What should a good financial planner/adviser be doing in this present market/environment to assist a client.
An adviser needs to be genuinely empathetic to listen well; have experience with all phases of life; and clarify any issues and opportunities with the client to understand their current position.
Incidentally through conversation a good adviser will learn what the client knows about investments and their experiences. This is important to discover the knowledge gap that may otherwise cause disappointment or confusion.
For example, a 70-year-old couple came to me with a conservative portfolio of managed funds. I asked what rate of return did they expect. They said 8% income. It was clear they did not understand the nature of defensive investments is to generate low income and low risk. In response I examined their appetite for risk and capacity for risk and developed a more suitable strategy and portfolio.
Often it is necessary to educate clients about the types of investments (asset classes) and the characteristic of liquidity, volatility, income, growth and time frame for investment. Also explain inflation as a risk to the value of money over time. Discuss strategies to manage inflation, liquidity, volatility and meet your investment objectives.
Once a client understands investments and strategies, they are better equipped to answer questions about what they will tolerate to reach their objectives. Therefore, the recommended portfolio will include investments that best suit the client for their peace of mind and financial needs.
Once advice is accepted then implementation can be problematic for people who do not know how the various stakeholders operate. A good adviser will manage this process to get the best from all stakeholders without causing any inconvenience to clients. So, no mistakes or missed opportunities.
In summary, it is my job to help clients understand their situation and how investments work, and set realistic objectives and goals. When clients know what to expect from their investment strategy and type of asset, they should not worry. For example, amidst the current falls in international and domestic sharemarket, and Sydney and Melbourne house prices, a high-risk investor will be quite comfortable knowing their income objectives are met and their investments will recover their capital value over time. Should a client choose an ongoing service then an adviser can assist their client to remember their strategy, check the asset is behaving as expected and reset the client’s expectations each year as part of a review.
Is superannuation the best financial strategy going into retirement and why?
Superannuation is the best concessional tax entity when planning for tax-free income during retirement. Dependent upon your wealth balance to fund retirement you should plan to use the tax-free threshold outside super and the tax concessions within super. Just don’t forget to think forward about survivorship when a single person will own the entire savings and may incur income tax on investments outside super. When this happens the retiree often is not eligible to contribute any more to super to reduce income tax.
Briefly the tax advantages within superannuation whilst you are working include the cap of 15% tax on earnings and 10% on capital gains. When you are retired and you move up to $1.6 Million from superannuation to pension phase the tax on earnings and growth within the pension, reduce to zero.
The taxation on payments from superannuation (accumulation or pension phase) after age 60 and when you are no longer working, will range from zero to minimal.
Therefore, the story that starts when you are working and continues when you are retired is your investment’s growth and income will pay little tax compared to earnings above $18,000 outside super.
Another story has regard for saving whilst you are working. It starts with contributing up to $25,000 currently to superannuation in a manner that offsets income tax on the sum contributed. The contribution will pay a 15% contribution tax however if your highest marginal tax bracket is greater than 15% then you have an advantage. Just don’t forget to understand the investments and ensure they are appropriate and competitive. Super is also valuable because you cannot impulsively withdraw the money and creditors cannot claim against this either.
So, super is a robust, tax-effective way to save especially after you own your home and raise your children. Remember as surplus monies become available during your 40s and 50s you should review what you are saving for retirement.
One last superannuation gem arises when one member of a couple is younger and the older member has reached age pension age. Should the younger member be earning little income, you can plan for the means test by holding more of your assets in the name of the younger member. This is because superannuation is not accessible until pension age.
Beware there are exceptions to the above tax and Centrelink tips which is why you should seek advice.
To conclude the reasons to include superannuation as part of your retirement strategy will vary between people with different wealth balances and differing goals. It is important to seek advice to obtain a tailored strategy to have a robust tax effective saving plan and investments.
What has been the benefits (or disadvantages if any) of the recent royal commission into banks and financial services?
It is important to distinguish between the big business names who have sold their own product and those advisers who are not vertically integrated with any product provider. The large business by nature operates on systems with significant staff at the client interface. Systems are designed to manage behaviour, compliance and profitability. It is not hard to understand that this can get out of hand particularly if there is poor compliance.
The findings from the enquiry included:
- fees for no service
- the form of recruitment and remuneration that drove poor conduct
- how complaints were addressed
- poor reporting to ASIC
- insurance selling without consultation
- irresponsible lending practise
The above reasons are exacerbated when an individual no longer thinks for themselves and becomes a puppet or worse, and the system is not challenged in a positive manner. The enquiry has tackled those responsible who drive the systems which is a good thing. The disadvantage is the increasing burden of compliance which will push up the price for financial advice. There are many advisers and licensees who have provided great service to their clients. However, we all will have to answer to changes made to control those who acted like cowboys.
What is the difference between you as an independent adviser compared with a bank or managed fund adviser on a trail commission.
Personally, I have avoided working in an environment that was integrated with product providers (to sell products). The incentives and rewards have encouraged cowboy behaviour I don’t like.
In the early days in this industry (and periodically) there were large incentives and no ongoing service. It made sense to me in 1992 to charge a fee for service each year rather than take a high upfront commission. Of course, I never considered to not provide an ongoing service for the 4% fee. On this basis it occurred to me that it was better to receive income in the year you incurred the expenses. This is less risky, retains clients and adds value to the business. So, in 1992 when the upfront commission was 4%, I offered to charge 1% per year and provide the ongoing service. Today my fee for service model has changed to a firm quote based upon the amount of work, where the fee does not outweigh the benefit. The fee for service model today also includes advice for life insurance, so I can pass on discounted policy premiums because I don’t accept commission.
The trail commission is not an upfront fee but a fee based upon a percentage of the sum invested every year. These were set up originally to act as a pseudo fee for service. However, the national enquiry (and I still find with new clients) that fees have been charged and there has been no ongoing service. This is wrong however it is also surprising that investors have not identified this in their investment transactions report each year. People should check their investment transactions for “adviser fee”.
To conclude I have not been tied to a big business since 1992 hence I have been able to control my fee model, service and product recommendations. In addition, I have bolstered my education with a Masters in Business Administration and Graduate Diploma in Law to raise the standard of business and advice service I can offer to clients. I am far from a puppet and have the ability to provide sound advice and treat my clients how I would like to be treated. Be assured there are good advisers.
Anything else you want to add?
I love working with a team! I really enjoy getting to know my clients and acknowledge their talents in business or professions. If I am the team coach then its understandable why I check in with clients periodically to remind, refresh or reset goals and expectations. Go team.
Sue Cavill is the CEO of Inspire Financial Services based in Tweed Heads.
0428 258 444 firstname.lastname@example.org