This is an interesting article I received today talking about the changes that are occurring in the Australian Financial Services industry.

I find it interesting that NZ is going through a similar transitional period and therefor I take note of what is occurring in Oz as the odds are in favor of NZ following suit in many areas.

A review of submissions to the Ripoll Inquiry highlights at least four areas that potentially impact Financial Planning Practices

• Commission – debate around progressively removing or banning the payment of commissions (including trail or service fees) from product or platform providers;

• Licencee over-ride payments – greater visibility of subsidies paid to Licencees by platform and product providers in exchange for support; and debate on the potential conflicts of interest inherent in these arrangements;

• An emerging industry preference for the separation of Advice and Platform fees;

• Asset based fees – divergent views of the appropriateness of fees charged as a percentage of assets under management.

Pre-empting what might be recommended in the Inquiry, and what might ultimately be adopted, our response is as follows:

• Financial Advice and Wealth Management remains a growth industry, where the demand for quality Advice, exceeds the current capacity of the Industry. The cost of client acquisition, of complying with the present Financial Advice regime and servicing clients is expensive, limiting comprehensive Advice delivery to a small percentage of those who need it. To impose a remuneration regime(such as banning commissions) may be politically unsaleable if the ban carries the potential to further limit access by the ‘mid-market’, to Advice. That said we are on a journey that may ultimately separate Advice and Platform fees and reduce the ability of Adviser s and their Licencees to rely on commissions or over-rides.

• Review your current business model – determine the value you derive for Clients and charge separately for it. If you use an outsourced Asset Management model and external Platform prepare your business for the day you may not be able to collect fees for that activity from the Platform.

• Any move away from asset based fees would require significant structural change to the industry and threaten the viability of many funds management, custodial and advice businesses. It would also be out of step and unattractive to larger international funds providers to enter the Australian market – not an outcome that will encourage competition, so highly likely to be avoided.

This is a question I am asked by nearly every single client when they buy an investment property.

As a Financial Planner in Australia the concept of an LAQC was new to me in 2004 and because you can achieve the tax benefits of an LAQC without having to have one I though it was just another way for accountants to increase their billable hours to investors.

A loss attributing qualifying company (LAQC) is simply a normal company that has elected to be an LAQC.

LAQC stands for loss attributing qualifying company, which means that the losses your rental property makes are allocated to the individual shareholders to offset against their personal income, thus resulting in a lower provisional liability or a refund of PAYE paid.

Since you can do this in your personal name many people wonder about the validity of setting up an LAQC for there property and even wonder why there even is such a thing as an LAQC, after all the idea of setting up a company is to make a profit, so why would you set one up knowing it is going to make a loss.

The answer is that in some industries in the first few years of the business it is impossible to make a profit, take for example forestry, in year one you plant the seedlings and then you wait…and wait…and wait, so each year that the tree are growing and being tended costs the business money however there is no income to the business and so it makes a loss. This loss is allowed to be allocated to the shareholders to offset their personal income from other sources….very handy indeed. Eventually the trees have grown large enough to harvest and so the business starts to make money and will be turned into a “non LAQC” company.

So quite a few years back some bright spark came up with the idea to use these vehicles for property investment and suddenly there was a huge influx of people wanting to own properties in an LAQC. Thankfully these days’ people are asking more questions and sometimes even asking the right people?.

You basically have 3 options when buying an investment property in terms of the ownership structure.
1. In personal name or names
2. In a company , LAQC or not
3. In a Trust

So the question should I buy my property in an LAQC or in my personal name is immediately answered with …”I will need to ask you a few more questions so that I can understand what you are trying to achieve with your investment property”.

In general though for most people who buy an investment property they will be buying it with borrowed money, the property will probably be making a loss, they will be intending on keeping it for the long term and they intend to use the rent to supplement their income when they retire (of course there are many people who don’t have those requirements like traders, developers and people who intend to use property to create wealth but will use other investments to provide an income in retirement) so in that case I would say yes to an LAQC because at some time in the future the property will be best sitting inside a trust (Financial Advisors take more into consideration than just what is happening today) and an LAQC makes this very easy to accomplish compared to if the property is in someone’s personal name.

by Sue Laing | Friday, 18 September 2009
If you are a full financial planner handling wealth accumulation, management and protection, you will be regularly facing a challenge few advisers seem to have yet conquered.

Unless you have a referral base that feeds you nothing but public servants (unlikely) the challenge manifests as the need to effectively engage clients who are co-owners of their own businesses, with arms-length partner or partners, in a discussion about the risks of illness or injury or death to a business partner.

If we talk in pure marketing terms for a moment, the challenge manifests in the financial planning industry’s pretty dismal penetration into the small-to-medium (SME) business segment to date.

If wealth accumulation and management are your target advice areas, then the SME demographic has not offered much in the way of potential to be workforce-through-retirement clients. By their nature, they reinvest most of their earned wealth back into their business, regard their business entity as their future retirement fund, and have little apparent investable wealth lying around.

But if you are conducting full financial planning, your responsibility extends to the protection of wealth no matter where that wealth resides – so the SME owner’s business asset must become the focus of a protection plan.

That all sounds straightforward.

So why don’t financial advisers do a good job of installing business insurance into their advice processes and delivering them to suitable clients? After all, with the number of small businesses in New Zealand, it’s impossible to imagine that any adviser has no clients engaged in their own businesses. So why stop at the personal insurances?

All is not lost!

Take heart – there are some sound reasons why advisers struggle with this, and it is largely to do with the positioning of such advice by the industry itself. With a little introspection and a slight shift of paradigms, the task becomes easy.

Firstly, the industry has been calling the delivery of this advice “business insurance” for so long that we may be caught up in our own jargon. For one thing, in the absence of an on-the-spot definition, the term means “general insurance” to most clients. So you are on the back foot to start with. For another thing, that name implies a much less significant process than it should. More on “business insurance” in a moment.

Secondly, a lot of life risk insurance advice, both personal and business related, is not delivered within the context of estate planning outcomes – and should be. After all, when it all boils down, insurance proceeds would not be needed if someone’s estate was guaranteed to contain enough liquid assets to meet all the estate desires of the deceased or disabled. In 99% of cases advisers deal with, there is no way the estate can meet all its current and future obligations without some form of additional funding. That’s all insurance is – a guaranteed funding mechanism.

Transpose this across to the business owner: what is often a business owner’s biggest estate asset (and therefore relied upon to provide for the estate beneficiaries if something should go wrong)? It’s their share of their business, be that 50%, 33%, or 25% of the business’ value. Try converting that business share, as an illiquid estate asset, into guaranteed funds for the surviving family, without insurance as the funding mechanism!

The root of the problem

Which brings us back to the root of the problem – calling this advice “business insurance” without questioning what message that relays to our clients. The term implies that a couple of policies sold will solve the problem, and underplays just how critical the full end-to-end planning process is to the business owners’ security. That’s why it should be called the “business succession planning process”.

Funding provided by a “business insurance process” cannot and does not fully protect the estate and the business without the accompanying planning and documenting, involving lawyers and accountants doing their bit to make it all work as the parties have agreed.

And the financial adviser is always the one who makes all this happen as the facilitator.

Yet we continue to talk about “business insurance” not “business succession planning”; the current moniker does nothing to showcase this crucial role the adviser plays in this very important piece of estate planning – it’s well beyond selling a few policies!

What about when we talk about protecting the business, rather than protecting the estate?

This habit certainly reflects the common wishes of the surviving partners to keep the business alive after the death of one of them. It doesn’t, however, result in great client engagement. Why? Because we are not targeting the emotion attached to the fear of leaving one’s family short of funds and facing debt. As you sit facing several business partners, remember that they don’t know which one of them might be the one to die – and so they can all be appealed to, to be concerned about their deceased estate being fairly rewarded for the blood, sweat and tears they have invested. The “protection of the business” becomes secondary.

It’s all in the lingo – and we are still learning to speak proper!

Sue Laing is Managing Director of the risk store, the life risk knowledge and ideas store for financial planning professionals. This article is published with permission from the risk store

In my opinion this has been a long time coming and it is about time it happened.
I also think we will see more of it in the future especially as new regulation comes in.

In what has been regarded a landmark case, a client has been awarded compensation of around $250,000 by the court for “negligence and breach of fiduciary duty” by her financial adviser. The judge in the case said, “It is apparent that the advice Mrs Breeze received was wholly deficient for the circumstances. The defendant (VPFS) has been Mrs Breeze’s adviser for some years, and knew her position and her investment profile”.

“It was an unsuitable investment for her, and obviously so. Even if everything went well, the maximisation of gains was some years down the track. Bearing in mind Mrs Breeze’s age and immediate needs, it was not an appropriate investment. It put at risk her one significant asset, namely her home”.

This is yet another case where things go wrong, not primarily because the product failed, but because the adviser failed to make recommendations that were appropriate for the client’s circumstances.

It is proper process leading to justifiable recommendations that is the mark of a professional.

Read the entire article here

by Gabriel Lacroix | Thursday, 24 September 2009
With growth asset classes highly correlated, and returns on cash and bonds creating a portfolio drag, diversification opportunities are scarce but possible, according to investment strategist, Norman Stacey.

Mixed and lagging economic data, worries of relapse and dithering cash rich investors are supporting monetary and fiscal stimulus remaining in place, aiding the global economic recovery, Stacey writes in his latest Diversified View.

He believes the economic turnaround is likely to exceed consensus expectations and official estimates will be sequentially revised upward as the recovery unfolds. But, he cautions, there are still risks to the global economic outlook.

In his view, a precipitous withdrawal of either monetary or fiscal stimuli, exogenous factors such as natural disasters and terrorism, and the possibility that “the world does indeed descend into another down-leg, heedless of, and perhaps exhausting, official stimuli” are some risks to the global economic outlook.

But at a global level, Stacey thinks that stronger than consensus growth ahead is of sufficient probability to warrant a bias to growth asset settings – but “always within a systematically diversified portfolio”.
He is not upbeat on the recovery of the New Zealand economy.

“New Zealand lags in both the market rebound and economic resurgence stakes. We continue to be beset by low-growth policies and big government, while the soaring dollar retards recovery in the export sector,” he writes.

“NZ economic outlook is mediocre; gently rising inflation despite modest growth, to be damped by rising interest rates ahead,” he adds.

On fixed interest, he said that despite good capital gains, the fixed interest asset class is unattractive. “Yields are generally now low in absolute terms and by historic comparison, while risks may be mounting,” he warns. He has adjusted Diversified’s model portfolio to minimal allocations supplemented with other sources of income such as gold.

Equities have again fulfilled their traditional role as harbingers of economic turnaround, Stacey writes. He predicts the possibility of a “melt up” in the equities asset classes. “Nervous cash, still on the sidelines, stands to cause another leg up, when eventually re-commits,” he argues, adding that he favours a “fully invested stance to equities, trimming profits at the margin from the most high-growth areas, and bolstering selected developed markets with the proceeds.”

But the future is never ‘knowable’, he warns.

“Currencies, Corporate Bonds, Equities and Commodities are all highly correlated at present, while returns on Cash and Sovereign Bonds are a portfolio drag. In this context, Diversified continues to advocate an elevated allocation to Gold – for scarce diversification as much as its intrinsic value,” he concludes.

© 2009 financialalert, Brillient Investment Publishing Pty Ltd ABN 19 122 531 337.

This morning (9am on 25 September 2009) the money markets were at the following levels:

Official cash rate 2.50% (unchanged)

90 day bill rate 2.78 (unchanged)

1 year swap rate 3.14 (up from 3.03)

3 year swap rate 4.73 (up from 4.63)

10 year bond rate 6.05 (up from 6.00)

Kiwi dollar 0.7205 (up from 0.6960)

Good News on the Economy

According to official GDP figures, during our last quarter we experienced a tiny amount of growth, which officially means we are moving out of recession, (according to the economists).

This is positive news but I think the good times are still a way off (here’s an article The ghost fleet of the recession anchored just east of Singapore that is pretty grim and indicates that not everything is as rosey as some would like us to believe) .

We are still susceptible to any one-off hits, such as a major company collapse, an international crisis such as a terrorist attack, or an oil price surge. Our unemployment numbers will continue to increase over the next twelve months (even if Key is saying that he thinks it has leveled out now on last nights news).

Our currency is high (and went higher overnight) which makes an export or tourist related recovery unlikely. Overall though the latest result is positive for our economy but we are still in a fragile state, and need another two improving quarters before we can say the recession is truly behind us.

Current Rental Market

Those wanting to rent a residential property are seeing a greater choice available. This is not unexpected in a recessionary environment, as younger renters return home, existing renters may get an extra flatmate to cut costs, and householders may get a boarder to supplement their income.

There are more “To Let” signs appearing around our cities and Trademe has also noted an increasing number of properties available.

I believe this will be a short term phenomenon, as the rental market over the median term is likely to firm up. This is because our population is increasing both naturally and via immigration.

My wife sent me this little saying because it made her think of me

The heights by great men reached and kept
Were not attained by sudden flight,
But they, while their companions slept,
Were toiling upward in the night.

–Henry Wadsworth Longfellow

Debt is an accepted part of life for property investors. It quite simply comes with the territory.

Experienced investors recognise the difference between good debt (tax deductible) & bad debt (non-tax deductible used to acquire assets that don’t produce an income).

Less well recognised is that there are good ways to pay down debt.

Financial experts have teamed up with API to identify 12 creative strategies to help exterminate your debt faster.

Here are just a few tips:

SIMPLE SACRIFICES
If you’re willing to make some simple sacrifices in your lifestyle, you might well find the dollars saved will have a big impact on your mortgage over the long term. Here are five ideas to set you on the sacrifice path.

1. Make your lunch
2. Give up smoking
3. Give up your morning coffee routine
4. Hire rather than buy clothing for weddings & major events
5. Sell unwanted items.

GOLDEN RULES
As well as looking for creative ways to reduce your debt more quickly, it’s always worth keeping in mind the golden rules of debt reduction.

1. Consolidate your debt – if you have any out of control debts spread among credit cards and personal loans, which charge high interest rates, it’s often a good idea to consolidate all of that debt under your home loan so that you’re paying a lower interest rate.
2. Pay off non-deductible debt first – credit card debt, personal loan debt and even debt on your own home isn’t tax deductible. For this reason, it’s often best to pay off this debt before paying off deductible debt, such as that used to buy an investment property.
3. Pay off debt with the highest interest rate – if you have a number of debts using different facilities, prioritise them by looking at the interest rate you’re paying. The debts with the highest interest rates must go first.
4. Budget – budgeting is the biggest factor in being able to reduce debt quickly. “How you manage your cash flow has by far the greatest impact”
5. Pay more frequently – paying more frequently pays big dividends, especially switching from monthly payments to fortnightly repayments, while keeping the amount paid at half of a monthly payment. This is because borrowers paying fortnightly end up making one extra payment per year.
6. Pay more than the minimum – paying just a little bit extra in each repayment cycle will make a big impact on your debt over time. Another option is to keep your repayments at the same level as before interest rates fell. By ignoring rate cuts and maintaining higher repayments, borrowers hasten the pace of their journey to outright property ownership.

Australian Property Investor August 2009 www.apimagazine.com.au

by Gabriel Lacroix | Thursday, 17 September 2009
A year after US investment bank Lehman Brothers failed and set off the rollercoaster ride that became the Global Financial Crisis, the world has pulled back from the brink – but there are at least eight lessons investors must learn from it, according to AMP Capital Investors’ Head of Investment Strategy & Chief Economist Dr Shane Oliver.

Oliver believes the signs of improvements are virtually everywhere. “Firstly, money markets are almost back to normal and credit markets have improved dramatically. Secondly, economic indicators in most countries seem to be rebounding almost as quickly as they collapsed,” Oliver said. “This is illustrated in the OECD’s leading economic indicators, which are combinations of indicators such as consumer confidence and building approvals, which lead future activity.”

In his view, there are several lessons to be learned from the GFC. “First, the GFC has provided a reminder that the capitalist system is inherently unstable thanks in large part to human psychology, and that the idea of an efficient market that can never go astray is completely fallacious.

“Second, there is a role for government to stabilise the economic cycle. Most importantly, policy makers have a decent, albeit not perfect, set of tools in their tool kit to do this.”

The third lesson – these things happen. “While after each economic crisis there is a desire to make sure it never happens again, history tell us that manias, panics and crashes are part and parcel of the process of ‘creative destruction’ that has led to exponential increase in material prosperity in capitalist countries,” Oliver argues.

And, he says, the basic lessons remain the same: higher returns come with higher risk; the role of sentiment can’t be ignored; be wary of financial engineering and products that are hard to understand; be wary of having too much debt; don’t think that having a well diversified portfolio of growth assets will necessarily protect you in a financial panic.

© 2009 financialalert, Brillient Investment Publishing Pty Ltd ABN 19 122 531 337.