Wealth management is much more than investment

Wealth management is much more than investmentInvestment is only a piece in the “puzzle”

The terms “wealth management” or “financial planning” are seen as synonymous with investment advice and investments by most people. This is not surprising given that much of the financial planning industry also thinks this way: the primary reason why the major financial institutions employ financial advisers is to sell their investment (and insurance) products.

But, in our view, wealth management should be much more than giving investment advice and promoting investment products. Its purpose should be to help you maximise the chances that you achieve your desired financial future.

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Household income and wealth in Australia

Household income and wealth in Australia

Official statistics provide income and wealth insights

In the latter part of 2011, the Australian Bureau of Statistics released three publications [1] that together provide valuable insights regarding household income and wealth in Australia. The surveys supporting the statistical releases were conducted in 2009-10.

The publications provide the most comprehensive and up to date data, on a state and national basis, for a number of key financial planning and wealth management “progress indicators”. In this article, we will focus on how those in the top quintiles (i.e. top 20%) by household net worth and income are performing in terms of benchmarks we monitor for our clients. The aim is to assess the “financial health” of the nation’s wealthiest 20%.

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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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Moneyball: a story of faith in an objective strategy

Moneyball: a story of faith in an objective strategy

Evidence triumphs over anecdote

If you’ve seen the movie “Moneyball”, (or read the book by Michael Lewis), you may have picked up on some similarities between the issues faced in managing a major league baseball team and those faced in managing investment wealth.

If you’re not familiar with the movie/book, it tells the story of Billy Beane, a professional baseball manager of the Oakland A’s, a low tier baseball team in the US major league. To overcome the financial power of the top tier teams, he adopts an approach that focuses on buying the attributes that win games (rather than buying the specific players he thinks will win games).

Rather than replace a high profile, big hitter with another equally expensive big hitter, Beane looked for other ways to replace him. The team didn’t necessarily need another big hitter, they needed to replace the (statistical) attributes that they had lost (e.g. the average number of times he got on base per game). By looking at player selection in this way he gave himself the freedom to build a winning baseball team without the restrictions imposed by traditional methods.

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Financial Independence: a worthwhile financial planning objective?

Financial Independence: a worthwhile financial planning objective?

Clearly, financial independence isn’t important for everyone

“Financial independence” is achieved when you have sufficient net investment wealth to support your desired lifestyle indefinitely, without the need for earned income i.e. work is a choice, rather than a necessity. We have always regarded the achievement of financial independence as a financial planning objective that most would embrace.

However, separate conversations that I had last week with three mid-late fifty year old professionals (who aren’t currently Wealth Foundations’ clients) really made me think that perhaps we, and our clients, were living in an alternative universe. The three admitted that within the past six months they had each borrowed between one and two million dollars either to renovate their existing residence or partly finance the purchase of a new residence.

And, apparently, they felt reasonably comfortable doing so. Either their accountant and/or financial planner had assured them that they could service the debt. Or they took solace from the fact that many colleagues around their age were borrowing similar amounts for similar reasons.
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You can be better off paying capital gains tax!

You can be better off paying capital gains tax!

Surely, it’s better to defer paying tax

It is not unusual for clients to have sizeable exposures to individual shares that they have held for long periods of time. We generally would encourage them to sell these holdings and invest the proceeds into highly diversified investments to reduce the risk of their portfolios, without a loss of expected return.

However, we often experience considerable resistance to this advice if sale of the shares would result in the crystallisation of significant capital gains and the obligation to pay capital gains tax. Clients reasonably ask “What’s the point of taking an unnecessary action that brings forward the payment of tax?”

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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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What is “The Value of Financial Planning”?

What is “The Value of Financial Planning”?

Financial planning continues to get a bad rap …

Financial planning continues to get a bad rap. The Global Financial Crisis, poor investment returns, the failure of various financial planning firms and investment schemes, threats of further government regulation of the industry and a media that is all too willing to focus on the negative are contributing factors. As a result, many people that should under no circumstances attempt to look after their personal financial affairs have been convinced that this is the best way to go.

And for those that continue to seek financial advice, too many decisions are being made on the basis of immediate cost rather than an assessment of value. This is often because it is difficult to judge the value ahead of making the decision to appoint a financial planner. But cost may be a very poor guide to quality. And, unfortunately, it will not reflect missed opportunities, mistakes and poor decisions. 

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DIY Financial Planning – The real costs may not be evident

DIY Financial Planning – The real costs may not be evidentDIY Financial Planning appears to be a low cost alternative

There are a lot of smart people who make some rather dumb choices with respect to their finances. More often than not this is driven by short term thinking and the desire to save an immediate out of pocket expense. There is often a failure to lift the eyes and see the bigger picture.

An example that highlights this is the use of superannuation. We’ve talked previously about the significant benefits of making pre-tax contributions to super. However, in this article we look at the benefits of making post-tax contributions to super.
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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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