A new era for personal financial advice?

A new era for personal financial advice?The Future of Financial Advice (FOFA) reforms ban “conflicted remuneration” … in the future

Many people will be unfamiliar with the new FOFA reforms that came into effect on 1 July 2013. In this article, we look at one of the key changes: the banning of “conflicted remuneration”.

The intent of the FOFA reforms is to improve the quality of financial advice in Australia. One of the key elements of the reforms is to ban “conflicted remuneration” i.e. the payment of commissions and rebates by financial product issuers to advisers who recommend their product to a client. This reform is not peculiar to Australia – there has been a worldwide push to remove commission based financial products.

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Revisiting the Global Financial Crisis

Revisiting the Global Financial CrisisHow did you feel during the depths of the GFC?

With the benefit of time, we tend to forget the strength of emotions we experienced in the past. I recently came across an email that we sent to a couple who were struggling with the uncertainty created by the Global Financial Crisis . It was written on 19th February 2009 – a couple of weeks before world share markets bottomed.

The email is a good reminder of the heightened emotions that prevailed at the time and the irrationality that they can produce. The couple were imagining all kinds of catastrophes and looking for any other solution than patiently sitting things out. Investor sentiment at the time was pretty low, with pessimists outranking optimists by seven to one.

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Principles of successful wealth management

Principles of successful wealth management

Do the “principles” still stack up?

When we started Wealth Foundations in late 2007, we had no idea just how troubled the world would become. At that time, we drew up what we regarded as twenty timeless principles for successful wealth management. They became the basis for our “Foundations” series.

It is interesting to revisit these “principles” four years later to see whether they still measure up or whether we built our foundations on shaky ground. Our assessment is that for those prepared to look beyond what’s happening now and are committed to building the financial future they want, the principles are as valid today as they were in 2007.

Our twenty principles of wealth management

Our twenty principles are restated below. Do they resonate with you?

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Is the nation’s financial planning on track?

Is the nation’s financial planning on track?What trends in key financial planning indicators should we expect?

As wealth managers, we spend a lot of time working with our clients to structure their affairs to give them the best chance of achieving their desired financial futures. And we’re not just talking about structuring in terms of setting up self managed super funds, family trusts and the like. We’re talking about the structure and composition of their personal balance sheets. To us, this is the foundation of good financial planning.

We thought it would be interesting to look at the change in the financial position of the average Australian household over the past 20 years. Given the aging of the baby boomers over these two decades and their growing need to prepare for imminent retirement, we were surprised with what we found.
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“Ace stock picker” claim warrants further investigation

Eight years of market outperformance seen as indicator of skill …“Ace stock picker” claim warrants further investigation

An article in “The Australian” of 20 October 2010, titled “Ace stock picker John Sevior the key to bid for Perpetual”, suggests that the proposal by private equity group KKR to purchase fund manager, Perpetual Limited, depends on retaining the services of veteran stock picker, John Sevior.

To illustrate Sevior’s importance to the Perpetual business, the article points out that since he was appointed head of Australian equities in September 2002, Perpetual’s flagship Wholesale Australian Share Fund had returned 12% a year (net of fees). This compares with the annual return for the well accepted market benchmark, the S&P/ASX 200 Accumulation Index, of 10.22% for the same period.

The article goes on to say:

“Industry observers said yesterday a 1.78 per cent outperformance a year for eight years was a creditable effort. This was especially so because the market was driven by growth stocks (the commodities boom) for much of that time, while Perpetual is a so-called value manager specialising in finding undervalued companies”.

So the conclusion appears to be that Sevior (and his team) must be highly skilled and adding significant value. But is this a valid conclusion?
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Is there a bond market “bubble”?

Investing in government bonds is attracting a lot of attention Is there a bond market “bubble”?

Herding or “running with the pack” is one of a number of well documented psychological biases that inhibit our ability to make rational investment decisions that are not in our objective long term interest. And so are “hindsight bias”, “prediction addiction” and “overconfidence”.

We may currently be seeing them all interact on a global scale in the fixed interest or bond markets. An article in “The New York Times” of 21 August 2010 reported that a “staggering” $33.12 billion had been withdrawn from domestic equity funds in the first seven months of 2010, with many investors now “choosing investments they deem safer, like bonds”.

“The Economist” of 19 August, 2010 observed that falling US bond yields had delivered “bumper returns to investors” and inflows of $191 billion to bond funds. The same article also noted that “Some go so far as to call the market a bond bubble”.

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Wealth Management: a risky business

Share and property investments are risky …Wealth Management: a risky business

Most people understand that the returns of growth investments (i.e. shares and property) fluctuate considerably. If they didn’t prior to the Global Financial Crisis, they most certainly have a better grasp of that now.

But most don’t really have a good understanding of the potential range of variation of returns, without anything particularly unusual happening. And nor do they appreciate how dramatically the pattern of returns can affect long term wealth outcomes.

We use the Australian share market experience of the 25 years to December 2009 to shed some light.
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Why have a Self Managed Super Fund?

Not for higher investment returns …Self managed super fund

There has been an above trend increase in the number of self managed super funds (“SMSF”) set up recently. Such spurts usually occur when investment returns have been poor. The expectation appears to be that better returns will be achieved with a self managed fund.

However, there is no clear link between investment performance and super fund structure i.e. self managed, industry, corporate or retail public offer. While industry fund advertisements suggest otherwise, their claims relate to the relatively higher costs of the alternatives. Before costs and taxes, no structure has any inherent investment performance advantage.

Five potential SMSF benefits …

But a SMSF offers at least five potential benefits over other super structures:
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Are home loan interest rates really low?

Lowest home loan rates in 50 years …
Low home loan interest rates
“Lowest home loan rates in 50 years” scream the headlines. Best time to borrow and buy property claim the real estate agents. With an increased home savings grant for first home buyers, it’s easy to believe that there will never be a better time for existing renters to stop paying “dead money” and buy their own home.

And many baby boomers, who created a lot of their wealth by jumping into the residential market in the 1970’s and early 1980’s, are probably now encouraging their children to take the plunge because it worked well for them.

But while home loan interest rates are “low”, the question that should be asked is “Are they “cheap”?”

Home loan interest rates are low but not cheap …
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Market Timing? … that’s easy!

Market timingYears ago at a foreign exchange course we were asked to participate in a practical simulation game. Prior to commencing the game one of the participants had a moment of clarity.

Participant: “So, what you’re saying is that we should buy low and sell high?”
Organiser: “Well … Yes.”
Participant: “Oh, that’s easy!”

What seems so easy in theory is anything but in practice. It’s a valuable lesson which few learn until late into their investing lives. Timing your entry and exit from a market is an appealing concept that seems a simple and smart way to add value.

What is it that makes it so difficult to turn this theory into reality?
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