the overriding factor when making investment decisions. Rather, the primary focus should be on risk and related return. The Personal Financial Dashboard includes two charts which look at key aspects of investment risk management i.e.:

  1.  the Growth  Asset Allocation Ratio (Chart 5); and
  2. the Diversification Ratio (Chart 6).

In this article we focus on the Growth Asset Allocation Ratio (“GAAR”). The Diversification Ratio is discussed in our next article.

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Should your feelings influence investment decisions?


Should your feelings influence investment decisions?Our feelings aren’t reliable indicators of future investment returns

If you let it, investing can be an emotional roller coaster. But while in many walks of life how we feel may be an important input to decision making, letting short term emotions substitute for a soundly constructed long term investment strategy is generally not a good idea.

For example, the emotions of fear and greed, allowed to run unchecked, can drive behaviours that are deleterious to our financial health. Evidence shows we often rush to sell when share (and property) markets are at their gloomiest (with prices relatively low) and fall over ourselves to buy when asset prices have risen and are relatively high. Consistently selling low and buying high is a sure fire way to go broke.

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Is your investment risk strategy paying off?

Is your investment risk strategy paying off?Are you an intelligent risk taker?

Most investors accept the notion that risk and return are related and that those who are prepared to take on more risk will ultimately get rewarded for their risk taking. As we’ve seen with the implosion of some investments during the GFC, increased risk taking does not always guarantee higher returns, it simply exposes you to the opportunity for higher returns.
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Understanding asset allocation

Understanding asset allocationAsset allocation: a measure of your investment risk

Our objective is to help clients become financially well organised and make smart financial choices so they have the best chance of enjoying the financial future they want. A key to achieving this objective is agreeing an appropriate investment risk exposure with each client and carefully managing that exposure over time. For us, this risk exposure is most appropriately measured by the client’s asset allocation.

This is the first in a series of four articles that explain our approach to asset allocation. Most people think they have a pretty good idea of what asset allocation is all about. Our experience suggests they don’t. While we start off pretty basically, we hope that by the final article you will agree that by viewing asset allocation in the lifelong context we advocate some conventional financial planning views are challenged and some smarter ways of thinking about personal finance issues emerge.
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“Timber”: Agribusiness Managers Felled

Diseased from the beginning …

“Timber”: Agribusiness Managers FelledWithin a couple of weeks of each other in April and May, the two largest stock exchange listed managers of managed investment schemes (“MIS”), Timbercorp and Great Southern, went under. Most likely, shareholders will end up with nothing while creditors are almost certain to take a substantial haircut.

Timbercorp and Great Southern sold interests in agriculture based (or “agribusiness”) investment projects, particularly forestry plantations, to investors or “growers”.

While the “green” credentials of the projects were highlighted, the primary purchase motivation for investors was the large up-front tax benefits offered. The long term economic viability of the projects was always suspect, even more so now that their ongoing management is under a cloud.

Based on our wealth management principles, we think these projects and the decisions to invest in them were flawed from the start. It is a tragedy that there is now an estimated $6 billion of funds and 61,000 investors (see Footnote) caught up in a disaster that could have been avoided by applying a few tried and tested decision making fundamentals.
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