Roskow Blog

Why sell when you can outsource?

Fri, 27 Jan 2012 06:34:00 GMT

A client of mine was getting concerned about her parents who were getting a little older and are at that age where they can still look after themselves but doing things like gardening are becoming increasingly difficult.

On her last visit, she took a look through the back sliding door and noticed "the jungle" that used to be a very tidy Queensland garden. She saw this as the first sign of trouble and raised the question with me of possibly selling the house to find something else without a garden that would be less difficult for them to maintain. So I crunched some numbers....

Their house is worth around $950,000 (in today's market that is). If they moved, they would be looking at something similar in price range because while they may look to downsize, they still want to live in a nice area and a property that doesn't need any work at all.

Let's look at some of the costs they'll incur to sell this property:

Advertising - $2,000 to $4,000

Legals - $800 to $1,000

Selling agent commission - $26,000

Other (cleaning up that garden and fresh paint etc) - $1,000

TOTAL MAX = $32,000

I know that in about 12 years time, her parents are going to need some further caring - perhaps looking at aged care facilities, so I suggested something quite simple:

Take that $32,000 that would otherwise get eaten up in costs, divide it by the 12 years and you get roughly $2,600 per year to spend on gardening. That is $100 per fortnight to get someone in and Mum and Dad get to continue living in the home they love.

Problem solved and you'll be happy to know, the garden is looking great, just in time for a BBQ on Australia Day.

Lower fees than Australian Super

Fri, 20 Jan 2012 00:02:00 GMT

I'm getting very irritated by the Australian Super advertisements that are being shown during the the tennis so it's time to take some revenge.

The reason I'm irritated is because Australian Super have a massive marketing budget and I think they are wasting money on lazy messages. The industry super funds have done a great job of pointing out that keeping fees low on your superannuation fund is very important but there more to it than just keeping fees low.

There was one advertisement that they were running where one of their members admits "I have no idea how the funds are invested but the fees are low so that's good".

Risk, asset allocation, investment strategy and investment managers are all other important issues, but Australian Super just keeps crapping on about low fees.

If keeping fees low is the most important thing then here's something Australian Super won't want their 1.8 million members to know: there's another industry superannuation fund out there with even lower fees than them.

Which one?

First State Super. Their fees are incredibly low. Their fees are over 50% lower than Australian Super. The Australian Super High Growth Fund investment fee is 0.62%, First State Super investment fee is 0.29%

Australian Super Balanced fund fee is 0.56%, First State Super is 0.19%; that's 66% lower!

For more information on the fees at First State Super click here.

Please note, this is not a recommendation for First State Super. Keeping fees low is important but they utilise crystal ball gazing fund managers who constantly underperform benchmarks so we don't have faith in their investment strategy. If you want to learn more about our investment philosophy you will need to call us to schedule an appointment but we do intend to have more educational tools on our website to provide more detail later this year.

So forward this blog on to everyone you know who has an Australian Super account because if fees are all that matters, then there's a better option out there (note: be careful when rolling over your superannuation; if you have insurance cover through your existing fund and are rolling it over, you must get replacement cover in place BEFORE you send a rollover request form; you can instruct your employer to start contributing to your new fund, get the insurance cover in place and THEN send the rollover form off; sound like too much hard work? Then get us to do it for you).

So one final point to make to Australian Super if any of their board members are reading this: keeping fees low is important and you've won that battle. But as a well known barefooted friend of mine has already advised the industry super fund network, it's time to take it to a new level and start educating members on the other elements listed above. Stop being lazy and complacent.

And stop utilising crystal ball gazing fund managers in your portfolios. There is overwhelming academic research which proves they aren't worth the fees you paid. It baffles me how you can't know about this yet...

Do you trust the Big 4 banks?

Fri, 13 Jan 2012 00:44:00 GMT

I was listening to Scott Pape's (The Barefoot Investor) radio program last Saturday whilst painting our wardrobes.

Scott's program is easy listening because it's low on jargon and he simply features caller after caller asking questions. One of the last callers was a dear old lady (it's safe to assume she was over 60) who was calling to discuss First Home Saver Accounts (FHSA) for one of her grandchildren.

She called to say that she hadn't started one for her grandchild because none of the Big 4 banks were offering them and called to ask why this was the case.

Before Scott could utter a word I yelled out "Because they can't make enough money off them" to show my wife how smart I am (she's very used to it) and picked up the phone to try and get through to Scott to share my view.

Scott has a 1 hour time slot which starts at 11am and 12pm was fast approaching. There was a line of callers so I didn't get through, but I am going to call Scott tomorrow to try to make this point:older generations are still in the (bad) habit of trusting the banks.

The reality is this: the products the big four banks offer, be it investment, superannuation, insurance or First Home Savers Accounts are not the best options out there because their fees are too high. The additional fees you pay compared to other options is all about their branding; the perceived "secure" element that "it's as safe as a bank".

But this isn't the case.

During the global financial crisis when the Australian Sharemarket dropped almost 40%, the banks products did too. In fact their own share price probably dropped somewhere near this as well. If anything, due to their higher fees if you had your funds invested in the bank products they would have dropped slightly more; and when the markets go up you get slightly less because you're paying for an additional security blanket.

Back in the day when the bank manager knew your name and getting a home loan was a privilege, not something they're begging you to do (as is the case today) I'm sure the level of trust and faith in the banks was much better than it is today.

The world has changed and this caller hasn't changed with it. She only trusts the banks and won't take action unless it's with them. What she doesn't understand is the banks are no longer a good option, there are much better options out there. She may be so set in her ways that it will be too hard for her to change her mindset on this, but the sooner that this perception is changed the better in my view.

If I get through to speak to Scott tomorrow I'm going to suggest that the lady look at Members Equity (www.membersequity.com.au). Members Equity is the bank that services all the industry superannuation funds. Their fees are low and their values are far more aligned to the interests of you and me, not generating profits for shareholders.

What is the cost of coffee per litre?

Thu, 12 Jan 2012 10:26:00 GMT

The cost of petrol was being debated on the radio this week with prices ranging from $1.30 per litre up to $1.60 per litre for unleaded petrol.

It always fascinates me that the price of petrol irritates people yet they don't complain about the cost of a bottle of Coke from the shops, the cost of water at the cricket or a new one to hit our budgets over the last few years; the cost of coffee.

Consider this:

On the Coles website a 1.25 Litre bottle of Coke costs $3.94 or $3.15 per litre.

A bottle of water at the cricket is $5.00 for a 600mL of water works out to be $8.33 per litre.

A medium coffee (around 333mL) costs $4.00 which works out to be $12.00 per litre.

Takeaway coffee is an item that is relatively new to most people's spending habits and it's scary how much it costs when you add it up.

My wife Sarah and I calculated that we spend up to $20 per week each on takeaway coffee and together might drink two bottles of wine per week at a cost of $30 per week. If we cut this out of our budget (at least most of it) we can save $70 per week or $280 per month.

With this additional money we've decided that we're going to apply for gym memberships at the local YMCA and we're thinking about getting Foxtel (for the upcoming footy season). If we are able to restrict our takeaway coffee to one a week each and cut wine out of our weekly diet, not only will we be fitter we'll still have money left over to throw at the mortgage.

What’s “New” about a New Normal?

Tue, 10 Jan 2012 00:05:00 GMT

The 2008 global market crisis and the struggling economy have left many investors fatigued. Despite two years of strong equity returns, some investors have been slow to regain market confidence. Many are accepting the talk about a “new normal” in which stocks offer lower returns in the future.1

The concept of a new normal is anything but new. In fact, throughout modern history, periods of economic upheaval and market volatility have led people to assume that life had somehow changed and that new economic rules or an expanding government would limit growth. What they could not see was how markets naturally adapt to major social and economic shifts, leading to new wealth creation.

Let’s look at other periods when investors had strong reasons to give up on stocks, and consider the parallels to today:

1932: The US stock market had just experienced four consecutive years of negative returns. A 1929 dollar invested in stocks was worth only 31 cents by the end of 1932. Hopes were sinking during the Great Depression, and many people felt as though the economy had permanently changed. Many investors left the market, and some would not return for a generation. Amidst what is considered the roughest economic time in US history, the markets looked ahead to recovery.

1941: World War II was raging, and the US had just entered the conflict. The US stock market had experienced two consecutive years of negative performance, and the economy had shown signs of sliding back into depression. Although conversion to a wartime economy would revive industrial production and boost employment, investors struggled to see beyond the conflict. Many expected rationing, price controls, directed production, and other government measures to limit private sector performance.

1974: Investors had just experienced the worst two-year market decline since the early 1930s, and the economy was entering its second year of recession. The Middle East war had triggered the Arab oil embargo in late 1973, which drove crude oil prices to record levels and resulted in price controls and gas lines. Consumers feared that other shortages would develop. President Nixon had resigned from office in August over the Watergate scandal. Annual inflation in 1974 averaged 11%, and with mortgage rates at 10%, the housing market was experiencing its worst slump in decades. With prices and unemployment rising, consumer confidence was weak and many economists were predicting another depression.

1981: The stock market had delivered strong positive returns in five of the last seven calendar years, and the two negative years (1977 and 1981) were only moderately negative. Despite these results, investors were weary from stagflation, which was characterized by high annual inflation, anemic GDP growth, and unemployment, and from fears of another economic downturn. In late 1980, gold climbed to a record $873 per ounce—or $2,457 in 2010 dollars. (By comparison, spot gold reached $1,256 per ounce in 2010.) Memories of the 1973–74 bear market lingered. A 1979 BusinessWeek cover story titled “The Death of Equities” claimed inflation was destroying the stock market and that stocks were no longer a good long-term investment.

1987: On “Black Monday” (October 19, 1987), the Dow Jones Industrial Average plummeted 508 points, losing over 22% of its value during the worst single day in market history. The plunge marked the end of a five-year bull market. But in the wake of the crash, the market began a relatively steady climb and recovered within two years. The effects of the crash were mostly limited to the financial sector, but the event shook investor confidence and raised concerns that destabilized markets would increase the odds of recession.

2002: By the end of 2002, investors had experienced the stress of the dot-com crash in March 2000, the shock of the September 11 attacks, and the early stages of wars in Afghanistan and Iraq. Although October 9, 2002, would ultimately mark the market’s low point, investors had endured three years of negative performance and an estimated $5 trillion in lost market value. A younger generation of investors had experienced its first taste of old-world risk in the “new economy.”

2008−2010: The market slide that began in 2008 reversed in February 2009—gaining 83.3% from March 2009 through 2010. Despite two years of strong stock market returns, memories of the 2008 bear market and talk of the “lost decade” have led many investors to question stocks as a long-term investment. But earlier generations of investors faced similar worries—and today’s headlines echo the past with stories about government spending, surging inflation, deflationary threats, rising oil prices, economic stagnation, high unemployment, and market volatility.

Of course, no one knows what the future holds, which brings the concept of “normal” into question. What exactly is the status quo in the markets?

The chart below shows the annual performance of the US market, as defined by CRSP deciles 1-10. Since 1926, there have been only four periods when the stock market had two or more consecutive years of negative returns. In addition, annual returns are rarely in line with the market’s 9.67% long-term average (annualized). The most obvious normal may be that, over time, stocks offer expected returns reflecting the uncertainty and risk that investors must bear.

What’s new about that?

1. Adam Shell, “’New Normal’ Argues for Investor Caution,” USA Today, August, 16, 2010. The term “new normal” originally referred to a post-global financial crisis environment characterized by several years of sluggish economic growth, below-average equity returns in developed markets, high market volatility and risk, high unemployment, and a world in which the range of possible financial outcomes is wider than normal and wealth dynamics are moving from developed to emerging economies.
2. Returns for all periods of the CRSP 1-10 Index are annualized. Data provided by the Center for Research in Securities Prices, University of Chicago. Data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and NASDAQ equivalents since 1973). Additionally, includes US Treasury constant maturity indices.

Seven Headlines to Beat the Gloom

Mon, 05 Sep 2011 06:28:00 GMT

Debt crises, sovereign risks, double dips and banking strains: Page One headlines can make for depressing reading these days. But being a smart news consumer—and smart investor—means keeping an eye on the lesser headlines. Here are seven you may not have seen:

Robust Growth in Germany Pushes Prices—Analysts see a strong chance that German inflation will head towards 3 per cent by the end of the year against a backdrop of robust growth in Europe's biggest economy. (Reuters, July, 27, 2011)
Brazil Domestic Demand Still Strong—The Economist Intelligence Unit says economic growth in Brazil surprisingly picked up speed in the first quarter, challenging the government’s efforts to cool the expansion. (EIU, July 6, 2011)
Japan Retail Sales Top Estimates—Japan's retail sales rose 1.1 per cent in June, exceeding all economists' forecasts and adding to signs the economy is bouncing back from an initial post-disaster plunge. (Bloomberg, July 28, 2011)
No Fear in China—Traders betting on gains in China's biggest companies are pushing options prices to the most bullish level in two years. The Chinese economy is projected to grow by 9.4 per cent in 2011. (Bloomberg, July 28, 2011)
Southeast Asia Booms—Southeast Asian markets are the world's top performers in 2011 thanks to strong economic and corporate fundamentals. Thailand's index hit a 15-year high in July and Indonesia's a record high. (Reuters, July 22, 2011)
Australian Boom Keeps Rate Rise on the Agenda—The Australian dollar hit its highest level in 30 years in late July as traders looked to the prospect of another rise in interest rates on the back of a resource investment boom. (WSJ, July 27, 2011)
NZ Bounces Back—The New Zealand economy has grown more strongly than expected after the Christchurch earthquake, helped by improving terms of trade. The Reserve Bank signals it may raise interest rates soon. (Bloomberg, July 28, 2011)

Standing back from all this, the picture that emerges of the world outside North America and southern Europe is of robust economic conditions. If anything, policymakers in many parts of the world, particularly in Asia, are seeking to pull back demand, rather than stoke it.

Australia, for instance, is enjoying its best terms of trade in more than 50 years. An unprecedented investment boom in mining is injecting extraordinary wealth into the economy and has helped to push the Australian dollar to levels not seen since it was floated in the early 1980s.

Likewise, China, India and much of South-East Asia are seeing strong investment flows and worrying more about over-heating than anything.

This is not to say that all is right with the world. The aftermath of the global financial crisis has created severe problems, particularly in terms of public sector debt and deficits. But we know that that news is in the price. Meanwhile, economic activity in much of the world is thriving.

For equity investors, that means opportunities for wealth building are increasing, not decreasing. Moreover, the global economy is becoming multi-polar, rather than overly dependent on the US, which means the potential benefits from broad diversification are even greater.

That's why focusing too much on the day-to-day headlines with the US debt ceiling or European sovereign issues risks missing many of the good stories out there.

Sometimes, the best advice is to read the newspaper from the inside out.

By Jim Parker of DFA

It's all in the mind

Thu, 04 Aug 2011 08:39:00 GMT

Professional Planner Magazine recently interviewed Neil Salkow for a profile piece. Here's a great opportunity to find out how candid Neil really is and his views on the importance of being truly independent. Click here for the article.

If you want a thrill ride try Luna Park

Thu, 28 Jul 2011 07:18:00 GMT

There’s an old saying: “If you owe the bank a million dollars you have a problem, but if you owe the bank $100 million, the bank has a problem”. The US President describes the possibility of his government defaulting on its loan payments as ‘financial armageddon’. If the rest of the world is the bank, who’s got the problem? Presumably you. Fuel for the fire under an already boiling cauldron of economic woes.

Is it possible to sidestep the financial tsunami by converting your super to cash and selling up your investments to buy gold?

Pause a moment, take a breath and acknowledge that the media is a terrorist who deals in noise, and if there is none to sell it will go and make some. Just ask Rupert Murdoch. It’s a headline-grabber to declare that we’re all going to hell in a hand basket because of Greece and the USA but it’s far from correct. Sure, the best economists in the world are more informed on financial current events but the truth is their crystal ball is just as cloudy as yours.

Here’s the thing: if you are acting on media sound bites then your decisions aren’t supported by fact. You’re driving under the influence of a toxic cocktail of hearsay, emotion and prediction. You’ll be lucky to make it home if you’re behaving irrationally. The best you can hope for is luck, and that’s no investment plan.

Instead bring your focus back to what is within your control. You can’t control the weather but you can choose what climate you live in. Does your wealth comprise a collection of investments or is it a structured portfolio (your ‘climate of choice’). Are you reacting to storm warnings and missing out on the best washing days for fear of rain?

Investing successfully isn’t a matter of knowing when to be in and when to be out, nor is it about backing the right horse. Truth be told, growing your wealth is actually a repetitive, disciplined process that is pretty boring. (And it should be – hey if you want thrills try Luna Park.)

So here’s the advice ...

If you are feeling the hairs on the back of your neck stand up in response to the headlines, if you are checking the news more frequently to see whether the US is going to default on August 2, or if you are losing any sleep over what to do with your money ... then call us. It might actually be true that you need to do something about your money. But simply pulling the trigger because something moved can get you into serious trouble.

Special thanks to Daniel Brammall for his assistance in preparing this blog post.

Betting on Growth

Tue, 05 Jul 2011 23:49:00 GMT

The world is changing. Economic fortunes appear to be switching from east to west. China and India are transforming into powerhouses as the established economies of the US and Europe struggle. What do investors do about it? The spectacular growth of emerging Asia in recent years, particularly in comparison to the developed economies of the West, has reignited a recurring debate about the relationship between economic growth and stock market returns.
By Jim Parker of DFA

It sounds intuitively right to most people that the best investment returns should be found in those countries with the fastest rates of economic growth. After all, shouldn’t investors receive the highest rewards in the most dynamic environments?

The problem is there is very little evidence that this is the case. In fact, study after study has shown there is little relationship between the speed of a nation’s economy and the performance of its stock market.

The table below plots annual GDP growth in constant prices against annual stock returns, as measured by MSCI indices and adjusted for inflation, in 16 developed economies over nearly four decades. Countries are ranked from the strongest growing over this period to the weakest. GDP and returns are in $US.

As can be seen, while Australia had the best real economic growth rate over this period, it ranked 13th out of 16 in terms of equity market returns. And while Sweden was fourth from the bottom of the table in economic growth terms, its market return was the strongest of the group. Likewise, Denmark – which was the second slowest growing economy over this period – had the second highest stock market returns.

These findings reflect those of my colleague Marlena Lee, who in a more detailed study published last year¹ , found no statistical difference in the returns of high-growth countries versus low-growth countries. In fact, Marlena found that low-growth countries had higher average returns than high-growth countries. This applied both to developing and emerging markets.

This seeming contradiction can be explained by the nature of markets to discount new information very quickly when assessing future expected risks. So if there is news that the economy is growing strongly, investors may anticipate higher future profits and lower risks and bid up share prices to reflect that. This means that when prices are high due to lower discount rates, future expected returns are lower. Likewise, if the economy weakens and perceived risks rise, investors may bid down share prices in anticipation of lower profits or higher instability. So when discount rates push down prices, future expected returns are higher.

Another explanation for the economic growth-returns quandary is that individual equity markets, particularly in this age of globalisation, are not necessarily driven exclusively by the economies in which they are based. For instance, the US market represents more than 40 per cent of the MSCI World Investable Market Index. But does that mean a globally diversified market-cap weighted portfolio has a 40 per cent-plus exposure to the US economy? Not necessarily.

According to analysis by Standard & Poor’s² , foreign sales reported as a percentage of sales of companies in the US S&P 500 index were 46.57 per cent in 2009. Among the fastest growing regions for US companies was Asia, where the proportion of foreign sales increased from 13.21 per cent in 2008 to 17.65 per cent in 2009. This stands to reason when you think of the global presence of US companies like Apple, Exxon Mobil, General Electric, Microsoft and Ford.

Similarly, in the UK market, firms like Pearson, Diageo, Vodafone and Rolls-Royce have a global presence. And in Australia, the market is dominated by large resource companies like BHP Billiton and Rio Tinto with substantial and growing exposures to the emerging economies of Asia.

In age of globalisation, where companies treat the world as their market and seek out buyers for their products and services from many different countries, it is simplistic to say that an exposure to a particular company in the country of its primary market listing equates to an exposure to that country’s economy.

Another theory is that the global investment landscape has fundamentally changed in the sense that we have entered a “new normal”. Features of this alleged new state include stubbornly sluggish economic growth, a general aversion to risk and a climate far less favourable to equity investment.

The problem with this theory is that history shows average returns from equity tend to be higher in bad times. While that might sound illogical, think about how the media and markets treat data surprises when the economy is in a trough.

For instance, the Australian economy recently recorded its worst quarter of economic growth since the recession of the early 1990s. The 1.2 per cent contraction in quarterly GDP was influenced by the run of natural disasters affecting Australia in the March quarter of 2011 and, on the surface, was shocking news.

The problem is the financial markets had been primed to expect a bad result. In other words, it was in the price. That meant when the numbers were released (and turned out slightly better than expectations), the Australian dollar actually bounced and the local equity market strengthened.

This is merely a way of reminding readers that markets are forward looking. We knew the news on the economy had been bad. But what matters for investors is what happens next. Without the powers of prophecy, we can’t ever know that. So we deal with it by diversifying according to our risk appetite and individual needs.

A final point is that a country’s economic footprint and its market footprint are different things. While China is a powerful global economic force, second only to the US in terms of GDP, its equity market – at least the part accessible by foreigners - is relatively small.

The MSCI All Country World Investable Market index, which covers 45 countries in developed and emerging markets, shows China’s weight at 2.34 per cent as of December 31, 2010, compared with 43.12 per cent for the US. By contrast, Australia, a middle-ranked economic power, has the sixth heaviest weighting in the MSCI at 3.45 per cent, equal to that of France³.

So those who fret about an apparently declining US economy and the implications for their market-cap weighted global market portfolio should know that these changing economic forces are reflected in prices.

Country markets and national economies are different things. And the emergence of new economies and changing patterns of production and consumption will not just energise one country, but will change industries irrespective of borders.

For an investor that is a reminder of some familiar lessons – markets work, risk and return are related, diversification is essential and structure determines performance.

The author would like to thank Marlena Lee and Fiona Murphy for their assistance with this article

1. Lee, Marlena, ‘The Economics of Fiscal Deficits’, Dimensional, October, 2010

2. S&P-500 Global Sales, 2009

3. MSCI All Country World Investable Market Index, Factsheet, MSCI, Dec 2010

2011 Federal Budget : "No disturbances"

Wed, 11 May 2011 03:06:00 GMT

The theme for last night's Federal Budget was "back in the black", but from our perspective it was more "brief and boring" but the key message for our clients is that there is very little impact on your wealth accumulation and preservation game plans which is a very good thing.

As usual, we will be in contact with all Private Clients by phone and email to explain if the changes listed below affect you in any way. In the meantime, so that you can sound smart in the line up for coffees this week, here are the good and bad bits:

We start with some good bits:

From 1 July 2011, if the concessional contribution cap to superannuation is exceeded, there will be the opportunity to get $10,000 back and included in your individual tax return (rather than be levied with 46.5% tax)
In last years Budget it was proposed that pre-retirees who are over 50 could continue to salary sacrifice up to $50,000 to superannuation if your balance is less than $500,000. This has been amended slightly so that the amount you can salary sacrifice will be $25,000 more than the standard contribution cap. This is currently $25,000, so it's still $50,000! They do their best to make it confusing.

The point is, if they increase the standard cap to $30,000, then pre-retirees that qualify can contribute up to $55,000 (don't forget this includes SGC from your employer). This still hasn't been made official through Parliament; it doesn't seem that there's a chance that they might change their mind, more so they're still consulting the industry on how it will operate administratively.
Those with "account based pensions" will still have some additional flexibility to draw under the minimum payment during the 2011/2012 financial year. For the past two years, the minimum has been halved, so for those under 65 instead of having to draw 4%, it has been 2%. For 2011/2012, it's no longer 50% of the minimum but 75% (who dreams up this stuff!?!). So under 65 the minimum is 3%, 65-74 is 3.75%, 75-79 is 4.5% and so on.
If you salary sacrifice a car and drive less than 15,000kms per year, the amount of fringe benefit tax (FBT) you will pay drops from 26% to 20%. This is also good for the environment because it means that people won't be racking up kilometers and burning fuel unnecessarily in March each year just so they can save a bit of tax! It will also push more people into using the operating cost method, rather than the statutory method, thereby increasing compliance costs.
The Low Income Tax Offset (LITO) will be increased to $1,800 which increases the effective tax free threshold to $18,000.

Some not so good bits:

If you have a family trust which distributes income to the kids, from 1 July 2011 instead of distributing $3,333pa to each child, it only makes sense to distribute $416pa
The Government Co-contribution rules haven't been indexed or changed in any way.
The annual levy SMSFs have to pay has increased by $30pa
Those that salary sacrifice a car and drive more than 25,000 kilometers a year will pay more FBT.
The Entrepreneurs Tax Offset will be abolished from 1 July 2012
The dependent spouse tax offset will be phased out for those under 40 years of age
Discounts for paying HECS student contribution upfront and the bonus on voluntary payments above $500 will be halved (from 1 July 2012)
The introduction of Paid Paternity Leave has been delayed by six months until 1 January 2013

Some more good bits:

Small businesses that purchase a motor vehicle (we haven't read anywhere that it has to be 'new') get an instant write-off equal to the first $5,000 of the purchase price. The remainder of the amount above $5,000 will be put into a pool of assets and depreciated at 30%.
The company tax rate will reduce to 29% for incorporated small businesses.
The ATO will have the "discretion" to extend the two-year ownership period in which the trustee of a deceased estate or beneficiary must dispose of their interest in the deceased's dwelling to access a full capital gains tax main residence exemption (no start date provided).
Medicare levy low income threshold will be increased from 1 July 2010
Those in receipt of a Disability Support Pension can work up to 30 hrs a week for up to two years and still remain eligible for a part pension.
There is an increase in the Family Tax Benefit A payment for some families
The Temporary Flood and Cyclone Reconstruction Levy was reaffirmed, applicable to all residents and non-residents for the 2011/12 financial year only (some might view this as bad, but if it happened to you it would be nice to know the rest of Australia was kicking in to help you). If your taxable income is less than $50,000 there is no levy, between $50,000 and $100,000 the levy is 0.5% and above $100,000 is $250 + 1% on the amount over $100,000.

If you need more information, please give us a call.

Why Costs Count

Fri, 06 May 2011 00:35:00 GMT

A positive consequence of the financial crisis is a dawning among investors about the difference that fund fees can make to what they ultimately receive in their pockets. Even better, this new climate of transparency is a global phenomenon.

By Jim Parker, Vice President, DFA Australia Limited

A report last year from fund rating service Morningstar¹ , no less, found that low mutual fund fees were better than "star" ratings systems in predicting winning funds.

"If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision," the study's author Russel Kinnel said, noting that in every time period and data point tested in the four-year study, low-cost funds beat high-cost funds.

These findings have been echoed this year by another research firm Lipper² . In an analysis commissioned by the London Financial Times, Lipper found that in the decade to the end of March, 2011, global equity funds in the US market delivered total returns of an average 66.22 per cent for the full 10-year period, against 50.02 per cent for UK funds. The results are on a local currency basis and gross of tax.

Lipper attributed the superior performance to a traditionally greater focus in the US on fund fees by independent boards of directors.

Even so, the UK market is changing, with new regulations stemming from a review of retail funds distribution due to come into force in 2013. The changes include a ban on commissions and a requirement that consumers receive upfront information about the fees they pay for advice.

While the review has not mentioned fees charged by funds themselves, the move by UK advisors toward a fee-for-service model is expected to result in advisors pressuring funds to lower their own management fees.

"The proposed changes to the way funds are distributed are such that the previous glacial pace at which apparent price wars had been fought over the previous 12 years has begun to quicken," Lipper's head of consulting Ed Moisson said in a separate study earlier this year³ .

The Dutch government is following the UK lead, announcing last month that it also will ban commissions on financial services products and force banks and independent advisors to be more transparent about costs⁴ .

In Australia, a similar revolution is underway. The federal government late last year, in response to an 18-month inquiry, announced proposed reforms⁵ aimed at lowering costs of superannuation, or pension fund saving.

Fully implemented, the proposed reforms are estimated to have the potential to lower fees by up to 40 per cent, lifting the retirement savings of a 30-year-old on average wages by $40,000 or 7 per cent.

Separately, the government in Canberra recently confirmed plans⁶ to ban all commissions to financial advisors from July 1, 2013, as well as other initiatives to bolster consumer protection.

"Fees and costs matter," the Australian pension reforms' authors said in their report. "They detract from members' retirement savings and need to be managed as diligently as the generation of investment returns."

The evidence supporting the case for a greater focus on fees and costs has been growing steadily for years. In 2007, analysts of the Harvard and London business schools published research⁷ on fees charged by 46,580 mutual fund classes offered for sale in 18 countries. Total assets covered more than $US10 trillion or about 86 per cent of the funds sold worldwide.

This study found a substantial variation in the level of fund fees around the globe, even after allowing for the size of funds, whether they sell to institutions or the retail market and whether they are index or traditionally active.

"The remaining differences are associated with a variety of factors, the most robust of which is that stronger investor protection is associated with lower mutual fund fees," the authors found.

This new global focus on the costs of investing is no accident. It represents an understanding, finally, that for too long investors have focused on things outside their control—like market ups and downs and media noise—at the expense of factors within their control—like adequate diversification, costs, fees and taxes.

As we have seen, legal systems and regulations are moving quickly in many jurisdictions to improve transparency around fees and ensure greater power to consumers in making smart investment decisions.

These changes are in keeping with the philosophy that Dimensional has embraced since its own founding three decades ago. Because the firm focuses on capturing broad dimensions of risk rather than the random movements of individual securities, it can trade patiently and keep costs low.

This unique approach results in lower fees to investors than those charged by traditionally active managers, while adding value beyond what can be achieved via a simple index approach.

Costs and fees make a difference. We have known that for a long time. And now the rest of the world is discovering the same lesson. That's good news for investors.

1 . Russel Kinnel, 'How Expense Ratios and Star Ratings Predict Success', Morningstar, Aug 2010

2 . Lipper performance comparisons, April 2011

3 . Ed Moisson, 'The Pressure to Perform', Lipper Research, March 2011

4 . 'Holland to Ban Commission in RDR-Style Reform', Money Marketing, April 27, 2011

5 . Australian Treasury, 'Stronger Super', Dec 2010

6 .'Future of Financial Advice', Information Pack, Australian Government, April 28, 2011

7 . Ajay Khorana, Henri Servaes, Peter Tufano, 'Mutual Fund Fees Around the World', SSRN, July 2007

Five words that get Australian consumers into a lot of trouble…

Wed, 20 Apr 2011 07:33:00 GMT

The end of the financial year is less than 12 weeks away which is hunting season for unethical, greedy financial advisers and accountants.

Over the next few weeks the focus of the finance section of newspapers will turn to tax. Headlines such as “10 strategies to reduce your tax” will be at the top of every editor’s wish list. By and large these articles are informative, useful and stay within the boundaries of the law.

The real threat at this time of year is advisers that provide conflicted advice, but ironically the cause of the problem could be you. If you seek advice from a financial adviser or accountant with the prime objective of “Help me reduce my tax” you’re asking for trouble.

“Tax effective” investment schemes that involve tree plantations, wineries, almonds, olives even ostrich eggs become all the rage at this time of year because they provide a wonderful short-term solution for both you and the adviser. Longer term, they stink for both you and the adviser.

In the short term these schemes deliver an immediate tax refund of up to $50,000 to you and a 5-10% commission to the adviser. Everyone wins.

Longer term, the loan that gets you the refund becomes a stain on your investment portfolio because the scheme doesn’t deliver the profits it projected in the product disclosure statement. And the reputation of the adviser/accountant takes a hammering because what appeared a great opportunity was in fact a bad financial decision.

These schemes are legal and in theory can work but in practice the problem with them is they are controlled by men in suits who receive high management fees, not farmers.

Clients rarely have a positive investment experience which is why you’ve never heard your friends or family rave about them. Most people don’t talk about it because they feel so embarrassed or ashamed at being sucked in.

Some clients attempt to take action against their adviser, but if you asked that fateful question of can you “Help me reduce my tax”, it’s likely you haven’t got a leg to stand on. What you should have asked is “Help me create wealth” because this is something you can keep your adviser accountable to.

Forward a link to this article to any friends or family who are looking for a short term fix to reduce tax to warn them of the trap they can fall into at this time of year. There are a lot of strategies we implement for clients to reduce their tax, but they’re long term solutions and implemented as part of a game plan.

Next newsletter I’ll reveal the five words that can ensure you always have a positive investment experience.

Disgusting advice

Wed, 20 Apr 2011 22:31:00 GMT

A prospective client recently approached us and showed us the Statement of Advice prepared by an institutionally aligned planner. We were disgusted by what we read.

It was a complete sham. The document was 79 pages of nonsense and the worst part is that it didn’t actually contain any strategic advice. The document may as well have been named ‘Our template pre-packed solution with your name on it’. The sad thing is we see this all the time.

The client was looking to retire in five years and wanted to know what options were available given his timeframe, resources and risk tolerance. His particular concerns were whether or not he should be holding or selling his investment property and how he should structure things to minimise his future tax liabilities.

The ‘advice’ was to rollover his Super from the existing low cost product to a new high cost product owned by the institution and pay a massive 3.3% contribution fee (each and every time he made contributions) and an ongoing fee of 1.1% per year to the advice firm.

Our disgust turned to anger when the client told us of how they were pressured to sign the authority to proceed in the presentation meeting without having fully read the entire document or had it explained to them. He told us he wanted to get a second opinion from an independent firm, one that had no conflicts of interest.

We explained that if you’re going to be paying someone fees you should know exactly how much that’s going to cost you and what value you are going to get. The problem with percentages is it sounds small but it all adds up. We are indeed a rare breed – we do not charge percentage based fees and do not receive commissions on any product recommendations including insurance.

We worked out that if the client went ahead with this ‘advice’ they would end up paying $72,855 in total fees over the next five years, an average of $14,571 a year.

The client engaged our services and we delivered a Game Plan that set out a number of different options that they could pursue in order to accomplish their goals. It explained the risks of each strategy and we guided them through the maze of options. They picked a path that worked for them and that they were comfortable with.

They also decided to retain our services to help implement the plan and keep them focused.

It’s been three months now and we have already received several referrals from the very satisfied client. They trust us because we put their interests ahead of our own and they want their family and friends looked after rather than taking their chances out there with the sharks.

Share this story with your friends or family who are looking for an adviser so they know what they should be looking out for.

The Apocalypse Grill

Fri, 06 May 2011 00:21:00 GMT

At a summer barbecue, diners were being assailed by an apparently knowledgeable gentleman who was providing in some detail a grim prognosis for the global economy for the next decades.

By Jim Parker, Vice President, DFA Australia Limited

Aside from killing the relaxed vibe of the occasion, the prognosticator (we'll call him 'Joe') was keen to give the guests some free financial advice. This largely consisted of buying gold, storing up on food and guns, and heading for the hills.

Asked by one diner where he received this sombre information, Joe said 'they' were all saying it. The next question, of course, was if 'they' were all saying it, where was the evidence that 'they' were acting on the advice? A quick survey of the neighbourhood did not suggest people were packing their SUVs with tinned food and vacating the city. Indeed, life appeared to be going on as normal. Maybe the mysterious 'they' hadn't spread the word here yet.

One astute diner asked the prognosticator that if things were so glum, why he himself was not acting on his own advice, selling up and putting the mattress on top of his pick-up truck, with the cash stacked underneath.

His answer was that it wasn't quite clear when this catastrophe would occur, so he was staying put for now "see how things panned out". He also was keeping one foot in the market "just in case". And he had some cash on hand in a bank deposit.

It turned out Joe had spent a lot of time on chat forums engaging with the sort of people who sit up all night watching overseas market action and news events on their mobile devices, second by second and headline by headline and trade by trade. The world was a scary place, he had decided. And the best way to deal with the resulting anxiety was to plot his escape. All he had to decide was when.

The crowd at the barbecue mulled on his dilemma, until one man wearing the chef's apron and flipping steaks offered Joe some free advice of his own.

"These theories about financial and economic apocalypse—does anyone else know about them and believe them?" the chef asked. Joe nodded.

"Well, wouldn't those fears be reflected in the market prices?" the chef added. Joe nodded again, this time more slowly.

"So presumably the people who agree with you would be getting out of the market or at least thinking about? And if they are selling their holdings, someone else must be buying them, obviously someone with a different view to your own?"

Joe, a little less confident now, looked around the group for support. But all were quiet, apart from some nervous clearing of throats.

"But let's just say you are right," the chef said, now tossing the salad. "If your scenario is as bad as you say it will be, won't the price of our stock holdings be the least of our concerns? I mean you're talking about living on dog food."

Joe at this point was no longer thinking of heading for the hills, but backing out of dinner and just driving home to spare himself any further embarrassment. But the chef wasn't quite finished with him.

"But say you're only half right and things won't be so bad, there'll be some opportunities in the market won't there? And if you're diversified across a range of assets, you've got some protection, haven't you?"

The chef was now piling everybody's plates high and getting ready to add the dressing to top things off.

"You see, those things that keep you up at night, I don't worry about. I let the market do my worrying for me. Chances are all those concerns are already in the price. And with the greatest respect, it's very unlikely that you know anything that someone else hasn't already thought about.

"Me, I only take risks I'm comfortable with. I know the returns aren't going to be there every day or every month or every year. But my focus is 20–30 years from now. Of course, there is a risk that things could be worse than I'm hoping. But there are also risks they might be much better. There's always uncertainty, isn't there?"

Joe couldn't agree with that statement. Indeed, he was fairly certain he wanted to be out of this place right now. But the chef had put a kindly hand on his shoulder.

"Look, Joe, let's eat," he said, handing him a plate piled high. "Then we'll have some dessert and then we'll watch the football game on TV. After that, you can tell me whether you still think the world is about to end."

For the first time that night, Joe smiled.

The Too-Good-To-Be-True Test

Fri, 06 May 2011 00:22:00 GMT

An Australian conman has been jailed for 13 years recently over a money management scam that offered clients annual returns of 50 per cent or more by investing in commodities and currencies. Why does this keep happening?

By Jim Parker, Vice President, DFA Australia Limited

Graeme Hoy and his business partner Ian Stewart Rau set up a company called Chartwell Enterprises which preyed on unsophisticated investors in the regional Victorian city of Geelong. Hoy brought in the dollars, while Rau ran the money from a fake trading room, complete with pretend "market analysts" making predictions.

Why no-one picked as odd the fact that someone should set up a commodities and currencies trading desk in an old industrial city better known for its football team than as a financial services hub isn't exactly clear. But it seems plenty of people, dazzled by the promised returns, were prepared to put logic aside.

Just to prove to potential investors that his mysterious trading methods were successful, Hoy leased a Rolls Royce Phantom and cruised around in a $6 million yacht paid for out of the company's retained earnings.

The ruse seemed to work and Hoy and his partner eventually brought tens of millions through the door on the promise of returns that few, if anyone, anywhere else in the world were able to generate with any consistency.

The problem in this case was that only $400,000 of those incoming funds was ever used for trading. Instead, Hoy and Rau survived for 15 months by funding "returns" out of new money from recently signed unit holders—a classic 'Ponzi' scheme.

Chartwell Enterprises finally collapsed three years ago under the weight of $82 million in debt. Hoy pleaded guilty to 44 charges relating to the scam and faces a non-parole period of nine years. Rau was jailed for just under two years.

In sentencing Hoy in the Victorian Supreme Court, Judge Terry Forrest noted that days before the collapse, Hoy was reassuring investors that their money was safe.

"You have diminished the lives of all," Forrest said. "You have stolen from them and humiliated them and for that you must be held to account."

While not in the class of the giant Ponzi scheme run by the infamous Bernie Madoff, the US investment advisor who scammed investors for at least $20 billion, the Chartwell sting revives some age-old truths about investing.

Firstly, there is no such thing as a sure thing. Promises of recurring returns of 50 per cent more a year irrespective of market conditions should set off alarm bells, as should inattention to the individual needs and risk appetites of clients.

Firms that appear out of nowhere in old industrial towns and led by Rolls Royce-driving, fast-talking salesmen might also justifiably attract suspicion. Claims to be able to successfully and consistently pick trends in commodities and currencies—when even the world's most powerful banks can't do it—should also be treated with the greatest scepticism.

Ultimately, though, there is only one test for would-be investors: If it sounds too good to be true, it almost certainly is.