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FINANCIAL
A FEW WORDS FROM OUR TEAM...
CBD Level 2, 62 Pitt St Sydney
Bondi Suite 2201, Level 22 Tower 2, Westfield 101 Grafton Street Bondi Junction
Rozelle 627 Darling St Rozelle
NEWS FROM THE OFFICE Welcome everyone! We have a new fresh look for our quarterly newsletters. We are looking forward to bringing you some great new articles on financial planning matters in this new magazine-style layout. We’re also excited to offer a new ‘Ask a Planner’ section where you can send in your finance-related question and one of our financial adviser gurus can help.
THE MANAGEMENT TEAM
Brenton Tong & David Hancock
Be sure to send us your questions to: qanda@financialspectrum.com.au or @financialspectr on Twitter or on our Facebook page. We have also welcomed some new team members recently, be sure to read all about them in our short biographies on page 3. As many of you would be aware, our Rozelle office is located next to the scene of the recent fire tragedy earlier this month. We would like to extend our sympathies to everyone affected. As our Rozelle office is currently closed, our team will be in touch with clients who normally visit us at our Rozelle branch to make alternative arrangements. As always, please remember that we’re here to help. Be sure to contact us with any questions or concerns.
Did you
know ?
That we have 3 offices across Sydney!
All the best!
// HOW FINANCIAL PLANNING IS CHANGING P. 04
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Australians still use financial planners less than they should, but this is changing.
SPECTRUM MAGAZINE
// ECONOMIC UPDATE P. 06
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The latest news from the Australian and global economy from economic experts.
// IT’S A WOMAN’S WORLD P. 08
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The old saying: “men are from mars, women are from venus” rings true not only for matters of the heart, but also for financial matters as well.
OUR TEAM JULIE HALL
HANNA SHEPHERD
CARMEN KWAN
Julie is responsible for managing the finances of our ever growing business. You may have already heard from her, she will be your go to person should you have any queries regarding payments or your accounts. Julie comes to us from Fairfax where she was responsible for managing their Treasury division.
Hanna has joined the financial planning industry after completing a Bachelor of Business with a major in economics and finance. She will be involved in research and implementation of your financial plans. She will also be working with our existing team to review and manage our clients strategies and portfolios.
Carmen has joined our exciting new internship program where Financial Spectrum is taking the best young graduates and training them according the principals, standards and ethics that we expect of all staff. It’s an exciting start to her career in financial services and sees her involved in most aspects of the business from research, analysis, client services and portfolio management.
// ASK AN ADVISER! P. 10
// COMPOUND INTEREST P. 12
// PREVENTION IS BETTER THAN CURE P. 14
COMPANY ACCOUNTANT
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Have a question that you’d like to ask one of our financial planning experts?
CLIENT SERVICES REPRESENTATIVE
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Albert Einstein referred to it as “the most powerful force in the universe”, and our own financial adviser Brenton Tong considers it the “eighth wonder of the world”.
CLIENT SERVICES INTERN
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No one likes getting sick. So what are the best ways to prevent catching the latest bug going around?
SEPTEMBER 2014
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HOW FINANCIAL PLANNING IS CHANGING It wasn’t that long ago that the closest thing you could get to a financial planner would be a door to door insurance salesperson or an accountant telling you that you should be spending less money. Today, the financial planning industry is a multi-billion dollar, multi-tiered behemoth. With more and more people seeking the services of financial planners to help plan their future, the industry has attracted the attention of big business and especially, the banks, super funds, fund managers and insurance companies. Australians still use financial planners less than they should, especially compared to other developed countries, but this is changing. Recently, the Government has introduced the Future of Financial Advice reforms, commonly referred to as FOFA. These reforms have been a result of some of the problems that have stemmed from conflicted and inappropriate advice in the lead up to the GFC, and the consequences of that advice. In doing so, the government has tried to separate
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advice from remuneration and instil further confidence into a sector that has had a wavering public image. The main attributes of FOFA were to ban commissions on investment products and introduce better disclosure to help investors gain a clearer understanding. A consequence of the reforms is that many of the smaller groups that didn’t have the buying power and balance sheets of the larger groups were facing an uncertain future. Over the past few years, the major players in the industry have been accumulating these companies so that they now own roughly 80% of the financial advice industry. While the FOFA reforms were supposed to give a better outcome for those that receive financial advice, the majority of advice that consumers are getting is now coming from the very people that are manufacturing the products that are being recommended in that advice. Additionally, recent media attention on the industry has highlighted the issues faced by some of the large, faceless multi-tiered financial institutions. With this minefield of conflicted advice, it’s prudent to ensure that you’re getting advice that is independent
from the manufacturer of the investment products that you’re investing into. Further to this, it’s also prudent to ensure that the conversations you’re having with your adviser are more than just about where to invest your funds. The implications of investing are long lasting and effect many of the decisions you make in your life. Good advice should take into consideration those life decisions to ensure that your investments fit around your needs, not the other way around. Often, the best advice isn’t even about investing, but more about assisting you to make the right decisions, for the right reasons at the right time. Generally speaking, in conflicted environments, the focus is going to be on your investments rather than your and your family’s long term needs. At Financial Spectrum, we are known for and specialise in the delivery of custom, holistic financial solutions for our clients. Since we’re not remunerated by placing you into products, the discussions you’ll have with your adviser will revolve around a timeline approach. Both initially and ongoing, your adviser will help you to discover and develop a plan that takes into account your personal and financial objectives. These include
house upgrades and renovations, paying for children’s education, travel, charity and eventually your retirement. The process will allow you to see the long term consequences of the decisions that you’re making today and how these decisions are likely to impact you in the future. Through our strategy process, you will have the ability to foresee and predict financial outcomes, allowing you to make the right decisions at the right time. Our experience tells us that this type of financial clarity will assist you to reach your financial goals and achieve the life you desire for you and your family. If you’ve had a change in your circumstances since you’ve last spoken to your financial adviser, you should contact them now to keep them abreast of any changes in your life. While there may be little consequence, it’s prudent to let them know and it’s possible there may be opportunities or risks that you’re not aware of. If you’ve yet to come in to meet one of our financial planners, it would be a good idea to get in contact now and arrange an appointment to see how you can take control of your financial future.
SEPTEMBER 2014
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ECONOMIC UPDATE THE LATEST IN AUSTRALIAN ECONOMIC NEWS....
THE LATEST The latest in the Australian economy. Source: Australian Economic Perspectives, CBA. The Australian July Employment Data The Australian July employment data delivered some surprising figures this month with the unemployment rate now sitting at 6.4%, its highest level in over a decade. The RBA expect the unemployment rate to start declining in 2016. Wages growth has also slowed considerably. This is a natural response to a rising unemployment rate. The overall labour market conditions will be the key to the RBA’s policy settings in the quarters ahead. Global Economic Data Figures released on the global economy this month have been disappointing. There was discouraging economic news out of the US, Europe and China, which serves to highlight that fragility in the global economy persists, particularly in Europe. Yields on 10-year German Goverment bonds dipped below 1% for the first time on record. 6
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Australian productivity Potential growth is the highest rate of growth that an economy can expand at over the long-term without an increase in inflation. Economic experts believe that the potential growth rate of the Australian economy has dropped over recent years, primarily due to weak productivity growth, and the ageing of the population. A boost to the productivity growth will occur as the mining boom transitions from the investment phase to the production phase. This is because resource extraction is less labour intensive than mining construction. Beyond this, policy reforms, innovation and infrastructure investment are required to boost Australia’s productivity growth. During the 1990s, economic growth in Australia was powered by a lift in productivity. This was due to a number of key economic reforms which enhanced the productive capacity of the economy. Since that time however, productivity growth has slowed significantly in Australia.
Did you know
that Australia has the 2nd most expensive real estate in the world?
There are two main factors which can account for this decline: an ageing population, and weak productivity growth. An ageing population Labour force participation has declined over the past few years. With an increase in longevity, there has been a rise in the number of people aged 65+ as a share of the working-age population. Weak productivity growth There are a few theories as to why Australia has had weak productivity growth. A life in terms of trade in the mid-2000s meant that incomes and company profits increased. The need for innovation and lifting of productivity thereby took a backseat. In addition, there has been a lack of government reforms aimed at improving the efficiency of the economy over the last decade.
$AUD $1AUD = $0.92 USD
CURRENT CASH RATE 2.50% Current as of 9 Sept 2014.
SEPTEMBER 2014
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IT’S A
WOMAN’S WORLD WHY WOMEN NEED FINANCIAL PLANNING MORE THAN EVER. The old saying: “men are from mars, women are from venus” rings true not only for matters of the heart, but also for financial matters as well. Back in the dark ages, the financial realm was entirely controlled by men. Typically, men brought in the income, and made the household financial decisions for the future. Modern day Australia looks very different. Women have become more independent with their own careers and incomes. In some households the roles have completely shifted with the woman of the house being the main breadwinner. But have these social shifts been matched with shifts in the way women seek professional financial advice? Are women really so different from men when it comes to financial planning? We talk to Financial Spectrum adviser, Brenton Tong, to find out why women in Australia have special needs when it comes to managing their money. “Women do have specific needs when it comes to their financial planning arrangements”, he says. This is due to a number of factors which mean that women are not only worse of financially than men, but also that they need to be prepared for the likelihood that they will outlive their partner, and will need to make their finances stretch further with a longer life expectancy. Here are the top 6 reasons why women need financial planning more than ever:
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OUTLIVING MEN
DIVORCE
IRREGULAR CAREER PATHS
Women typically live for 6 years longer than men. Most women end up in a serious relationship, the majority being with a man who they either marry or live with in a de facto relationship. The sad reality is that in most of these relationships it will be the woman who will outlive her partner, living 6 years without him on average. The outcome of this is two-fold. Firstly, it means that women need to prepare for a time in the future where they will need to be financially independent, even if that is not their current situation. And secondly, that women need to be financially prepared for a longer retirement than men.
Up to half of all marriages and de facto relationships will end. It’s a sad fact that around half of all marriages and de facto relationships will end. This leaves a lot of women on their own and in charge of their own finances. In addition to this though is the chances that after this relationship breakdown, that women are worse off financially than they were before the relationship. Statistically, women are more vulnerable to suffering these financial consequences more than men who have the capacity to rebuild assets more easily in most cases.
Many women become mothers or primary care-givers at some point in their lives and need or choose to alter their working patterns to give them the time to work in the home. Despite being fulfilling for many women, working in the home can impact heavily on finances by limiting future career options, impacting on cash flow, and less contribution to superannuation thereby drastically reducing savings for retirement.
LESS PAY
LESS INVOLVEMENT
LESS SUPER
Whether we like it or not, women in Australia still tend to earn significantly less than men. In November 2013, the Workplace Gender Equality Agency released the latest gender pay gap statistics showing that there is a 17.1% difference between the average weekly earnings of men and women. Women working full-time earn on average $1270.30 a week, compared to men who earn $1532.80 a week.
Many studies have indicated that women in long-term relationships or marriages often look after the day-to-day running of the household finances, but tend to leave the long-term planning (such as investing and retirement) to their partner. This is particularly worrying when you consider that given the divorce rates and longer life expectencies, many women will be left to manage their finances with little experience.
With most women having breaks in their career at some point, combined with lower incomes than men, means that women generally have less superannuation savings for retirement. This combined with the fact that women typically need to prepare for a longer period of retirement means that women have to do more with less!
SEPTEMBER 2014
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ASK AN ADVISER! ASK ANY QUESTIONS, WE WILL ANSWER... Q
A
My late grandfather has left $30,000 to my 7 year old son. What is the best thing to do with this money and will he have to pay tax on it? - Rachel -
Assuming that the money gifted to your son is a net cash distribution from the estate, then there will not be any tax payable on the $30,000. Once invested though, there will be tax payable on any interest and income earned. Probably the most important thing to consider when looking at investing for children, are the tax implications. Minors and adults are taxed quite differently to prevent parents splitting their income and taking advantage of tax-free thresholds. For children under 18, they pay a huge 66% in tax when they earn more than $416 passively (i.e. “unearned income” not from their own employment). One way to reduce some of the tax burden is to add the income to a parent/grandparent’s taxable income and to hold the investment for them in trust. Investment-wise, there are lots of options you could consider ranging from a relatively simple high-interest online savings account, to insurance bonds, shares, managed investments, and education funds. All of these options have pros and cons in terms of risk and return. One of our financial advisers can help you to weigh up the options and recommend the right one for your situation. Further information about investing on behalf of children can be found at the Australian Taxation Office website: http://www.ato.gov.au/Individuals/Families/Investing-on-behalf-of-children/
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Q
A
I am the sole bread-winner in our family (my wife is at home with our 2 children). I recently received a promotion at work that means I’m now in the highest tax bracket. Should I set up a family trust to reduce my taxable income? - Mark -
Hi Mark. Congratulations on your promotion. With your rise in income, there are a number of ways that you can reduce your earnings taxable income. One of them as you have mentioned, is sharing investment income with your family members through a discretionary family trust. A discretionary family trust can be great for people in higher tax brackets as it allows you to distribute and stream income to family members to achieve an optimal tax outcome, and also to protect your assets if you were to become insolvent or bankrupt. Beware, however, that there is a cost to running additional structures so ensure that any benefits are more than the costs. There are other negatives to owning assets in a family trust that you need to consider. If you were to own your own home via the family trust, you would not be able to claim the Capital Gains Tax exemption if you decided to sell. Also, if any of your investments in the trust are negatively geared, you cannot distribute the losses to your beneficiaries, instead they will accumulate until your trust turns a profit. As introducing a family trust is a complex area, it is important that you seek some professional financial advice before you make your decision. There are a multitude of other methods to be more tax effective with the money that you earn. You may want to explore geared investment strategies (however that comes with additional risks) and additional contributions to your superannuation. Of course, our financial planners would be happy to help.
Have your own question? Ask our experts! Tweet us @financialspectr
Q
A
My wife and I have an investment property that we’ve owned for the last 10 years or so. We are approaching retirement and are looking at selling it. If we lived in our investment property before we sold, would we still have to pay Capital Gains Tax (CGT)? - Eric -
If you own the home that you are currently living in, then only that property is subject to the capital gains tax exemption. Investment properties do attract Capital Gains Tax (CGT) when they are sold. If you did decide to move into your investment property prior to its’ sale and make that your principle residence, you may still owe CGT for the portion of time that it was used as an investment property. Depending on the time you decide to stay in your investment property, the CGT would be payable on the total percentage of time that it was an investment property. For example, if you lived it the property for a further 10 years, then you may only have to pay CGT on half the profit. However, since you can only claim one tax free property at a time, you may have to pay tax when you sell your prior primary residence. Instead, think about your timing for when you decide to sell the property. When you retire, you’ve got much greater control of your yearly income and can pay yourselves the minimum income in the year that you sell the property, potentially minimising the tax you would have normally paid. Seek the services of either an accountant or qualified independent financial planner to help you work out which scenario would be best for you.
SEPTEMBER 2014
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COMPOUND INTEREST THE EIGHTH WONDER OF THE WORLD...
WHAT IS COMPOUND INTEREST? Albert Einstein referred to it as “the most powerful force in the universe”, and our own financial adviser Brenton Tong considers it the “eighth wonder of the world”. So what is this amazing thing and how can it help you super-charge your investments? The answer is compounding, or a clever little formula: I = P(1+r)n-P Compunding your interest is one of the most powerful ways to super-charge your investment. But how does it work and why is it so amazing? When you invest, you typically earn interest on your investment. The classic example is cash in a bank savings account. The bank will pay you a percentage of interest each year that your money is invested. Compound interest is where you are earning interest not only on the money that you first put into your savings account, but also on the interest that the bank has paid you. An example of compounding in action Two friends, lets call them Alex and Daniel are the same age. When Alex was 25, he invested $15,000 at an interest rate of 5.5% p.a. (calculated annually). When Alex turns 50, he will have $57,200.89.
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Daniel didn’t start investing until he turned 35. He invested $15,000 (the same amount) at the same interest rate (5.5%). By the time Daniel turn’s 50 he’ll have $33,487.15 in his account. The difference of $23,713.74 can be attributed to having the investment over a 10 year longer time-frame. Time is money – literally The nature of compound interest means that investments start to grow slowly and then accelerate. The interest earned accrues more interest. A child born today could easily live to 100. Simple interest on a $100 investment would amount to $1,000 over their lifetime. Left to compound untouched at 10%, that same investment would grow to $2,113,241!
SUPER-CHARGE YOUR INVESTMENTS
HARNESS THE INVESTMENT POWER OF COMPOUND INTEREST... Understanding compound interest is an important factor in maximising the wealth creation of your investments.
Even on such a small initial invest ment, that’s an incredible difference!
Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t ... pays it.
When you invest, you should keep in mind that compounding will amplify the growth. But remember, because time and reinvesting make compounding work, you must keep your hands off the principal and interest for the term of the investment!
- Albert Einstein -
Interested in taking your investments to the next level using compound interest? Have a chat to one of our friendly financial planning team to see how we can help! Give us a call today on 02 8238 0888
SEPTEMBER 2014
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QUITE RELEVANT BEAUTIFUL STUFF INSIDE HERE
PREVENTION IS BETTER THAN CURE THE BEST TIPS TO AVOID GETTING SICK. No one likes getting sick. Scientists have found that when someone is sick in an office, it takes only four hours for surfaces such as photocopier buttons and fridge doors to have infectious virus on them. Yuck! So what are the best ways to prevent catching the latest bug going around? 1. Skip the Vino Try to avoid drinking alcohol. It can reduce the quality of your sleep and make you more susceptible to catching bugs. 2. Drink Tea Drinking tea and breathing in steam stimulates the hair follicles in the nose to move germs out more efficiently. Lemon and honey are good additions to your mug too. 3. Protein Diets that are low in protein can deplete the immune system. Make sure that you’re getting enough protein through the day by eating protein-rich foods such as eggs, fish and yoghurt. 4. Sanitise your space Clean everything that is touched by lots of people in your office. Things such as microwaves, phones, photocopier keys, doorknobs, elevator buttons, chair armrests. Use a disinfectant at least once a week. Viruses can live on surfaces for up to 48 hours and be transferred to the next unsuspecting victim easily. 5. Breathe out When walking past someone who is coughing or sneezing, keep breathing out until you’re a couple of metres away. This is to prevent inhaling bugs. 6. Supplement During cold and flu season, it can be a good idea to take preventative supplements such as Vitamin C and Zinc if you feel like you’re starting to come down with something.
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7. Drink it up Drink lots of water to flush toxins out through the lymphatic system. You might also like to drink juice to increase your fruit and vegetable intake. Think apple, parsley, carrots, lemon, kale and broccoli. 8. Call it a day Research shows that our bodies need seven to eight hours of sleep per night to stimulate our immune system. Sleep is one of the most reliable defences against infection. 9. Wash, rinse, repeat Wash your hands often and pat them dry. Make sure to wash your hands before eating, and try to avoid touching your face, mouth and nose during the cold and flu season. 10. Don’t talk dirty Mobile phones are surprisingly dirty. If you think about it, your phone comes in to contact with lots of icky places - tables, counter tops, bathroom sinks, and then you touch it and put it next to your face to speak on the phone. Clean your phone regularly with sanitising wipes to prevent infection. 11. Ditch the takeaway Fatty foods and takeaways can dampen the immune response. Make sure you’re eating fresh healthy foods so that your body is in tiptop shape to fight infection.
SEPTEMBER 2014
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F I NA NCIAL S P E CTRUM CBD Level 2, 62 Pitt St Sydney P. 02 8238 0888 Rozelle 627 Darling St Rozelle P. 02 8238 0888 Bondi Suite 2201, Level 22 Tower 2, Westfield 101 Grafton Street Bondi Junction P. 02 8238 0888