HEWISON Financial news, our views AND other issues Issue 45 ~ September 2013
Understanding the terms we use Fringe Benefits A collection of various benefits provided by an employer which are exempt from taxation as long as certain conditions are met. Any employee who receives taxable fringe benefits will have to include the fair market value of the benefit in their taxable income for the year which will be subject to tax withholdings and social security benefits payments. Salary packaging Is a term used to refer to the inclusion of employee benefits (also called fringe benefits) in an employee remuneration package in exchange for giving up part of monetary salary. Such arrangements are entered into most commonly if there is tax or other benefits to be derived by the employer or employee from the arrangement. Diversification The process of buying securities in different investment types, industry types, risk levels and companies in order to reduce the loss from a possible company-local or industrylocal loss of business (Diversification is illustrated by a famous saying, “Don’t put all your eggs in one basket.”) ‘Fed’ otherwise known as the Federal Reserve Bank The central bank of the United States. The Fed, as it is commonly called, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C. (the Board of Governors) and twelve regional Federal Reserve Banks in major cities throughout the United States.
Q
uarterly • Will they or won’t they • From the MD’s Desk • You bought a car! Now…how will you fund it?
• Markets and change of Government • Lifecycle Investing - what is it and do you need it?
Will they or won’t they? Story by Simon Curtain, DIRECTOR/PRIVATE CLIENT ADVISER Image by Billy Alexander
W
ithout a doubt, the dominant economic theme over the past three to six months has been whether or not the US will scale back its massive $85 billion a month bond buying program. The program, more commonly known as quantitative easing, has seen the US Federal Reserve purchase billions of dollars of bonds in a bid to drive down US interest rates, in the hope of sparking the US economy into action. While commentators debate the effectiveness of the program, it has certainly had a large impact on the global economy. In May, Federal Chairman Ben Bernanke advised that the Fed may begin scaling back its bond buying program over the coming months. While the Fed argued that the US economy was ready to stand on its own two feet, the market thought differently and sent prices into a tailspin. During this period we saw the Australian market shed all of its 2013 gains in the space of a few weeks. As always, it took some time for the impact of this statement to make its way through the system and before too long markets in the developed world were back on track with the Australian market reaching a 5 year high of almost 5,300 points. Perhaps the hardest hit by the Fed’s statement were emerging economies like India, Indonesia, and Brazil. Over the past 5 years these economies have been in favour with Western investors, who have sent huge amounts of money flowing into their markets. With the
Fed signalling improvement in the US, a large portion of this money has found its way back to America resulting in massive declines on stock markets and currencies alike. More recently, the Fed announced that it would delay winding back its bond buying program, citing weaker economic data and a worrying unemployment rate (7.3 per cent in the US). While these statements will continue to affect markets around the globe, we need to concentrate on the larger picture. Broadly speaking, we expect to see a shift in the Australian economy over the coming years due to improvement in the US economy, and China signalling a controlled slowdown in growth. These factors have already resulted in a decline of the Aussie dollar and while a falling dollar will slow export-reliant industries like mining and resources, it will also increase competitiveness in lagging industries like manufacturing, housing and tourism resulting in a more balanced local economy. We also expect to see interest rates settle at around 2% – 2.25%. Lower interest rates will encourage consumers to spend, further propping up the economy. Lower interest rates also reduce the attractiveness of bank term deposits, therefore encouraging investors to buy other assets such as shares and property. As always, we continue to monitor the global landscape and identify opportunities over the short term, while keeping in mind your long term goals and objectives.
From the MD’s Desk
John Hewison
We now have a new Federal Government and regardless of your political persuasion, it was important to have a clear winner for the sake of certainty and a return of confidence to the private sector. One of the ramifications of a change of Government is that legislative changes proposed by the previous Government are now up for review. This applies to a raft of legislation applicable to the financial services sector.
You bought a car! Now… how will you fund it? Story by ANDREW HEWISON, Director/Private Client Adviser
Buying a car is often a significant event in a person’s life. There are many ways to fund a vehicle and before signing a contract, I recommend you speak to your Financial Adviser or Accountant. Here are some of your options:
Under the Future of Financial Advice (FoFA) reforms, the previous Government aimed to provide consumers with clarity of pricing and fairness of advice by banning commissions on financial products, and implementing a fiduciary duty. The intent was well-meaning and admirable, but the reforms failed to go far enough or recognise the complexities of the financial services industry.
Novated Lease
As a result of pressure applied by the industry, the Government decided to “grandfather” commission arrangements that were already in place prior to 1 July 2013. This was clearly motivated by the fact that it would have meant dismantling existing revenue streams to institutions and, via them, to their adviser networks.
Novated leasing forms part of a person’s “salary package” and therefore is viewed as providing a “fringe benefit” to the employee and fringe benefits tax (FBT) can apply.
What also became obvious is that the application of a fiduciary duty could not be satisfactorily achieved. This is because more than 90% of the advisory community is licensed to financial institutions that manufacture and sell financial products, creating an underlying conflict of interest. As I said previously, the Government was well-intentioned but this is just not cutting the mustard. How hard can it be to separate advice from product, so that consumers can be fully comfortable that they are receiving unbiased, non-conflicted advice, solely focused on their interests? How hard can it be to strip out all the incentives payments from investment costs and clearly state who is being paid for what, so that the consumer can make a clear value judgement? From where we sit, advice must be independent and unbiased. Investment should be separately priced on its merits. We have argued this position for over 20 years and eventually someone in charge will get it right – we hope.
An individual obtains borrowing via a finance/ leasing company who would purchase the vehicle and lease it to this individual, who then enters into a Novation agreement with their employer who agrees to meet the payments on the lessee’s behalf. Under this agreement, the finance company owns the vehicle and there is a residual value payable under the agreement.
FBT is treated concessionally for vehicles, so novated leasing may be a tax-effective way for an employee to purchase a vehicle, depending on a number of factors not limited to the type of vehicle, kilometres travelled annually, FBT method used and employee’s salary.
Who will this benefit? • If leasing is not a suitable fit for an individual, and they do not have the physical cash to pay for the vehicle, hire purchase is worth consideration. Personal Loan A personal loan will usually be secured by the vehicles owner or some other form of security. This would mean that the lender would require a deposit to ensure that their loan is adequately covered by the value of the vehicle. Motor vehicles are depreciating assets and not considered to be preferred security. Interest rates applicable are therefore comparatively high. If the owner is unable to repay the loan, the lender can repossess the vehicle and sell it. Who will this benefit? • Those who cannot fund the purchase via free cash. • Those who have no other avenue to obtain funding. Chattel Mortgage
Who will this benefit? • Those who do significant kms per annum. • Those on the top marginal rate of tax. Hire Purchase The vehicle is purchased on the individual’s behalf by the finance company and “hired” back by the individual who agrees to pay a hiring fee plus make progressive capital payments off the value of the vehicle over the period of the agreement, spreading the cost of the vehicle. There is usually a lump sum residual amount payable at the end of the period. Hire purchase arrangements have termination values (TV) included in them. This means that at a certain point during the life of the agreement, the borrower may have the ability to simply hand the car back to the lender and walk away.
Under a Chattel Mortgage the financier lends funds to purchase a vehicle and the customer takes ownership of the vehicle (chattel) at the time of purchase. The lender then takes a “mortgage” over the vehicle as security for the loan, typically for 1 – 5 years. Again, the loan is for a sum less than the value of the vehicle and. at the end of the loan, a balance, referred to as a “balloon payment,” will be left owing. However, it remains the responsibility of the borrower to repay the “balloon,” often by selling the vehicle. Who is this good for? • A Chattel Mortgage is suitable for those companies, partnerships, and sole traders who have the ability to claim back the GST associated with the vehicle’s purchase price.
Markets and change of Government Our new Federal Government is now firmly in place and ministers appointed to their duties. During this time markets have been relatively buoyant. Leading up to the election there was quite a bit of commentary regarding the impact a change of Government would have on financial markets. Historically, such a change is generally positive for the markets in Australia. There are however a whole range of factors that influence financial markets and the result of an election plays a relatively minor role. In the shorter term, some of the factors expected to keep a lid on market exuberance are: - Syria and the threat of US military intervention;
- US Federal Reserve Bank’s tapering decision; - US Debt ceiling and the related negotiations; and - Concerns about emerging market economies and slowing mining infrastructure development. By contrast, some short term influences that point towards positive market movements are: - Lower interest rates encouraging investors to consider additional investment into equities to ensure they earn sufficient income. - Strong corporate balance sheets both in Australia and overseas; and - Economic recovery in the US and the absence of economic catastrophe in Europe leading to positive global sentiment.
Story by CHRIS MORCOM, Director/Private Client Adviser
However investors should not be focusing on short term issues… they come and go. It is the longer term that is important, especially for share market investors. To that end, we are seeing quite positive signs with the Australian share market still trading 25% below its 2007 peak (although when dividends are counted it has now surpassed its 2007 peak). Lower interest rates are helping keep the Australian dollar below parity and this will help our export sector and those sectors reliant on inbound foreigners such as tourism and education. The impact of new Government policies will take time to filter through the corporate sector, however the focus for us remains on investing in quality companies that run businesses with competitive advantages and that trade at attractive valuations.
Lifecycle Investing - what is it and do you need it? Story by Nathan Lear, Director/Private Client Adviser
Last month I attended an investment conference that was themed ‘Lifecycle Investing’. Lifecycle investing is not an overly common term in Australia, so it had me asking the question, what does it actually mean? Lifecycle investing is defined as a ‘philosophy of constructing portfolios so that over the whole of a person’s life, acceptable standards of living and specific life goals are achieved’. Put simply it means investing in order to meet specific goals and objectives. The idea behind lifecycle investing is to have an investment strategy that meets your objectives according to your lifecycle stage. For example a young couple in their early 30’s should have a different investment portfolio to a retired couple.
Young Accumulator Couple The young couple is likely to have an aggressive portfolio with a high allocation to growth assets such as shares and property. The reason being a young couple’s goals are likely to be skewed towards accumulating wealth. This couple has a long-term investment horizon that may be as long as 30 years if they plan to retire at age 60. Such a long investment horizon would give this couple sufficient time to ride out the short term fluctuations in the market and take on higher levels of risk.
Retiree Couple Now consider a couple in their 60’s who have just retired. Their focus is to generate an income stream that is capable of meeting their retirement income needs. This different set of circumstances requires the retiree couple to have a much more defensive portfolio with a much higher exposure to fixed interest style investments and much lower exposure to shares and property. The reason being this client needs the predictability of reliable income. While growth assets such as shares and property have the ability to generate higher returns, they also carry more risk and volatility. The above examples compare two very clear cut scenarios. However it is not always so simple. Throw into the mix a few curve balls and you will see that the design of an investment portfolio is not so simple. For example the portfolio may need to be constructed taking into account issues such as saving for a house with the need for a future deposit, funding your children’s school fees, or gifting funds to your adult children. To complicate things further, throw in issues such as, how will inflation affect portfolio returns? Or if you were to live longer than your life expectancy, would you have enough funds to cover the later years?
The concept behind life cycle investing is not new to Hewison clients. However you may have heard the concept framed differently such as ‘objective based advice’ or ‘designing a strategy to meet your individual goals and objectives’. We have for years advocated against the idea of plugging our client’s personal information into a software program that would then magically spit out their desired asset allocation. Instead we have strongly endorsed the need to sit down with our clients, understand their specific goals and objectives, and then tailor a strategic framework and investment portfolio that is capable of meeting those objectives. As the client’s objectives change or move into a different ‘cycle’, a review of the existing strategy is required. There is no-one-size-fits-all solution or investment strategy (such as ‘accumulator’, ‘pre-retiree’ and ‘post-retiree’) that can be applied across the board. It is important that your adviser has a full understanding of your goals and objectives and that your strategy and investment portfolio are designed to work towards meeting those objectives.
Congratulations to Lisa Munro, who received her Diploma in Financial Planning Technical PA Lisa Munro has successfully completed her Diploma of Financial Planning and is using her newly gained knowledge in her recently appointed adviser support role, where she is excelling. Lisa has been with us for 2 years as a Relationship Manager and then advanced into her current role. Well done Lisa!
It’s a girl! Congratulations to Simon & Sarah Curtain on the birth of baby #3. Little Isla was born on the 19th of July weighing 6lb 9oz (2,994g). She joins big sisters Eve and Adele.
Relationship Manager, Denise Poole starts maternity leave Denise left us on Friday 27th of September 2013 to prepare for the birth of baby # 3. She will return to HPW the week beginning the 31st March 2014. We wish her and her family all the best.
Hewison Private Wealth investor insight series for 2013/14 For our next Investor Insight series in October, senior Advisers Nathan Lear and Glenn Fairbairn will share the secrets to successful investing and key principles to super charging investment returns.
Please feel free to extend this invitation to family and friends who may be interested in this topic. We would welcome the opportunity to meet them.
Details are as follows: Date: Tuesday 29th October 2013 RSVP: To Clare Kerber on 03 9682 1900 or email clare@hewison.com.au Times: 5.45 - 6.00 pm Networking (drinks and canapés served) 6.00 - 6.45 pm Nathan and Glenn’s presentation 6.45 - 7.00 pm Discussion and question time
Date
Topic
Speaker
Venue
29th October 2013
“Supercharging Investment Returns”
Nathan Lear and Glenn Fairbairn
@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE
11th February 2014
MD Forum “Secrets of the successful investor”
John Hewison Managing Director
@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE
Level 4, 102 Albert Road, South Melbourne VIC 3205 P (03) 9682 1900 | F (03) 9682 5999 info@hewison.com.au | www.hewison.com.au
The information contained in this publication is general in nature and not intended as personal advice. Please obtain advice from your financial planner before acting upon this information.