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Written by: Content Partner

Category: Uncategorised

Published: 26 August 2015

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Increased caution when using fixed income to lower overall portfolio risk 

Read more: De-risk your portfolio without fixed income

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Written by: AIOFP

Category: Uncategorised

Published: 25 August 2015

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The AIOFP has launched a new campaign entitled ‘Battle of Fairness’ encouraging all advisers to make contact with government officials in response to the recent risk reforms.

We would like to ask any adviser that will be affected by the proposed reforms to make a stand and contact their local MP. To make this process as easy as possible simply cut and paste the letter below, pick your local MP’s email from the list provided and send.

Read more: Calling on all financial advisers, time to make a difference

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Category: Uncategorised

Published: 23 June 2015

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Written by: Content Partner

Category: Uncategorised

Published: 02 June 2015

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If a client were to receive a windfall inheritance, they may be tempted to take it as a lump sum of cash; however it may not be the best approach. It’s important to carefully manage any tax liabilities associated with inheriting, and consider how best the inheritance should be used for your clients’ situation.

The same can be said when it comes to superannuation. The Financial System Inquiry (FSI) report released in December 2014 concluded the purpose of superannuation is to provide a retirement income, suggesting we shouldn’t think of it as taking a lump sum payment.

According to Colonial First State’s Income Stream Index, launched in April 2015, many Australians are actually already doing this.

The analysis found that 83.3per cent of retirement assets were taken as income streams for the 2014 financial year, suggesting that Australians’ reliance on lump sums is an exaggeration. Additionally, the Index is projected to rise to 96% by 2025.

These findings contradict widely quoted, but flawed, data from APRA that shows only half of retirement benefits are taken as income streams.

Changing the conversation

Developed in conjunction with Rice Warner, a leading provider of research and advice to the superannuation and wealth management industries, the Index shows a strong preference for income streams over lump sums, particularly as balances grow larger. Derived from an analysis of over 10 million members and $55 billion in assets, the findings reiterate those from the FSI report. Of those who do opt for lump sums, Australian Bureau of Statistics data (2013) suggests they tend to use them productively: one quarter invests in their own home, 18% reinvest as ordinary money and 13% reinvest into another retirement scheme.

“The question is not so much about whether Australians use income stream products in retirement but whether they are using the right income streams,” says Nicolette Rubinsztein, General Manager Retirement at Colonial First State.

Diversification is king

Just like an investment portfolio, the idea that you shouldn’t put all your eggs in one basket applies to super. The FSI report states that “superannuation assets are not being efficiently converted into retirement incomes due to a lack of risk pooling and over-reliance on individual account based pensions.” This suggests a combination of products may be the best option for a healthy retirement income.

What is the optimal retirement solution?

That’s the million-dollar question, and the main message for consumers is to seek financial advice. As an adviser it’s your responsibility to understand all the different elements to a good retirement solution – including the bigger issue of Australians potentially out-living their super balance.

According to a 2014 Mercer report, over 85 per cent of white collar workers are expected to live beyond 88, with 35 per cent of men reaching 91 and 93 for women, which could result in many people being forced to rely solely on the age pension.

To reduce reliance on the age pension the FSI report recommends introducing a Comprehensive Income Product for Retirement (CIPR) that is tailored to the individual client’s needs and risk tolerance, and that can handle fluctuations in the economic climate. This may not necessarily be a single product solution. An account based pension, paired with a product that provides longevity risk protection, could provide a regular and stable income that is flexible yet offers a certain amount of risk protection.

So a good CIPR option could potentially combine an allocated pension and a term or life annuity. In fact, the FSI report suggests that the income from such a strategy would be 15 to 30% higher simply drawing the minimum amount from a single account based pension. Given post-retirement needs are quite different to the accumulation phase, and need to balance income, longevity and inheritance, it’s essential for advisers to provide bespoke financial advice.

Read the full Index for further insights here.

Adviser use only. This is general information for the adviser only and is not intended for any investor. It is not financial product advice and does not take into account the individual objectives, financial situation or needs of any individual investor. Investors should read the Product Disclosure Statement (PDS) available at colonialfirststate.com.au and consider talking to a financial adviser before making an investment decision. Colonial First State Investments Limited (Colonial First State) ABN 98 002 348 352 AFSL 232468 is a subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 ('the Bank'). The Bank and its subsidiaries do not guarantee the performance of Colonial First State's products or the repayment of capital by Colonial First State.

Data source: Colonial First State Income Stream Index prepared by Rice Warner, April 2015.

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Written by: Tony Rumble PhD, CEO, LPAC Online

Category: Uncategorised

Published: 18 May 2015

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We all know that 2/3 of financial advisers include direct shares in their advice. That’s why the industry is facing a mighty challenge, as many key stocks are trading at record high prices, fuelled by yield hunters chasing income for retiree clients. Interest rates are at all time lows and heading even lower – so it’s little wonder that we are seeing a wave of new ASX listed products (including mFunds) specifically aiming for an income focus and with reduced levels of equity risk.

Read more: Equity income still the biggest challenge for advisers

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Written by: MLC

Category: Uncategorised

Published: 23 April 2015

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In an unpredictable world, insurance is a necessity, not a luxury. While many Australians understand the importance of insurance, one of the biggest barriers to taking out and keeping life insurance is affordability. 

Read more: Protecting Australians with affordable insurance

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Written by: Blair Dods

Category: Uncategorised

Published: 26 February 2015

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Promoted by Smarter Money Investments

With the Reserve Bank of Australia cutting its official cash rate to a new record-low of 2.25 per cent, savers, investors and retirees are faced with two choices: either leave their cash wallowing in sub-three per cent deposits that fail to cover inflation after tax, or search for superior solutions that can beat vanilla deposits.

Something to be aware of is that many ADIs have changed the conditions of their term deposits and require depositors to give 31 days’ notice if they want to get their cash before the maturity date. This is in response to the introduction of a new liquidity coverage ratio requirement.

Under the new rule, ADIs must maintain an adequate level of high-quality liquid assets that can be converted to cash to meet liquidity needs for 30 days. To determine the appropriate ratio, banks must estimate their net cash outflow over 30 days under stressed conditions, with higher runoff rates to apply to less stable deposits. Retail deposits are divided into "stable" and "less stable" portfolios.

Cash outflows related to term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from ratio calculations if the depositor has no legal right to withdraw deposits within 30 days. Banks are now targeting deposits that can't be withdrawn before 31 days. Over the past couple of years, several ADIs have launched notice accounts, which allow regular deposits and have no maturity date but require the depositor to give notice before making a withdrawal.

With the new rule taking effect on 1 January 2015, most other ADIs have changed the terms and conditions of their existing term deposit products. In the past, depositors could break the term and get their money out at short notice, usually paying a fee. Now, they must give 31 days’ notice, unless they face hardship.

Increasingly advisers have been reducing portfolio exposures to ASX-listed hybrid securities after some price volatility in recent times. With many clients fully exposed to bank stocks, advisers are reluctant to move to overweight positions, notwithstanding many that have quality blue-chip portfolios in place to provide consistent levels of franked income.

Advisers say that the current challenge they face is to secure reasonable levels of income from investments for clients, whilst maintaining a conservative or defensive investment risk profile in this part of their clients’ total portfolio asset allocation.

Portfolio manager Darren Harvey from Smarter Money Investments says for advisers and clients who are willing to educate themselves, it’s possible to have the best of both worlds – safe net returns of around four per cent annually via a portfolio of “active cash” investments without undue increases in risk.

Mr Harvey argues that investors can avoid the traditional capital instability associated with “fixed-rate” bonds by investing in a high quality and liquid portfolio of Australian bank-issued “floating-rate” notes, which have interest rates that reset every month or quarter off the bank bill rate that closely tracks the RBA cash rate.

A five-year fixed-rate bond is like investing in a five-year term deposit, Mr Harvey says. In contrast, floating-rate notes are like one-month or three-month term deposits and remove the long-term punt on the direction of interest rate changes that you make with fixed-rate bonds.

“A bank-issued floating-rate note is similar to an at-call deposit or very short term TD,” he continues. “They typically have very low capital risk: Australian floating-rate notes have historically displayed volatility of less than one per cent annually compared to four per cent per annum for fixed-rate bonds.

“We fundamentally believe the Aussie fixed-income market is inefficiently priced and there are opportunities for aligned active managers with principals – as opposed to agents – who own the business to add value for clients looking to beat cash,” Mr Harvey exclaims.

Mr Harvey concludes with a warning about the sleeping catastrophe risks in the fixed-rate bond market. “If inflation ever returns it could wreak havoc on old-school bond funds,” he says. “A one percentage point (ie. 100 basis point) increase in 10-year Australian government bond yields, which are currently over 300 basis points below their average level since 1993, would inflict an 8.3 per cent loss on holders of these assets, which are often assumed to be ‘defensive’.”

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Written by: Sonia Bluzmanis

Category: Uncategorised

Published: 18 November 2014

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Australian Equity managers are starting to realise that their traditional benchmark aware, long only strategies aren’t likely to be enough to maintain a competitive advantage and sustain their businesses in coming years.

Read more: Australian equity managers reassess their product suites