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Archives for Stephen Coniglione

Upside with protection

We’ve seen global markets correct as global growth wanes under pressure of protectionist political policies and an escalating trade war with China and the United States. The fear of a global recession pushed our Australian stock market lower.

Has this market volatility scared you?

Rewind a few weeks and the Standard and Poor’s (S&P) Australian Stock Exchange (ASX) 200 closed at a fresh record high surpassing the closing price reached on 1 November, 2007. Our asset allocation strategy provides our clients with the comfort of knowing that a vast majority of their investments are not exposed to the Australian stock market.

Firstly, we assess our clients’ risk tolerance and understanding of the risks associated with investing, then allocate a risk profile (such as Balanced) based on this assessment. Each risk profile divides our clients’ money up between defensive and growth asset classes to produce a diversified portfolio. Defensive investments include cash, term deposits and fixed interest investments (government and corporate bonds). Growth investments include Australian shares, international shares, property and infrastructure.

Effective asset allocation not only provides protection when markets correct but also offers opportunity to maximise returns. I often say to my clients that defensive investments can be compared to shock absorbers of a car as they smooth out the bumps in the road.

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Developing Saving Habits

You can’t teach an old dog new tricks, or can you?

Who we are today is a reflection of our past experiences and as we age we become more set in our ways. Our habits, what we enjoy and how we respect the people and material things we have rub off on those around us, especially children. What financial habits are you teaching your children?

Adolescence and teenagers are not taught how to manage money at school and it is left to parents to provide them with the knowledge and skills to be good money managers.

I remember at school buying my lunch from the canteen on a rare occasion, the lunch was something of a treat and not the norm. It’s not like my parents couldn’t afford it and at times I felt angry that my friends always bought lunch and I couldn’t.

On reflection, I now understand what my parents were unknowingly teaching me. Preparing my lunches the night before school was a habit they taught me and preparing my lunches has continued into my working life. However, now my wife and I prepare lunches on Sundays for the working week, we eat more nutritious food and avoid the costly takeaway lunch expense.

The $15 to $20 daily work lunch and coffee might not seem like a lot but, preparing our meals saves us thousands each year. Thank you, Mum and Dad, for teaching me how to make good financial decisions on a daily basis.

This is only one example of how my parents taught me to respect and spend money. The only way to save is to spend less than you earn and a bit of frugality is key. What financial habits will you teach your children?

Please note this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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Protecting Your Loved Ones From Potential Financial Mistreatment

What I really enjoy about being an adviser is the opportunity to resolve client puzzles. Each situation is unique and the solutions are an opportunity to make a real difference to a family’s life.
Recently, I was asked by a client how to protect their child with special needs from potential future financial mistreatment. This was an opportunity for me to dust off my knowledge of trusts and more specifically, special disability trust.

The purpose of a special disability trust

A trust is a legal obligation that details how you want property or assets held for the benefit of a beneficiary administered and managed.

Special disability trusts are primarily established to assist succession planning by parents and family members, for the care and accommodation needs of a child or adult with a severe disability. The name ‘special disability trust’ relates to the social security treatment of the trust, not the actual disability.

The legal requirements for setting up a special disability trust

The first step is to make sure that the special needs person qualifies for a special disability trust. They need to meet the definition of severe disability as detailed in the Social Security Act 1991. The individual will have to go through a process where they are interviewed and assessed by social security. Centrelink has a special division that makes an assessment regarding whether they meet the criteria under section 1209M of the Social Security Act.

The Social Security Act recognises that people with special needs work and positively contribute to our society. If the special needs person is working, the act states that a condition of a disability restricts them from working more than 7 hours a week for a wage that is at or above the relevant minimum wage.

The trust deed must comply with certain conditions, and incorporate compulsory clauses as defined in the model trust deed as laid out by the Department of Social Services.

Anyone except the special needs person or the settlor can be a trustee of a special disability trust. There are two types of trustees and they both must be Australian residents (must be assessed by the Department of Social Services).

  1. Independent (corporate) trustee – does not have any relationship with the special needs individual and has to be a professional person or a lawyer.
  2. Individual trustee – A minimum of two trustees are required to ensure the special needs individual’s interests are protected.

The trust can either be activated while you are alive – this gives the special needs individual more independence or set up as part of a will – to protect the special needs individual.

The special disability trust can only have one beneficiary (the special needs individual) and the beneficiary can only have one trust. There are two main restrictions placed on the beneficiary, their living situation and gifting.

The Social Security Act stipulates that the beneficiary is not able to reside permanently outside of Australia – the reasonable primary care and needs for the beneficiary must be met in Australia.

There is also a gifting concession available and the contribution made must be unconditional (you can’t get it back), and without the expectation of receiving any payment or benefit in return (if gifted by you). The beneficiary is only able to give money that they received as an inheritance within 3 years of receipt into the trust. Also, a gifting concession, that does not impact any Centrelink benefits is available for the first $500,000 of gifts contributed to the trust.

The social security implications of a special disability trust

There is no limit to the dollar value of assets that can be held in a special disability trust, however, there is an asset test exemption (for Centrelink benefits) of up to $669,750 (indexed 1 July each year) available to the beneficiary. Another advantage is no income is assessed under the social security income test for the beneficiary. The special needs individual can also have their primary residence in the special disability trust, which is also exempt.

Centrelink has also added a limit of $11,750 to ‘discretionary expenses’ for beneficiaries to improve their level of health, wellbeing, recreation and independence.

Further information about special disability trusts can be found on the Department of Veteran’s Affairs site and the Department of Social Services site.

In conclusion, the aim of establishing a special disability trust is to provide protection and to ensure that those we love have a secure financial future.

Please note this article provides general advice and information only, it has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today, one of our advisers would be delighted to speak with you.

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The Global Financial Crisis?

Just over 10 years ago we were in the midst of what is now known as the Global Financial Crisis (GFC). I recall at the time a flurry of job losses from the financial services industry, Australian banks and the collapse of the American investment bank Lehman Brothers. Our country just avoided a technical recession but it felt like one for many people.

The GFC referred to a period of severe stress in the global financial markets and banking systems between mid-2007 and early 2009 as the US housing boom ended and defaults increased. Banks’ access to short-term borrowing evaporated and funding account holders withdrawals were problematic.

Why did the US housing boom impact the world economy?  For many years prior to the GFC, house prices in the US grew strongly as banks and other lenders were willing to make highly profitable increasingly large volumes of risky loans to buyers. The loans were risky as the lender did not closely assess the borrower’s ability to make loan repayments. You might recall the nickname NINJA (no income, no job, no assets) loans, symbolising the lack of documentation the banks and other lenders had to provide to secure funding.

Financial innovation allowed banks and other lenders to reduce their lending risk by packaging these risky loans into mortgage-backed securities (MBS) and collateralised debt obligations (CDO). In the US, over $500 billion USD in CDOs were issued in both 2006 and 2007 (source). Credit rating agencies provided these financial products with a high credit rating signalling to investors that they were low risk. The high rating allowed pension funds, governments, US and global banks to invest. Many investors borrowed large sums to purchase high yielding ‘low risk’ MBS and CDOs without understanding the complex and illiquid nature of the underlying investment.

When the US housing boom ended and defaults increased the demand and liquidity for MBS and CDOs evaporated and prices dived. MBS and CDOs could only be sold at a large loss of up to 95 percent (source).

The systematic problems started in the United States and rapidly spread across the globe. Banks and other financial institutions stopped lending as they were unable to easily assess how badly a potential borrower was impacted by the toxic debt. This credit freeze spread globally, many companies were unable to access funds and those that could, found there was a substantial increase in the cost of debt making the venture unprofitable.

In the wake of the turmoil, central banks globally lowered interest rates rapidly (in many cases to near zero) and lent large amounts of money to banks and other financial institutions that could not borrow in financial markets. Central banks also purchased financial securities to support markets.

Governments increased their spending on infrastructure to support employment throughout the economy, Australia handed taxpayers $1,000 relief money and guaranteed deposits and bank bonds. Governments also increased their oversight of financial firms that must assess more closely the risk of the loans.

The severity of the Global Financial Crisis caused a global economic slowdown that led to unprecedented government bailouts and economic stimulus globally. The support from governments and central banks paved the way to an economic recovery.

Please note, this article provides general information and advice only. If you would like tailored financial advice, please contact us today.

Read more articles in our Financial Literacy series. 

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3 Tips For Reducing Christmas Costs

Christmas is a time to be savvy!

The November and December months are a time when our wallets are an endless money pit, credit cards are in high demand as we try to keep up with the Joneses. The next few months of unconscious spending can set us up with a significant financial burden well into the New Year.

What can you do to avoid the Christmas expense blues?

1. Create a list

Get organised and make a list of all the people you need to buy presents for. Creating a list allows you to jot down some ideas and start looking online where you can find a bargain. Purchasing multiple gifts from one retail site will reduce your cost of postage.

2. Create a budget

This could be for each gift or the total amount you want to spend on all the gifts you want to buy. A budget will prevent you from buying gifts you don’t need or spending more than you want to.

3. Gift an experience

The manufacturing of cheap, quickly disposable trends are cluttering our lives and sending us broke with a mirage of happiness. Experiencing nature or organising an adventure will create a memorable journey that will last a lifetime.

These simple tips and suggestions will help you avoid overspending, which you’ll reap rewards for well into the New Year.

Please note this article only provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak to you.

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Benefits of an SMSF

Previously, I highlighted the findings of the Australian Securities and Investment Commission (ASIC) report after reviewing 250 self-managed super funds (SMSF). ASIC does not regulate SMSFs, the Australian Tax Office does and trustees are held directly accountable.

At The Investment Collective, we assess the appropriateness of an SMSF, provide tailored written advice in the form of a Statement of Advice and present the recommendation where you are encouraged to ask questions to better your understanding.

Why should you set up at SMSF?

A client of mine established an SMSF to take back control of their superannuation by removing any influence from large financial institutions and unions. They wanted more investment choices and to be involved when choosing the underlying investments that are appropriate for their risk profile. Both members are now benefiting from the additional income from franking credits.

Another client established their SMSF once we conducted a fee analysis of their previous super fund provider. We highlighted all the fees and additional transaction, operational, borrowing and property costs they were paying. With their new SMSF the client has a very transparent fee structure and is now saving thousands each year. This client had a share portfolio in their name that we were able to directly transfer to their SMSF, increasing their superannuation benefit. We managed their capital gains over a few financial years and transaction costs were cheaper than going through a share broker.

In many instances, our clients’ are surprised how stress-free maintaining their SMSF is. We assist clients to look after and oversee almost all of the administrative tasks. We also connect our clients’ to professional SMSF administrators to complete the annual compliance obligations.

As you can see, there might be benefits to establishing an SMSF depending on your circumstances. The Investment Collective can assist you in an analysis of your current superannuation provider. Please contact us to arrange a review.

 

Please note this article provides general advice, it has not taken into consideration your personal or financial circumstances. If you would like more tailored advice, please contact us today.

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Is A Self-Managed Super Fund Right For You?

Australian Securities and Investments Commission (ASIC) recently released a report after reviewing 250 self-managed super funds (SMSF) files. These SMSFs were randomly selected based on Australian Taxation Office (ATO) data.

The report highlighted a poor standard of advice provided on SMSFs. They found 91% of the files reviewed were non-compliant. Non-compliant advice included process failures, poor record keeping and increased risk of financial loss for lack of investment diversification mainly due to a single investment property.

An SMSF allows a member to purchase property within the superannuation environment and I am often asked about how to facilitate this. However, what most clients do not realise is that property is capital intensive, costly to maintain and tends to offer a very low income. An SMSFs sole purpose is to provide retirement benefits for the members or their dependents. Therefore I have to ask my clients, is property appropriate for your retirement when you need to draw an income?

At The Investment Collective, we assess the appropriateness of an SMSF for every client.  We look at many factors and alternatives and then provide a detailed analysis for our clients’ to make an informed decision. If you have thought about establishing an SMSF you should consider the following:

  • The balance of your superannuation
  • Costs involved to set up and running an SMSF
    • According to ASIC a starting balance below $200,000 the setup and operating cost are unlikely to be competitive with other options
  • Willingness and ability to manage the SMSF and meet trustee obligations
  • An investment strategy that suits the needs of members
  • Members Insurance needs
  • Lack of government compensation available for SMSFs

Please note this article only provides general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Investing For Your Children & Grandchildren

I’m often asked how best to invest for children and grandchildren. My clients are looking for the best long-term strategy to provide a gift to their children or grandchildren on their 18th birthday.

The best gift we can give children is educating them about the value of money and the benefits of saving and investing.

Prior to choosing an investment, we need to consider a few aspects including tax, fees and the complexity of the structure.

A major consideration for parents and grandparents is the tax rate children have to pay. To prevent Australians investing money in their children’s name to save tax, special rules apply to income earned by children under 18. Income derived from investments and savings account is taxed at 66 percent once it exceeds $416 a year until it reaches $1,445, after which 47 percent tax applies.

We can safely say that investing in the child’s name will incur the highest marginal tax rate.

The simplest approach is to invest in your own name, preferably the lowest earning parent or grandparent.

  • You pay the tax at your marginal rate
  • The first $18,200 earned is tax-free
    • You may be eligible for the low-income tax offset
    • If you meet the age requirements for Age pension, you may be eligible for the seniors and pensioners tax offset
  • Income derived from the investment may have franking credits

Another structure that can be used is a family trust, however, they are costly to establish and maintain, and time-consuming to administer.

As you can observe, the decision on the most appropriate investment vehicle for your children or grandchildren can vary depending on your circumstances. It is best to speak to your financial adviser at The Investment Collective.

Please note that this article is provided as general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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It Takes Time: Superannuation Contributions

The superannuation system has a long history with both sides of government shaping the compulsory superannuation system we have today. The establishment of this system in Australia was a response to the financial challenges posed by an aging population. The aim was to have individuals saving for retirement over a working life to relieve the pressure on Australia’s government paid age pension.

Throughout your working life, your employers will make compulsory contributions to your superannuation fund (currently 9.5%). You also have the option to make personal contributions to help build your savings at an accelerated rate.

The government has made superannuation savings attractive as it offers a flat tax rate of 15% on employer contributions and investment earnings (10% on longer-term capital gains if held for more than 12 months).

Reaching your retirement savings goal should not be complicated. You should endeavour to start early and make short-term sacrifices for the longer-term gains. Let time and compound interest do the majority of the heavy lifting for you!

An initiative from the federal government to help boost your superannuation is the co-contribution scheme. If you make a personal after-tax contribution to your superannuation, you may qualify for an additional contribution directly from the government (free money!).

The government will match $0.50 (50 cents) for every dollar you contribute to superannuation up to a maximum co-contribution amount of $500.  The maximum super co-contribution is available if your total income is less than $36,813. The maximum co-contribution reduces by 3.33 cents for every dollar earned over $36,813, reducing to zero when your total income is $51,813 (for 2017/2018 financial year).

There are a few basic eligibility criteria to be met in order to qualify:

You must lodge a tax return

At least 10% of your total income comes from employment or carrying on a business

The balance of your super is equal to or less than $1.6 million and

you are less than 71 years of age at the end of the financial year.

Provided you qualify for the co-contributions, and your fund has your tax file number, the government will automatically forward the co-contribution amount to your super fund.

To find out more go to the super co-contribution information page on the ATO website.

This article has not taken into account your objectives, financial situation or needs. You should consider if the advice contained within the articles is suitable for you and your personal circumstances before acting on it. If you would like to discuss the suitability of the advice to your personal situation, please contact us to make an appointment with one of our friendly advisers.

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Another New Year With Another Unrealistic Resolution?

Happy New Year from all the team at The Investment Collective.

What is your New Year’s resolution? Is 2018 the year you achieve it? I’d like to say that the odds are on your side, however, statistics from 2016 show that only about 8% of people achieve their New Year’s resolutions.

Setting goals is always tricky. Many New Year resolutions are either financial or fitness related. Financial and fitness goals are challenging at the best of times, especially if sacrifices or a change in regular behaviour need to be made. Is there another approach?

Setting only one goal will allow you to focus all your energy on achieving a positive outcome. Your financial New Year’s resolution may, for example, involve paying off a credit card. Setting up a regular cash transfer from your spending account after each payday will gradually reduce the amount you owe. These small steps will help in the long run to pay off the credit card by the end of 2018.

Paying off your mortgage is a big hairy audacious goal (BHAG) and an unlikely achievement in one year. However, you can make some simple steps to reduce years of repayments and thousands in interest. Firstly, get your mortgage reviewed from one of our mortgage specialists. Our team will compare a range of lenders to find you the best offer. Secondly, set a monthly repayment amount that is above the minimum required mortgage payment.

Have you set a fitness goal? The same way you consult a financial adviser to help you reach your financial goals, I suggest talking to an expert who can assist you step by step to help you achieve your fitness goals.

Personally, I have only set one goal that is not a BHAG – I’m getting married next year! My goal is to save an additional $10,000 before the wedding. I have also stepped out how I’m going to achieve this goal. The wedding is in one year, so I have a definitive timeframe. My goal is $10,000 and I intend on saving an additional $200 per week. To help me reach this goal, I have taken on an additional job that is flexible and manageable.

As you can see, each step is measurable, time-based and realistic. 2018 is the year I will achieve my goal. Will you achieve your goals, whatever they may be?

Please note this article is prepared as general advice only. It has not taken into account your personal circumstances or financial goals. If you would like financial advice tailored to help you achieve your goals, please contact us and talk to one of our friendly advisers today.

 

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