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FINANCIAL
A FEW WORDS FROM OUR TEAM...
CBD Level 2, 62 Pitt St Sydney Rozelle Level 1, 442 Darling St, Balmain
Bondi Suite 2201, Level 22 Tower 2, Westfield 101 Grafton Street Bondi Junction
NEWS FROM THE OFFICE Christmas is in the air! Every year we try to give back to our local community through volunteering. This year the team volunteered at the annual Special Children’s Christmas Party at Rose Hill. Each year children with life threatening and severe illness, intellectual disabilities and kids from underprivileged backgrounds enjoy a free party hosted by a number of businesses and sponsors. Our team had a busy day assisting in the running of the party (we had 4,500 kids this year!). The team really enjoyed seeing the smiles on the kids’ faces. The true Christmas spirit.
THE MANAGEMENT TEAM
Brenton Tong & David Hancock
Please be aware that our office will be closed for the Christmas break from the 19th Dec - 5th Jan. If you require urgent assistance during this time, please contact your adviser by email and we will be in touch with you ASAP. From all the team, we would like to thank you for your support over the past year. We wish you a happy and safe Christmas break and look forward to working with you in 2015.
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Australians still use financial planners less than they should, but this is changing.
SPECTRUM MAGAZINE
know ?
That we have 3 offices across Sydney!
All the best!
// HOW FINANCIAL PLANNING IS CHANGING P. 04
Did you
// ECONOMIC UPDATE P. 06
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The latest news from the Australian and global economy from economic experts.
// GETTING A HOLD OF THE PROPERTY LADDER P. 08
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In this article we look at the basics of property investing to help you get started.
OUR TEAM JULIE HALL
THE TEAM VOLUNTEERING AT THE ANNUAL SPECIAL CHILDRENS’ CHRISTMAS PARTY’, DECEMBER 2014
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.
The Special Childrens’ Christmas Party is an annual event which has been running since 1979. The children who attend have life threatening illnesses such as cancer and leukemia, children with physical impairments such as muscular dystrophy, children with intellectual impairments such as Down Syndrome, and children from severely underprivileged circumstances. For more information visit www.christmasparty.com.au
// ASK AN ADVISER! P. 10
// ACTIVE VS PASSIVE INVESTING P. 12
COMPANY ACCOUNTANT
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Have a question that you’d like to ask one of our financial planning experts?
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Beating the market – it’s what every investor wants to do.
// TOP CHRISTMAS EVENT 2015 P. 14
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As the Christmas season nears, there are some fantastic events that are held around the country.
SUMMER 2015
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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 you 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.
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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. China-Australia Free Trade Agreement (ChAFTA) Australia and China have signed a Free Trade Agreement. The deal follows trade agreements that Australia signed earlier this year with Japan and S. Korea. The first round of negotiations for this agreement began in 2005 and since then 21 rounds of negotiations have been completed. The ChAFTA will deliver a net benefit to both Australian households and businesses. The Government has declared that 14 commercial agreements were signed, covering projects worth more than $20 billion (1 Âź% of GDP).
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Domestic Outlook: The Australian dollar has continued its downward trend due to a firmer US dollar and lower commodity prices. The price of iron ore (Australia’s largest export), fell sharply as market participants weighed up slowing demand from China against rising supply. The decline in the AUD is a welcome development as it will help the Australian economy rebalance from mining to nonmining led growth. But the fall in commodity prices will act as a drag on income growth domestically.
Did you know
that the Australian Alps receive more snow than Switzerland?
Lower Oil Prices: The latest frenzy in financial markets is the continuing tumble in the oil price. Currently, the Brent oil price is trading at $72/barrel which is a fall of around 37% since mid-year. Near-to-medium term oil prices are likely to trade down further. A lower oil price is positive for household spending. The income impact equates to a lift of around 0.2% of household income. A positive business impact will be on the firms in industries who consume a significant proportion of energy (manufacturing, electricity and road, rail and air transport).
$AUD $1AUD = $0.84 USD
CURRENT CASH RATE 2.50%
Current as of 5th Dec 2014.
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GETTING A HOLD OF THE PROPERTY LADDER With interest rates at some of their lowest rates than they’ve been for decades, property investment has become increasingly popular as a method of building wealth. But, if you’re an investment novice looking to get into the property market for the first time, where do you start? In this article we look at the basics of property investing to help you get started. How do you make money from property investment? There are generally two ways to make money from property investment – rental income and capital growth. You may also enjoy some tax benefits that help you to maximize your profits and the effects of rental income and capital growth. Rental income from an investment property helps you to pay down your mortgage and increase the equity you have in your property over time. If the rental income is greater than the costs involved with your rental property, this is referred to as ‘cash flow positive’. If the rental income is less than the costs involved with your rental property, this is often referred to as ‘negative gearing’ and may offer some tax benefits. Both strategies may be useful to you, depending on your personal financial situation. When your property increases in value, this is referred to as ‘capital growth’. Generally speaking, the longer you hold your property the more opportunity it has to increase in value. When you add in the effects of rental income paying down your mortgage, your equity in the property grows over time and you can see significant gains. The equity is your profit. Many investors access the equity after it builds up to use as a deposit to purchase their second investment property, and then a third and so on until they have a property portfolio. What are the steps to getting started? 1. Seek independent financial advice 2. Gather your deposit 3. Structure your finances
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4. Source a property 5. Manage and grow 6. Understand the value of professional advisers
STEP 01 Seek independent financial advice to determine your financial position. You’ll also want to explore the tax benefits of investing and how it will help to offset your costs, so it pays to get advice from professionals like a financial planner or qualified tax accountant.
STEP 02 Saving for a deposit is probably the most significant hurdle when it comes to property investment. If you already own a home, you could access the equity to use as a deposit on your first investment property. If you don’t, then then you will need to use genuine savings. How much money you actually need for a deposit depends on the cost of the property you wish to purchase – but in some cases, it might be possible to start your property portfolio with as little as 5% of the purchase price.
STEP 03 Structuring your finances is the next important step. Our job is to find and help you access the best possible loan for your purposes considering your personal financial situation. We help you to sort out exactly what you can afford to pay for your first investment property, and help you to find the loan that will be flexible enough to meet both your current needs and your future investment plans. Structuring your finances is a very important step and it’s wise to get your finances sorted before you even start looking around for a property to buy.
investment property, so it’s important that you take the time to consider how this will happen and do your research. It’s a good idea to choose a property in a growth area – inner city suburbs are popular because they are always in high demand. Make sure that the property is near to amenities such as public transport, shopping centers, schools and parks. You can also plan to create capital growth by improving or renovating a property – but be careful to choose a property that only needs cosmetic changes as structural work can be expensive and may cause you to over capitalize. Remember, you don’t have to choose an investment property that is close to where you live. You can invest anywhere in Australia and some areas of the country have more capital growth potential than others.
STEP 05 Manage and grow, so you can build equity and use it to purchase your next property. Two things are important to your objectives here – keeping your property tenanted to pay the mortgage and keeping it well maintained to protect the value and grow your equity. If you are time poor, you may want to employ a property management company to help keep your property tenanted and maintained. If this is the case, make sure you take the costs
into consideration when you are structuring your finances. After you have held the property for a while, you can check on capital growth by having your property valued. When you have built significant equity, you can use it to purchase your next investment property. The more properties you hold, the more quickly your equity builds and the more properties you can purchase – and up the property ladder you go!
STEP 06 Understand the value of professional advisers part of our service is to refer you to the right people at every step of the process – from a good buyer’s agent if you don’t have time to source properties that meet your financial and investment strategy, to the professionals you need to complete the purchase. We can help with referrals to solicitors, conveyancers, building and pest inspectors and even property management companies after you make the purchase. It all starts with a conversation about your financial situation. So why not give us a call today? If you’re already investing and have friends who might benefit from property investment, don’t hesitate to send them to us. With the cost of borrowing so low, it’s a great time to put your foot on the first rung of the property ladder!
STEP 04 Source a property with capital growth potential. Capital growth is where you aim to make the most significant profit from your
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Q A
We’re in our 30’s and about to have our second child. We’ve outgrown the house we’re living in and need to either renovate for more room or buy a new place. What do you suggest we do?
There are a lot of factors that you need to consider when you need to change your living arrangements. Buying a bigger place or renovating will come at an additional cost, so the first thing to work out is your affordability – do you have the savings or additional borrowing capacity to do it? If you’re struggling with your budget at the moment, borrowing more money may not be a good thing, so buying a larger house in a cheaper area may be your only possibility. If you can afford to spend more, then you have to weigh up the cost of renovating and the end product that you’ll get with the costs of buying a new house. Don’t forget when you sell, you have to pay agents fees and buying another property will have stamp duty and moving costs. Stamp duty on a $1,000,000 house is $40,000, and selling an $800,000 house will cost you around $20,000. Factor in moving and settling in costs at an additional $10,000 and you’re up for $70,000 to move house. Depending on the work you need to do on your house to make it more suitable to your needs, the cost of moving may not be worth it. There are other facts to consider such as including the cost of living somewhere else if you can’t live in the house while it’s being renovated and the disruption that it may have on your life. Ideally, any renovation or move should fit into your overall long term strategy and you also have to take into consideration any future changes such as having another child in the future or changes to your job. Once you’ve worked out the total cost with each option, then look at the overall positives and negatives then hopefully you’ll be able to see better value in one rather than the other. Don’t forget, you can always speak to a professional about it to help you with the analysis.
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ASK AN ADVISER! ASK ANY QUESTIONS, WE WILL ANSWER...
Q
A
I’m 3 years into my career as an accountant and I can’t seem to save as much as I thought I could. I earn reasonable money and know I should be doing something, but it just doesn’t seem to work. Please help me with some ideas?
Saving is actually be a very difficult thing to do. In your day to day life, it’s likely that you’re going to come up with lots of things to spend your money on. Life, in general, is always going to be throwing things at you. The basics of saving are having a budget and an understanding of what you’re doing with your money. Further to this, however, is an understanding as to why you’re saving. If you have something that you’re aiming for, whether it be a holiday, an investment property or your first house, you need to have something real and achievable that you’re aiming for.
Have your own question? Ask our experts! Tweet us @financialspectr
Write a list of all the things you’d like to achieve in the next 10 years (if you can think that far ahead), then put them in order of time. Next, put a cost next to each one (such as a 10% deposit on a property). Given that it’s hard to have everything at the same time, have another look at the order of things in light of their costs, then pick out the items that you’re most excited about and appear to be achievable. You can then reduce them to an amount per month that you would be willing and able to commit in order to achieve them. If possible, tell someone you trust (a family member or trusted professional) so that you have be held more accountable. Review how you’re saving regularly in order to make sure that you’re on track.
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ACTIVE VS PASSIVE INVESTING THE CASE FOR INDEX FUNDS
Beating the market – it’s what every investor wants to do. Essentially, it’s winning and doing better than everyone else. While it sounds great, it’s actually very hard to do. While the activities of direct shares traders are impossible to track (and most people like to talk about their wins rather than their losses), it is easy to compare actively managed funds with passive index funds. An actively managed fund aims to perform better than a chosen investment market, such as Australian shares, by building a customized portfolio of shares based on unique criteria and often involves highly refined intellectual property built up by the fund manager over many years. A passive fund is quite different – it aims to match the return of the chosen market rather than outperform. Given the choice of aiming to outperform or just match a market, it would initially appear obvious that you would want to outperform. However, current research is showing that nearly 70% of the available actively managed funds have underperformed the benchmark
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that they are trying to beat. The numbers increase the longer that you choose the period to compare with almost 75% of active funds underperforming if you look at periods of 5 years or longer. Surprisingly, given the statistics, only 30% of funds invested globally into managed investments are directed towards index funds with actively managed funds still making up the bulk of where investors are putting their money. The lure of beating the market, with slick marketing and presentations, along with strong relationships between the fund managers and the advisers recommending their funds see that index funds are still an unknown option for many investors. Index funds, in aiming to match market performance, don’t have the depth of research, trading facilities and infrastructure that actively managed funds have. While the market is constantly singing the praises of research driven asset selection, it comes at a cost. When viewed in light of the long term performance, some researchers
are starting to question the value that active investing brings to the end user – paying more for lower long term performance. Given the long term rise in popularity of share investing, along with compulsory savings into superannuation and pension funds, more and more funds are finding their way into the market. Consequently, the information available on the various markets, coupled with the advancements in the technology that supplies that information, means that the transparency in the market is increasing all the time. Most investors, should they have a desire to, can gain sufficient information to be making an informed decision and this has brought about a more efficient market.
successfully applying their research and infrastructure to learning more about the companies that they are investing into. This potentially gives them the leg up on average investors who don’t have the ability to dig in and find those hidden gems. The trend is certainly pointing towards a steady growth in people being interested in index funds as more and more investors are becoming disenchanted with the withering value proposition that actively managed funds are offering. Given that many index funds are now available as Exchange Traded Funds (ETF’s) listed on the ASX, it’s getting easier and more cost effective to access this increasingly popular investment choice.
An exemption to this trend is smaller companies, also known as small-cap or micro-cap stocks. These are much less traded, and must less researched. Actively managed funds in these areas appear to be outperforming the market. Active managers are
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TOP CHRISTMAS EVENTS 2014 14
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As the Christmas season nears, there are some fantastic events that are held around the country. Here are a few of our top picks of things to do over the holidays with the family: 1. Christmas Lights Spectacular - Hunter Valley Hunter Valley Gardens is set to host the Christmas Lights Spectacular, Australia’s biggest Christmas lights display. A wonderful experience for the whole family to enjoy, the gardens will be alive with colour every night. With exciting new displays of over a million lights, plus festive food, beverages, children’s entertainment and of course Santa Claus, the Christmas Lights Spectacular is bound to capture the spirit of Christmas and create lasting memories for all. Every year Hunter Valley Gardens makes several additions to the Christmas Lights Spectacular with choreographed music and light displays with three Mega Trees and the 12 Days of Christmas, you can see Cinderella’s Pumpkin Coach in fairy lights, as well as a narrated Christmas story told over loud speaker at the Nativity scene.
2. Carols in the Domain This year’s Carols in the Domain is on Saturday 20 December 2014. For those who can’t make it to the Domain, you can watch the event live on the Seven Network from 8:30pm or listen to the simulcast on smoothfm in Melbourne and Sydney. From 12pm there will be pre-show stage entertainment with the main show beginning at 8:30pm when the live coverage kicks in. • 12pm - Public catering & event carnival commences • 3pm - CarolsTV & pre-show entertainment on stage • 8:30pm - Woolworths Carols in the Domain Concert commences • 11pm - Event ends
3. Variety Santa Fun Run The Variety Santa Fun Run is Australia’s most festive event taking place in every major city across the country, supporting Aussie kids who are sick, disadvantaged or have special needs. The Sydney event is a 5km walk starting at Darling Harbour. Other events are being held in all other capital cities around Australia. Check the Variety website for more details. WHEN: 7th December 2014 WHERE: Darling Harbour to the Opera House.
WHEN: 20th Dec 2014, 12pm-11pm WHERE: The Domain, Sydney
WHEN: 7 Nov 2014-26 Jan 2015 WHERE: Hunter Valley Gardens, Pokolbin
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F I NA NCIAL S P E CTRUM CBD Level 2, 62 Pitt St Sydney P. 02 8238 0888 Rozelle Level 1, 442 Darling St Balmain P. 02 8238 0888 Bondi Suite 2201, Level 22 Tower 2, Westfield 101 Grafton Street Bondi Junction P. 02 8238 0888