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A 16-year study by Vanguard Investments that found a financial adviser effectively adds around 3% to the value of a client’s portfolio over time.  This is on top of normal investment returns.

 

         

The real significance of this is that you can have a finance professional take care of one of the most important jobs in your life (funding your retirement) for very little, if any, real cost.  This can even be the case for those with smaller portfolios.

This benefit isn’t just from better investing, though that will often be the case.  It’s the more holistic approach that wins the day.  Vanguard Investments identify the following areas as those that will generate this positive outcome:

  • Suitable asset allocation
  • Cost-effective implementation (expense ratios)
  • Rebalancing
  • Behavioural coaching (Vanguard Investments found this to be the most significant contributor because there are some tasks people struggle with such as budgeting and expense management.  Behavioural coaching addresses this issue).
  • Tax efficiency (An example here is where an investor with a modest portfolio lost more than $250,000 in value over a 10-12 year period because they thought the three stock brokers they used were looking after tax related issues.  They weren’t!  If the planner had been involved sooner the outcomes would have been significantly different.)
  • Total returns versus income investing.

Finally, the concerns many potential clients have over the cost of financial planning means they delay getting help early enough which, in turn, threatens the very retirement outcomes they want to achieve. 

 

Peter Graham
PlannerWeb / AcctWeb

 

It's a number that can only be described as mindboggling: $400 million a day.

         

That's the total amount of money that has been withdrawn from Australia's retirement savings system under the federal government's special early release measure since it became effective in late April.

From 20 April, individuals financially affected by COVID-19 have been able to apply online through the myGov website to access up to $10,000 from their superannuation account tax-free this financial year.

So far, around 1.1 million Australians have collectively withdrawn close to $12 billion in superannuation – with an average withdrawal amount of about $8,000 according to the Australian Tax Office.

Superannuation funds, particularly the industry funds with large membership bases covering workers in the hard-hit hospitality and retail sectors, have been flooded with withdrawal requests.

The vast bulk of those requests have been from individuals with less than $10,000 in their accounts, with another sizeable proportion of applications coming from people with less than $20,000 in super.

In the context of Australia's total superannuation system, which is managing almost $3 trillion in assets on behalf of members, the amount that has been withdrawn to date represents less than 0.5 per cent.

However, the volume of superannuation money being taken out of the system is climbing day by day.

There is still over a month until the end of this financial year, and then a second tranche of the superannuation withdrawal measure comes into effect. Individuals who have been made redundant, or who have lost 20 per cent or more of their regular income, can access $10,000 of their superannuation from 1 July until 24 September, 2020.

In many cases, applications are likely to come in from the same individuals who withdrew $10,000 of superannuation savings before 30 June.

The cost of early access

As we've detailed in previous articles, the cost of accessing superannuation early primarily comes down to the forsaking of future compound returns.

For someone close to retirement, let's say less than 10 years away, the net returns cost of pulling out savings early won't be as great as for a younger person.

Our Investment Strategy Group recently did some calculations based on a balanced multi-asset managed fund containing a mix of equities and fixed income, with an average net return of 6 per cent per annum.

For an investor who has 20 years until retirement, the value of a $10,000 withdrawal is estimated to be worth $32,100 at retirement. Over the course of 40 years, the impact of the $10,000 withdrawal on the retirement savings climbs to $102,900, while a $20,000 withdrawal means an investor would have $205,700 less at their disposal.

A way back

It's still very early days, but there's already discussion in financial circles around the need to entice individuals in the post COVID-19 environment – especially those who have withdrawn superannuation – to replenish their retirement savings incrementally over time through additional concessional contributions (taxed at 15 per cent).

This discussion is being framed into the wider debate around the ultimate purpose of superannuation, which is enshrined in the Superannuation (Objective) Bill 2016 as “to provide income in retirement to substitute or supplement the Age Pension”.

Last September the federal treasurer announced an independent review into Australia's retirement income system, with the final report from that Retirement Income Review due to be provided to the government by June.

The longer-term consideration for individuals who have needed to withdraw superannuation because of the COVID-19 crisis is perhaps around developing a savings plan for further down the track, once they are in a more stable employment position.

Which could involve allocating small amounts of earnings back into superannuation over a long period in addition to the compulsory employer-paid Superannuation Guarantee levy contributions.

There are also much more generous rules in place now around making larger superannuation contribution catch-ups, well beyond the standard annual limitations.

In our recent article Do your investment goals stack up?, we pointed to the importance of having a financial plan and the need to reassess one's goals when unforeseen events occur, such as those currently being experienced.

In the current environment, the need for having a long-term financial plan that incorporates having adequate retirement savings in place is arguably more than important than ever.

 

Tony Kaye
Personal Finance Writer
26 May 2020
vanguardinvestments.com.au

 

The Federal Court has determined whether trusts that distribute capital gains to non-resident beneficiaries are taxable and will need to be included in their assessable income.

         

The case of Peter Greensill Family Co Pty Ltd (as trustee) v Federal Commissioner of Taxation [2020] FCA 559 sought to determine whether the trustee was entitled to disregard its capital gains when it made a foreign resident beneficiary specifically entitled to those gains.

In making the decision, Judge Thawley found that:

  • It was the trustee that made the capital gain.
     
  • The trustee was not a foreign resident, so section 855-10 did not apply to the trustee.
     
  • Section 855-10 also did not apply to the foreign resident beneficiary as the distribution was not a capital gain “from” a CGT event, but a distribution of “amount” equal to the capital gain made by the trustee.

In a blog, Murray Shume of Cooper Grace Ward Lawyers noted the capital gains tax event occurred in relation to shares that were not taxable Australian property.

“Under section 855-10 of the Income Tax Assessment Act 1997, foreign residents are entitled to disregard any capital gain or loss from a CGT event that happens in relation to a CGT asset that is not taxable Australian property,” Mr Shume said.

“In Greensill, Thawley J found that section 855-10 did not apply when foreign beneficiaries were specifically entitled to capital gains from an Australian resident trust. Therefore, the trustee was required to pay tax on the capital gain.”

Mr Shume said the decision has implications for distribution resolutions for the 2020 income year.

“In deciding how to make distributions of capital gains for this income year, trustees should consider the tax consequences of distributing capital gains to non-resident beneficiaries,” Mr Shume said.

 

 

Adrian Flores
25 May 2020
smsfadviser.com

 

Sometimes it is true that you don't know what you've got.  ​Till it's gone.  Music aficionados will recognise that line from Joni Mitchell's 1970s hit Big Yellow Taxi.

         

There will be many lessons we learn from the COVID-19 pandemic and its impact on our lives and our investment portfolios.

Few people will view risk – be it to their health or their investments – through the same lens again.

Rewind to the early days of a bright new year in January. The notion of a global pandemic that would infect more than 7 million people and result in more than 400,000 deaths (to date) and shut down large parts of the economy would have belonged firmly in the realm of Hollywood disaster movies rather than something you or your super fund had reason to worry about.

Liquidity is one of those things that investors – both professional and individual – can take for granted particularly after an extended period of relatively strong growth in investment markets and in Australia's case, no economic recession for 29 years.

Times of severe market disruption effectively stress test portfolios and their need for liquidity.

Large superannuation funds have been part of the public debate on liquidity in part because of their need to rebalance portfolios affected by the drop in market values but also because of the wide-ranging package of support measures initiated by the Federal Government that included varying the criteria for early access to super up to $20,000.

But it is not just large super funds that will be rethinking their approach to liquidity. Self-managed super funds also need to factor in the need for liquidity – particularly when they are approaching or indeed are already in the drawdown or pension phase.

Superannuation, by its nature and design, is a long-term investment. So liquidity can be traded off to a degree when the funds will not be needed to be drawn down for 30 or 40 years. Accordingly, for those SMSF trustees in their 30s or 40s liquidity is more an opportunity than a risk.

However, if you are approaching retirement the situation shifts significantly. The purpose of super is to provide the income to fund or supplement your lifestyle once the regular paycheck has stopped.

How you manage your funds' liquidity is always important but becomes critical when you hit the pension years because it is your responsibility as the trustee of your SMSF to be able to pay expenses of the fund and benefits to members as required. The liquidity challenge for an SMSF that is invested in one illiquid asset such as property can be dramatic when things do not go to plan.

There are a variety of strategies that specialist SMSF advisers deploy based on an individual's circumstances. But there are a number of risk areas for SMSFs in particular those with concentrated direct property portfolios.

Last year the Australian Tax Office sent letters to 18,000 trustees of SMSFs asking about the diversification within the fund's portfolio – the letter was sent to funds that had more than 90 per cent of their fund's assets in a single asset class – typically a property.

The ATO was not saying you could not invest everything in the one asset class – it just wanted trustees to be sure they understood the risks – particularly if limited recourse borrowing was involved – on return, volatility and liquidity and a properly considered investment strategy.

At the time there was commentary around whether it was a proper role for the ATO to ask such a question; for trustees that heeded the warning about the risks of lack of diversification and the potential liquidity risk it was prescient indeed.

An iteration of this article was first published in The Age on 13 May 2020.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
19 May 2020
vanguardinvestments.com.au

 

There's an old saying, to only focus on the things in life that you can control.

         

But that adage has been well and truly stress tested on just about every level over the past few months because of the uncontrollable events stemming from the COVID-19 pandemic.

On an investment portfolio management level particularly, it's been difficult if not impossible to have much control amid the wild daily fluctuations in the values of many financial securities.

And, on a household level, the repercussions arising from lockdown restrictions and widespread business closures are that many families are now experiencing unprecedented financial strain because of a sudden loss of regular employment income, investment income, or both.

Of course, we all still have some elements of life control and maybe the current conditions are an opportunity to reflect on our investments goals to see if they still make sense and are realistic.

Depending on your circumstances, which may have necessitated impromptu investment actions during the crisis – such as the withdrawal of some superannuation funds or the selling of other financial assets – some goal adjustments may be prudent.

Last week, we referred to the Australian Tax Office now requiring SMSF trustees to not only review their investment strategies regularly, but to justify them.

The same sort of investment review also makes sense outside of the superannuation sphere.

Revisit your investment framework

Regardless of where and how you invest, creating clear financial goals is one of the fundamental pillars for having the best chance of achieving investment success.

Your goals should be well defined and as realistic as possible based on your current financial situation. If circumstances change, it makes sense to review them.

A review needs to take into account your immediate financial needs, and how they may impact your longer-term financial objectives.

Any adjustments will need to take into account factors such as your age, how your household income-earning capacity is likely to change over the short and medium term, and cater for revised expectations on investment returns over the longer-term.

Ideally, investment goals should always have a long-term focus and be designed to endure through changing financial environments over time, including periodic downturns in equity and property markets.

They should also take into account the potential for loss of income over time, which can be partially mitigated through appropriate personal insurance coverage.

Allowing for market risks

The current events have highlighted that investment risks are ever-present, and that when major value corrections do occur on markets they are usually widely unexpected.

In setting investment goals, it's important both to understand that risk is a key factor in investment returns and to build in your own tolerance for risk.

Market risks and potential returns are generally related, in the desire for higher returns will invariably require taking on greater exposure to market risk.

A current example of this is in the fixed interest market, where investors with a higher-risk tolerance have invested into bond issues from companies with low-quality credit ratings (see Know your bonds, they're not all the same). The investment temptation has been the issuers' high income payments, however recent events have seen a large number of these companies default on their debt repayments.

Other key aspects in setting and reviewing goals is your investment time horizon, liquidity requirements, tax obligations, legal issues, or unique factors such as a desire to avoid certain investments entirely. Constraints can change over time, and should be closely monitored.

The danger of lacking a plan

Without an investment plan, it can be easy to lose sight of the bigger picture and to end up with a portfolio that's not well balanced across different asset classes.

As a result your portfolio may wind up being concentrated in a certain market sector (see Over-concentration risk comes to the fore), or it may have so many holdings that oversight of your portfolio becomes onerous.

Most often, investors are led into such situations by common, avoidable mistakes such as performance-chasing, market-timing, or reacting to market “noise.”

Many investors—both individuals and institutions—are moved to action by the performance of the broad equity market, increasing equities exposure during bull markets and reducing it during bear markets. Such “buy high, sell low” behaviour is evident in managed fund cash flows that mirror what appears to be an emotional response—fear or greed—rather than a rational one.

Stay focused on your goals

A sound investment plan can help you to avoid such behaviour, because it demonstrates the purpose and value of asset allocation, diversification, and rebalancing. It also helps you to stay focused on your intended contribution and spending rates.

Vanguard believes investors should employ their time and effort up front, on the plan, rather than in ongoing evaluation of each new idea that hits the headlines. This simple step can pay off tremendously in helping you stay on the path toward your financial goals.

Being realistic is essential to this process. You need to recognise your constraints and understand the level of risk you are able to accept.

In reviewing your investment goals, don't underestimate the importance of professional financial advice (find out about Quality financial advice in our Plain Talk library).

A financial adviser can help in developing a framework around your long-term goals and financial capabilities, which can be reviewed regularly over time.

 

 

 

Tony Kaye
Personal Finance Writer
12 May 2020
vanguardinvestments.com.au

 

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