Do You Own Your Investments?

By Jason Fittler

The GFC has certainly shaken up the Financial Services Industry; one of the big shocks to many investors was that they did not have control of their investments. Most found this out too late and were left out of pocket.

This article will walk you through the different ways Financial Advisers hold investments on behalf of clients and give you some tips on what to look out for.

First I will start with how we hold investments for our clients.

Grow Your Wealth has a structure so that firstly our office is financially independent from our Head Office. This means if something happens to our Head office we are not affected.

Next we make sure that all of our client’s investments are held directly in the name of the client. This means that if something was to happen to us, our clients would not be financially worse off.

Call me old fashion but I believe that protection of client’s wealth is the first rule for Financial Advisers.

Under our structure clients hold their shares on CHESS directly in their own name, their name is also recorded at the registries as the beneficial owner. Next any action we take on the client’s investments being a buy, sell or corporate action, the client’s approval needs to be given either in writing or verbally. Diary notes are kept of all emails and conversations to make sure we have a record. This way the client is always informed about what is going on but more importantly own and control their money.

If you think this is the case for all investments and Financial Advisers then you are wrong. Below I will go through a list of different structures in which investments are held.

Managed funds – under this structure you own units in a unit trust, as such your investments are safe if the manager goes broke. Though this is a safe structure it does have a few draw backs. First, all the investment decisions are made by the manager so you have less control. The manager is limited in his scope by the trust deed. It is important that you understand the scope of the trust deed.  Second, if the manager does fail there will be a delay in you being able to get your fund back. You will get your money but there will be a wait while the issues are sorted.

Managed Discretionary Accounts (MDA) – under this arrangement your shares are held in your name on CHESS but the manager has discretion to act on the account without discussing the issue with you. The real issue here is trust - Is the adviser doing the right thing for you? Unfortunately if they are not, you will find out to late. You can move your shares whenever you like but this will normally be after the losses are incurred. The ASIC is not a big fan of these types of arrangements.

Separately Managed Accounts (SMA) – these are similar to MDA but your funds are held on trust by a Responsible Entity (RE). This structure is similar to a managed fund except you have direct choice of the shares you buy and hold. The manager has the ability to buy and sell on your behalf with inside the mandate for the SMA. You have the ability to lock in and hold any shares you do not wish to sell. You will receive ongoing repost on how your portfolio is performing. Overall this structure will mean lower ongoing fees and transaction fees. What you need to look out for is the gearing level of the shares. If the SMA has any sort of gearing approved or the ability to lend the shares I strongly recommend avoiding them. However, if they have a sensible mandate and the manager has a good track record this is a very cost effective way to invest.

Wrap Platforms – these are very similar to managed funds, you do own the investment but you have the same issues as a managed fund. The Wrap platform will provide you with a large choice of funds but as there is now an extra layer of administration therefore your fees are much higher - normally around 2%. These platforms are very good for large investors who do not want to invest directly in the share market and are comfortable to pay the higher fees for the convenience.

Unlisted Investments – these were popular with property trusts and agricultural investments. You do have clear title to the investment but trying to get your money back is always the problem. As they are unlisted you need to find someone to buy your holding. This is not an easy task. I personally do not invest in anything which is unlisted, you have little control and no ability to exit, I would avoid.

There are also a few more very complicated structures but I will leave these alone for now.

I like to keep things simple as such the safest way to invest is directly in your name.  Have your shares on CHESS so you don’t lose track of them and make sure your adviser needs to contact you before making any changes to your portfolio. This give you control and portability, making your investment safe and you know you cannot suffer financial loss due to the mistakes of another.

Do you have any questions on the above? Please give me a call I am happy to discuss.  Call (07) 4771 4577.

Fees – What Are You Paying For?

By Jason Fittler

Last I wrote about moral hazards, now let’s explore why the MINC Townsville fees model is structured in such a way that our future is aligned with your future.

But first, what fees are you paying and to whom?

One of the big problems in the Financial Services industry is the complexity of the advice we give and the fees we charge for this advice. End of the day most people really do not understand what they are paying and what they are getting for these fees. The most complex fee model is when you are investing through Wrap Platforms and managed funds.

Wrap Platform and Managed Fund Fees

When you are dealing with an adviser who invests your money through Wrap Platforms, there are three levels of fees you pay. First the Wrap providers fee, next the fund managers fee and finally the advisor fee.

To explain the relationship between the three I will use the analogy of a concert.

The wrap provider is like the stage at a concert, it provides the platform for the bands to play their music on.  The fund manger is like the different bands at the concert, each with their own style of music. The advisor is like the promoter of the concert organising the ticket sales and which bands will play. Each one doing their part to put on a good show, each requiring payment for their efforts.

The concern is what risk do they take when it come to managing your portfolio and how are they affected when your portfolio under performs? Is there a moral hazard?

Let’s look at how the fees are broken up between the three:

Wrap providers general charge a flat rate of around 0.6%pa, for larger investments, this may scale done a little.
Managed funds also charge a flat rate however; this will differ between each managed fund depending on the style of investing. On average you will pay around 1%pa, this fee is called a MER and goes directly to the fund manager.
Adviser fee, this goes directly to the advisor and the industry average is 0.6%pa. However, this is soon set to change to a flat fee each year once the government’s fee for service rules come in. The trend at present is for the adviser to charge a flat $5000 pa.
Adviser up front fee, the industry average is 4% but this is only a one off fee so I will not include in below example.

If we look at an example of an investment of $500,000 placed in a Wrap provider, your fees would look something like this.

1. Wrap provider fee, $500,000 X 0.6% = $3000 pa
2. Managed fund fee, $500,000 X 1% = $5000 pa
3. Adviser Fees, $500,000 X 0.6% = $3000 pa (or flat fee of $5000)

Total $11,000 or 2.2% of the amount invested.

The Moral Hazard

Wrap providers do not give advice, as such their business is based on economies of scales, the larger they get the cheaper it is to run per account. These benefits however are not passed on to the investor but are kept in ever increasing profits. Their aim it to simply have more investors place their money in the Wrap platform. Clients are sent their way by the advisor; as such, their interest is in looking after the adviser not the investor.

Managed funds, the managers who run the managed funds are paid based on their out performance of their fund against a certain index. In the GFC, we saw these managers receiving bonuses because their fund out performed the benchmark index even though the investor lost up to 50% of the value of their investment. Their focus is not in step with the investor.              

Advisors, as the investors portfolio falls so to does the advisers income, so in this sense they have no moral hazard except for the following two issues;

1. They receive only 27% of the overall fee, you the investor pays, ($3000/$11,000 =27%) as such they cannot afford to spend too much time on your account. In fact, the only way for advisors to increase their income is to get more clients. This leads to advisors not providing any ongoing advice.

2. When flat fees are introduced, advisors will be paid regardless of the performance of your investment.

As you can see when dealing with wrap platforms you need to be aware that there are many snouts in the fee trough and that, the majority of the fees do not go to your adviser.

To make sure that MINC Townsville is not subject to this Moral Hazard we have structured our fees in such a way that the majority of the fees come to us the advisor.

This way we can afford to provide a higher level of service.

We also link our fees to the value of your portfolio in such a way that if the value of your investment drops, our fees drop along with it.

During the GFC our office fee income fell in line with the drop in our client’s portfolios, this keeps our focus on real growth in your portfolio instead of focusing on beating some index.

MINC Townsville Fee Structure

Our preferred investment platform is the Grow Your Wealth Private Wealth Management service. Through this service we invest only in direct shares cutting out the middle man (the managed fund).

Your fee structure is as follows:

1. On going fees at a scale rate of

            1.32% on first $250,000
            0.99% on funds between $250,000 and $500,000
            0.66% on funds over $500,000

2. Our only up front fees are 1.25%, which is the cost of brokerage when buying the shares.

3. Financial Plan fees, we also do charge $2500 if you require us to prepare a full financial plan. This is optional, although recommend for new clients.

If we look at the same example as above, the investor has $500,000 to invest and places it in our Private Wealth Management platform:

1. Platform fees are $5,775 pa, that is the total for the year. In percentage terms 1.16%.

When we compare the two fee structures, some interesting fact arises:

• As the entire fee goes directly to the adviser, we can make more money, while still charging you less. This means we can provide you a better service, cheaper.

You pay less overall

• Our income is directly related to the size of your portfolio; as such, our focus is in growing your wealth.

Our fee percentage gets lower as your portfolio get larger to reflect the economies of scale we receive as your portfolio grows. We also offer a flat fee for very large portfolios.

Our up front fees are less being 1.25% as opposed to 4%.

Being direct equity advisors we can go directly to the market and cut out the middle man, most financial planners can not, as such they have to use managed funds to achieve the same result. This is our advantage.

This has all been achieved by simply by reducing the number of snouts in the trough; the kicker is that we have been doing this for over 10 years. 

Like to find out more? Give me a call on (07) 4771 4577.

Property, How Cheap Does it Have to Get Before You Buy?

Key Points

1. Property Trust investments have fallen by 50%.
2. Property Trusts are now around 20% undervalued.
3. Listed property trusts pay a far superior yield then any direct property

This is a strategy for the longer term balanced investor.

I believe now is the time to start re-weighting your portfolio to property, property is cheap right now and over the longer term will produce great results.

I expect that this sector will continue to be restructured over the coming 12 months as, such I prefer to play the sector through the use of an index fund as opposed to direct shares for now. This will reduce your overall risk level while at the same time providing you the opportunity to cash in on the expected growth in the sector.

Jason Fittler

Download PDF Report.

If you are interested in taking advantage of this opportunity please contact your advisor on 07 4771 4577.

The Secret to Achieving Great Results... be a Contrarian

contrarian |kənˈtre(ə)rēən; kän-|

noun; a person who typically acts or thinks in a way contrary to popular or accepted opinion; specif., an investor who seeks to make a profit by acting in opposition to majority opinion, prevailing wisdom, etc., as by buying a company's stock when it is out of favor with the majority of investors

adjective; opposing or rejecting popular opinion; going against current practice :

When investing whether in Property, Shares, Managed Funds or Index funds, the small investor has no control over the direction on the market. It is like being on a mighty river in a small boat; you will simply be swept along with it.

As such it is important to go against the trend and invest in times while there is a little uncertainty if you wish to achieve great results. Take a look at the below charts.

Would you be comfortable investing in this market.

How about this market?

When we put these two together you have the following chart. My guess is in hind sight you would have picked the part circled to buy in. The problem is that we do not invest in hind sight we invest in real time. As such the truth is that most would not have bought in until many years later. 

The Message:
For the small investors we need to invest against the trend in order to make large profits. We need to take a little more risk as long as that risk is calculated.

“All progress is made by the unreasonable man.”

So if you are ready to make money give us a call so we can discuss your options.

Phone (07) 4771 4577

Jason Fittler

Fees and Industry Funds

By Jason Fittler

Third, anyone can give you good advice when the market is going up it is only the few that can give good advice in bad times.
The government on one hand is telling the public that you the investor are paying advisers too much in fees; and on the other hand they’re over regulating advisers so they need to charge higher fees to cover costs.

In down markets, such as the one we are currently in, the call from industry funds is that, given your portfolio has performed so poorly, why pay fees to advisers?

Both Industry funds and the Government understand that the service which a financial planner or investment adviser provides goes far beyond choosing investments. In fact the choice of investments is only a minor part of what they do.

My question to you is… When was the last time you had advice on structure of investments, tax effect of salary sacrifice, negative gearing, positive gearing, super regulations, transition to retirement, tax free super, capital gains and losses, tax effective strategies, self managed super funds or anything related to your investments from either the government or industry fund?

Below are a few thoughts on fees in relation to investing;

First, paying a small fee for no service is not good value for money.  When was the last time your industry fund did anything for you?

Second, bad years are when you need your adviser’s experience and advice.  It is what you do during this time will determine your future wealth.

Third, anyone can give you good advice when the market is going up it is only the few that can give good advice in bad times.

So who are you listening too? Now be honest, why are you listening to them?

Managed Funds – How a Financial Planner Adds Value

By Jason Fittler

Managed funds are not passive investments, they’re active investments.

Passive investments are property, index funds and cash. Why? Because very little activity is required to produce a return. You simple buy and hold for at least 20 years. Except cash, cash will never give you a good return.

Managed funds are not passive investments, true you do not need to trade them as actively as direct shares but you do need to continue to monitor them and move your money into the investment which is going to out perform in the coming year. That is why you need a Financial Planner.

Much like your stock broker will continue to review your shares and advise you on how to squeeze some more profits out of them, so to does your Financial Planner with your managed funds.  The difference is that when reviewing your managed funds the Financial Planner is in fact reviewing the people running the funds and how they’ve performed; also your financial planner will only review your funds every 12 months or if something drastic happens.

This regular review of your investments will provide a far superior return over the longer term.
Now cast your mind to your Superannuation, the largest investment you have and the one you will most likely have for the longest time. When was the last time you or your Financial Planner reviewed the investments you have in your Superannuation?

If you are in a cheap industry fund, do you even know where your funds are invested? Have you ever met the person in charge of your money? When was the last time someone contacted you about your Superannuation?

Now you know why it is cheap and why over the longer term it will under perform.

Self Managed Super Fund – For Better Returns Borrow.

By Jason Fittler
One of the big issues in the 2008 year will be borrowing through your Super Fund; under new legislation passed recently you now have the ability to borrow in a super fund. But before you rush out and start borrowing there are plenty of rules which go along with this new found freedom.

There will no doubt be many fancy spruikers hitting the streets soon with some fantastic ideas of how to separate you from your super while offering to improve your super fund return through the use of gearing. Be aware of this and please do not put your money into anything until you speak with us first, even if you are not our client.

But it’s not all bad news, if you are like me and a sensible investor looking to use these new rules to help grow your super in a sensible manner, the new rules provide you with two basic opportunities. Now you have the ability to borrow through the super fund and buy shares or property. Property is straight forward and we all know how residential investment property works. But what about shares?

Self Managed Super Fund – You Should Have One!

By Jason Fittler

For most of us our superannuation will be our largest asset, but not only this, it will be the asset which will provide us the life style which we deserve. At present your employer is paying 9% of your salary into superannuation on your behalf. You also have the ability to top this up through salary sacrifice to $50,000.

But who is looking after this money?  More importantly why are you not taking an active interest in how the funds are being invested?  If you care about your future you should be looking at starting up a Self Managed Super Fund (SMSF).

Industry Super Funds

Do not believe everything you see on TV... In fact do not believe any of it.
by Jason Fittler

Right now, all across Australia there is heavy advertising about industry super funds, for those of you not in the industry we are talking about funds such as Australian Super, First Super, Host Plus, and Qsuper. These are funds run by large companies and unions, they run on a platform of:

1.    Low Fees
2.    No Commission to advisers
3.    Outstanding service

Anyone who has had to deal with Qsuper or Sunsuper will know that quality service is something they say not do, so lets disregard this. The other two points they make are Low fees and No Commission to advisers.

Property Vs Property

Every week we receive calls from people looking to invest in residential property, most have spoken to a friend or family member who have told them it is a good idea. But very few understand how it will work, or what the benefits are of this type of investment. When asked why they want to invest in property they will 99% of the time answer because I need to save tax.

Today I want to take a closer look at investing in property, and compare it to investing in property well, but through different vehicles.

Let’s take a look at a listed property trust. This is merely a very big rental property, but instead of owning a house and renting it to a family they own in the case of ALE Property hotels on long term leases to Woolworths.

Managed Funds. What Are They?

A managed fund is merely a way of investing so that you don’t have to make any decisions. You pay someone else to make all of the investment decisions. How do they work?  The fund manager merely pools your money with other investors and then goes and buys shares on the Australian or International stock market. It is the fund manager who decides what and when to buy and sell the shares.

Who do they suit?
1. People with small to medium amount to invest. Anything from $5,000 to $200,000.

New Super Rules, Time to Look at Self Managed Super Funds

As we are all well aware on the 01/07/2007 the new superannuation laws came in to being. For those who have a Self managed Super Fund you will need to make sure that your super fund trust deed has been updated for the new changes.
Not sure if this affects you? Generally speaking if your Self Managed Super fund was set up prior to May 2006 then you will need to have it updated. We have organised with a local solicitor firm to have this done for you for a mere $470 plus GST. If you would like us to arrange this for you please let us know.

Beware the Financial Adviser Selling Hedge Funds

By Kim Allen

If you listen to the hype, hedge funds are the best thing since sliced bread and are suitable for all types of investors.

Promoters of these funds claim you can earn higher returns than traditional funds, but with lower risk.  They hope you won't remember the collapse 9 years ago of Long Term Capital Management.  LTCM was bailed-out to the tune of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets.

Well, it's happened again, and this latest collapse should serve as a warning to anyone invested in these types of funds.

Last week, New York-based Bear Stearns pleaded for help to rescue two of its hedge funds teetering on the brink of collapse.

Property As Safe As Houses... Or Is It?

When we speak about property investments most people think of residential property being a house or unit. When in fact, property investments can be much more. Have you ever though of owning a pub, shopping centre, high raise office building, aged care facility or industrial warehouse?  Did you ever think you could have a national tenant such as Woolworths, BHP or National Australia Bank?

Most people think they have to have a lot of money to invest in these types of property assets. In fact you can do so with as little as $500 and will receive better returns then residential property. Let's take a closer look at how residential property compares to listed property trusts.

Residential Property

Big Returns Big Risks

Beware of the High Return No Risk Promise.

You may recall my comments a few weeks ago in regards to Fincorp and Westpoint. These were the two property investments which were cleverly marketed to people who were chasing high returns but no risk. I say cleverly as when both of these fell over the investors lost everything. While this was happening, where was the corporate watch dog the ASIC. No one is really sure but this week I note that they have come out and stopped the latest prospectus for Australian Capital Reserve (ACR).