Inappropriate advice costs you in the end - Jamie Nemtsas

Warning bells

Private jets, beachside condos, Brisbane River mansions, junkets to far off exotic places - South Africa, Italy, Canada, along with black tie company events!

No, we are not talking about the Packers, the Murdochs or the Lowys. We are referring to the Cassimatises - the owners of Storm Financial Planning (Storm) from Townsville, Queensland.  They are now relatively famous but for all the wrong reasons.  Aggressive, inappropriate advice will see thousands of loyal clients lose their homes and probably be declared bankrupt.

My personal experience!

Just before Christmas a story on ABC's 7.30 report grabbed my attention. The story was in reference to a financial planning firm called 'Storm Financial'.  What I was watching was totally concerning.  All I could think about was the fact that an industry that is trying to become more professional had just taken two steps back before even taking one forward. 

The next day (Friday) I called the Financial Planning Association (FPA) and offered my assistance (pro bono) to any ex-Storm clients that needed to talk to someone about their specific financial situation.  Following my discussion with the FPA,  I basically concluded that the 7.30 Report had blown it out of proportion and it was just creative journalism with only a handful of clients that were making noises. 

 
It didn't really make sense to me as Storm Financial invested all their clients into badged index funds (a fund that follows the general market).  Further these funds were provided by third parties, large robust institutions: Colonial and Challenger. 

Index funds are a very passive way to get exposure to the stock market.  Also after reviewing Storm's website they encouraged staff to do further studies, and most of their financial planners held the highest level of accreditation in the industry Certified Financial Planner (CFP).   Given this level of professionalism existed then the advice being given should have been appropriate - maybe a little expensive - however still appropriate.
The response from the FPA was that I shouldn't really expect any calls as it was a Queensland based firm and the FPA were referring clients to local financial planning firms, however one or two might call over the holiday break. 

How wrong could I be! The 7.30 report was actually  a gross under-representation of the scenario.  In fact, most articles that I have read about Storm Financial continue to be understating the losses.  The next business day, Monday, my mobile phone rang - an ex-Storm client. That phone call ended 30 minutes later and to my surprise I had three messages all from ex-Storm clients. Calls continued that day, the next day and then most of January.
In my professional opinion this was the worst scenario possible.  It was not the product or even the methodology that was the root of the problem. The problem was it appeared to be inappropriate advice.

 
Stormifying your balance sheet!

Storm had one major investment strategy:  gear (borrow to invest); gear (borrow to invest); and gear (borrow to invest) every asset you hold.  The advice seemed to be talk to your bank and borrow all that you can against your home/farm/business.  Then pull all your money out of superannuation (out of a tax friendly environment)  and gear the total with the aid of a margin loan.  It seems laughable now as Storm called this  'Stormifying Your Portfolio'. 

In fact, it was probably more like a strategy to increase the firm's funds under management, to make huge entry fees and was totally inappropriate to a number of their clients.
So, for clients who are in their 30's or 40's; who understand the risks with the strategy; who have a large non-cyclical income - then maybe - but this is a stretch - maybe. 

However, not for risk adverse wheel-chair based  pensioners; not for pensioners full stop; not for self funded retirees; not for farmers who have had farms and properties in their family for over 150 years; not for business owners working hard to make a basic living. The advice appears to be self serving and inappropriate, and those that gave that advice should  have their licenses and memberships torn up.  They should never be able to give advice anywhere in any form again.

Cassimatis has continued to claim it is not his fault, asserting that it was the fault of the Commonwealth Bank.  However, the Commonwealth Bank didn't give the advice.  They didn't tell 70 and 80 year olds to borrow against their only asset to invest in the share market. It was Storm and Storm only.  It was their company giving the advice.

We have reviewed more than 10 statements of advice (SOA) issued by Storm.  The first thing that you notice is how similar every statement of advice is with very minimal tailoring - borrow, invest and get rich! 
The second thing is the size of the fees disclosed, normally page 2 of the document.  7% of gross assets, in many circumstances, hundreds of thousands of dollars spelt out in plain English.  That would be enough to scare anyone off !   The document was supposed to be a professional, tailored letter of advice but it looks like a sales document selling a "one strategy fits all" get rich thinly veiled scam.  The document lacked disclosure of the absolute risk of the strategy in the worst case scenario.

This is a sad and unfortunate situation. A situation from which many clients of Storm will never recover.  The reputation of financial planners has been rocked again.  However, saying that, these guys were never financial planners.  Financial planners provide appropriate advice to the individual and charge fees that are fair and reasonable.  It is lucky that I am only 33 given that I would like financial planning to be a real profession somewhere in my career.

Putting mainstream losses in perspective

We have all been hurt by the Global Financial Crisis (GFC).  Most assets have fallen by 40% notwithstanding if they are managed funds, shares, property or even bonds. However, this pales in comparison to losing every cent plus more. 

Most prudently well diversified portfolios will be able to fight another day, will endure the recovery, and will continue to produce income. That is, if the advice that you have received has been appropriate.

Trading using the Trend as your Friend - Julia Lee

Have you ever wondered how traders decide to get in and out of stocks? Trendlines are a powerful concept and they can help even a long term investor get more from their portfolio.

There are different ways to draw trendlines. Usually an uptrend is drawn by joining the valleys or the bottoms in the price line. A downtrend is drawn by joining the peaks or the tops in the price line. Once the share price has broken the trend, it could be a potential signal to buy or sell.

Consider the below chart of the S&P ASX 200 index over the last 10 years. You can see that an uptrend was in place from 2003-2007. At the end of 2007, we saw the long term trend broken (as identified by the circle on the graph). That would have been a signal to potentially look at selling out of the market. The market hasn't yet broken the downtrend that is currently in place.

In this example of the S&P ASX 200, we have used a weekly graph. Long term traders would probably examine a longer term chart such as a weekly or monthly chart. Short term traders would use a daily or intraday graph.

Here's another graph of AMP.

This is AMP's share price over the last 10 years. You can see that there was a downtrend from 2001-2003. In 2003, that downtrend line was broken with the share price rising above the downtrend line. That would potentially be a signal to buy into the stock. There was an uptrend between 2004-2007. In 2008 you can see that the uptrend line was broken which would have been the signal to get out of the stock. At the moment, AMP's share price is moving in a downward trend. If you wanted to get into the stock, you would probably wait until the share price breaks the downtrend line which can draw by connecting the peaks in the share price.

Technical Analysis or charting is not an exact science and is not correct 100% of the time. As you can see, it can help you with timing your investments to help you get more from your investments. It's just another tool that can help both traders and investors alike.

Happy Investing!

Julia Lee - Equities Analyst - Bell Direct

To buy or sell shares from as little as $15 per trade, go to www.belldirect.com.au  

Bell Direct does not provide investment advice. This information is general information only. You should consider your own financial situation, particular needs and investment objectives before acting.

Should the first property you buy be your home or an investment? We crunch the numbers to find out which option delivers the best outcome.   Michael Carman

UP UNTIL recently, if you were a first homebuyer looking to get into the housing market you may have felt stuck between a rock and a hard place.

On the one hand, there was all the talk of the decline in housing affordability: an intimidating prospect for first homebuyers. And on the other hand, the spike in rents meant that rental accommodation was also a very expensive option. The CPI (consumer price index) stats show that rents across Australia rose by 8.2 per cent in the year to September 2008, with some cities recording even higher growth in rents (notably Perth with 13.9 per cent, Darwin with 10.6 per cent and Brisbane with 9.9 per cent).

However the changes announced by the Federal Government to the First Home Owners Grant (FHOG) scheme in October could mean an end to the gloom.

Previously under the FHOG, first homebuyers were eligible to receive a one-off grant of $7000 when they purchased their home. On October 14 the grant was doubled to $14,000 and - for first homebuyers purchasing a newly constructed home - tripled to $21,000. The increase applies until June 30, 2009.

There's even more good news though ... if you're looking to buy your first home, you may be able to get the best of both worlds: to receive the FHOG and cut your costs through property investing!

TWO WAYS TO BUY YOUR FIRST HOME
You can buy your first home the conventional way: by saving cash for a deposit (or borrowing it from a family member) and taking out a conventional bank loan. You live in the house and repay the loan, as well as the usual costs associated with running a home (repairs, rates and the like). And as a legitimate first homeowner you'll qualify for FHOG payment.

Or, you can buy your first home the unconventional way: as an investment. With this option, the tenant and the tax man help you meet mortgage repayments. They help ease your cash constraints early on in ownership, after which you move into your dream home in a stronger financial position.

As we saw earlier rents have risen, so having a tenant paying you is a very attractive prospect. And gaining the benefit of tax advantages through negative gearing is a huge bonus to a first homebuyer with stretched finances.

It’s not all one way in favour of investing your way into ownership though: there are some offsets.

If you're not living in your house then you'll be paying rent yourself for wherever you're living - at the high market rates that your tenants are also paying.

So the choice whether you buy your own home and live in it straight away, or buy an investment property to occupy as your own home later can only be definitively answered by looking at the numbers on a case-by-case basis. It comes down to whether the rental income, tax advantages and extra housing costs of investing outweigh the cost of foregoing the rental expense you forego by occupying your first home (see table above).

You might have thought, as many have, that entering the homeowner market as an investor would preclude you from qualifying for the FHOG. Not so.

As counter-intuitive as it sounds, you can buy an investment property and later on buy your own home on which you claim the FHOG. Or you could purchase an investment property and move into that property within one year of settlement and claim the FHOG on that property. Provided you: purchased the home after July 1, 2000; haven't purchased property before July 1, 2000; are over 18; you meet residency/citizenship requirements; and occupy the home on which you claim the FHOG for a continuous six-month period commencing within 12 months of settlement, then you're eligible for the FHOG.

You could even buy and live in an investment property and then claim the FHOG on another property, so long as you hadn't lived in the investment property for longer than six months.

Let's look at some made-up case studies to see how the two ways to enter the home ownership market affect the bottom line. We'll assume in each that the buyer(s) arrange their purchase so they can claim the FHOG whether they buy as owners or investors, and that they receive the FHOG on an already-constructed property at the new higher rate of $14,000. In the case where they buy as investors they let the property for 11 months and move in at the twelfth month to ensure they meet the eligibility conditions for the FHOG, and they receive rental income - and pay the cost of living in rental accommodation - for 11 months of the first year.

CASE STUDY 1: THE YOUNG WORKING COUPLE
The first case study is Gary and Glenda, a young couple, both working, who are currently renting and wanting to move into their own home with a view to starting a family in a few years' time.

Gary is a tradesman who earns $55,000 a year, while Glenda works as a clerk earning $45,000 per year. Their living expenses total $40,000 per year and they want to buy a house on the city outskirts for $380,000 for which they would take out a 90 per cent loan. Their loan (and those of the other case studies we'll see) will be interest-only irrespective of whether they occupy the house or invest, so that the results aren't affected by differing loan types.

The property is purchased in Gary's name because he's the higher income earner. The rental income from the property if it's treated as an investment is $18,000 per year (i.e. a yield of 4.7 per cent), which is also the cost they incur for their own accommodation if they use the property as an investment and live elsewhere. Property management expenses for the investment are 20 per cent of rental income.

Figure 1 shows Gary and Glenda's cash flows for both occupying the house straight away and using it as an investment, after one year. The positive bars show income (cash in, such as wages and the first home grant) and the negative ones show expenses (cash out: mortgage costs, living expenses etc.).

Rental income has been offset against property management expenses and loan repayments and appears in the graph as net property expenses.

The final bar for the two methods - the mushroom-pink coloured bar with the data value - shows net cash, which is the final cash flow after all income and expenses have been added up. In other words, net cash is the bottom line.

What we see is that Gary and Glenda are better off entering the homeowner market via investing, to the tune of more than $1800 after one year. That's a nice extra to have in their pockets when they move in to their home and no longer get the tax benefits from investing.

Which brings us to the key question: what's behind the difference?

The graphs help us understand the answer. Note that the blue gross wages bar, the pale blue living costs bar and the navy blue FHOG bar are the same for each option - investing versus occupying makes no difference to these. The other bars show the difference: the reduction in Gary and Glenda's tax, and the lower housing costs paid when investing outweigh the cost of renting their own premises while the tenants occupy their home.

Let's see whether this applies in other case studies.

CASE STUDY 2: THE STAY-AT-HOME
Stuart is in his early 30s and lives with his parents. He wants to buy his own place - a unit near the CBD - which costs $380,000 and which generates $19,000 rent per year. His salary is $65,000 per year before tax, and his living expenses total $20,000 per year.

Figure 2 shows Stuart's cash flows for buying his own place as an owner-occupier and as an investment.

We see that using his property as an investment leaves substantially more money in Stuart's pocket.

It's remarkable how much better off Stuart is as an investor: as the bottom panel of graphs shows he has more than $33,000 left over at the end of the year if he treats his unit as an investment, compared with less than $15,000 if he moves in to his unit as an owner-occupier straight away.

The major reason for this is that if he uses his unit as an investment he simply stays put living with his parents and doesn't pay rent - his own accommodation costs are zero. But tax also plays into the situation: Stuart pays around $4000 less tax as an investor than as an owner-occupier.

What happens for another single person who earns a high income but isn't living at home?

Let's look at the case of Libby ...

CASE STUDY 3: THE YOUNG PREOFESSIONAL
Libby is a professional in her mid 30s who earns $100,000 in her job and is living in a rented unit near the CBD. She has a high-spending cosmopolitan lifestyle which costs $40,000 per year, in addition to the costs for renting the unit she lives in. She wants to enter the housing market and buy an apartment similar to the one she's renting.

Figure 3 shows her financial situation for owner-occupying her own apartment versus using it as an investment.

Libby's situation sees a similar pattern to those of the other homebuyers we've seen: at the end of the year Libby has roundly $16,600 left over if she occupies her unit straight away, but more than $19,000 in her pocket if she treats the property as an investment for the first 11 months. That's a tidy difference of $2500 which Libby can use for her lifestyle, or to pay down (or offset) her property loan.

Another factor in her situation is that she's in a higher tax bracket than Gary and Glenda and Stuart (her marginal tax rate is 40 per cent rather than 30 per cent), which is why she pays $5000 less in tax as an investor than she does as a homebuyer.

THE FOG SURROUNDING THE FHOG
We saw earlier that it's possible to enter the homebuyers' market as an investor and still qualify for the FHOG, provided you occupy the property within 12 months of settlement for a continuous period of at least six months. (The August 2007 issue of API examined this issue).

There are a couple of other things to note.

Firstly, there are a raft of stamp duty rates, concessions and refunds which vary according to your buying status and which differ state by state.

For simplicity's sake, and because the main concern here is to compare investing versus owner-occupying as a means into home ownership, we haven't taken these into consideration but they would need to be thrown into the mix.

Check with your office of state revenue or accountant to get the fine print on these.

Secondly, it's worth considering the possibility of foregoing the FHOG altogether and investing for, say, three years and then moving into the property.

In many cases, the tax benefits and rental income over that period of time outweigh the benefit of the grant, although the increase in the FHOG shifts things in its favour.

Crunching the numbers for your own situation is the only definitive way to gauge what works best.

SMART STRATEGIES FOR FIRST HOMEBUYERS
We've seen that one year of investing and generating higher cash balances leaves homebuyers better equipped to deal with the financial requirements of being an owner-occupier with a large, non-deductible home loan.

There are a few other things that smart, wealth-minded homebuyers can learn from this potted analysis.

Firstly, if you're cutting it a bit fine in terms of your ability to service a home loan as an owner-occupier, investing will serve you well: the rental income and tax benefits will improve your financial position and your attractiveness to lenders.

Secondly, it's very useful for first homebuyers to frame the issue as when to get the respective benefits of investing and occupying - rather than if they get them - and mix and match for their own benefit.

For example, since the benefit of the FHOG is concentrated in the first year of ownership a couple may decide to occupy their home in that first year and get the benefit of the FHOG, then move out to live in rental accommodation and treat their home as an investment to gain tax breaks and rental income.

With a stronger financial position because of their investment the couple could move back in after a couple of years and be far better equipped to meet the pressure of a home loan.

With some active planning and management it's possible to make a good deal even better. All of which adds up to very good news for first homebuyers.

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting. Please read our warning and disclaimer.

Update on Relief for Account Based Pensions - Laura Menschik

Recently the Government announced measures to provide relief to account-based pensions for the 2008-09 financial year.

The media release stated "This will occur through a 50% reduction in the minimum payment amount for 2008-09".

Those with an existing Allocated, Account-based or Market-Linked Pension at 1 July 2008 will only be required to draw half of what they would otherwise have been required to draw based on their account balance at that date. 

Those wanting to continue taking their pensions as before will continue to do so. All pensions commenced post 1 July 2008 will also be entitled to the 50% reduction on the pro-rata pension amount.

As with all aspects of your financial affairs, and especially in regards to SMSF's, ensure that you are not beaching any rules, plan accordingly and appropriately and always seek professional advice in areas for which you are uncertain or have less expertise.

Laura Menschik
Director and Authorised Representative
WLM Financial Services Pty Ltd.
CERTIFIED FINANCIAL PLANNER TM - SMSF SPECIALIST ADVISER TM
WLM provides client services in an independent, professional and personal manner by qualified financial planners on a fee-for-service basis. WLM is wholly owned by its Directors. Visit WLM Financial Services online wlm.com.au

Record high Gold prices in 2009 - Peter McGuire

Gold prices have rallied over 40 percent since 2008's October low of US$680 an ounce, one of few assets to benefit from the current climate of extreme economic and financial market uncertainty. Gold prices have risen to near record highs as priced in a number of currencies including the US dollar, British pound and Australian dollar.

Risk aversion has underpinned demand for lower risk assets such as precious metals due to diminished investor confidence in asset classes such as equities, real estate and currencies. The recent rally in gold prices has developed despite a firming US dollar. The normally inverse relationship between the pair has broken down in recent months as both the USD and gold prices were driven higher by strong investment inflows linked to perceptions that each is a relatively low-risk asset in the current economic and financial market landscape.

Chart 1: COMEX Gold price, continuous weekly contract

While the global economic downturn has negatively affected industrial and jewellery demand for gold, strong investment demand for the precious metal has underpinned aggregate demand, driving the rally in gold prices. At the same time equity markets extended their bear market slump, demand in physically-backed gold investment products surged. The SPDR Gold Trust, the world's largest exchange-traded fund backed by bullion, last week reported that its gold holdings had risen to a record 1,029 metric tons.

Gold is often viewed as an inflation or deflation hedge with investment in the metal as a means of preserving the purchasing power of investor wealth. The past year has seen a significant shift in inflation expectations with the strong inflationary pressures of first-half 2008 now replaced by significant deflation. A significant contraction in aggregate demand has taken place in recent months amid what some commentators have predicted will be the most severe economic contraction since the Great Depression.

In a desperate effort to stimulate economic growth and stave off recession, expansionary monetary and fiscal policies have been implemented by many central banks and government treasuries around the world. Many are pessimistic about the ability of these measures to prevent an historically deep and protracted economic downturn and the possibility of a prolonged period of falling prices (deflation) remains significant. In fact, the most recent US inflation data released by the Labour Department showed the US consumer price index was unchanged in the year to January 2009 as oil and many other commodity prices collapsed in the latter stages of 2008.

Chart 2: COMEX Gold price (blue) vs USD Index (red), continuous weekly contracts. Note the generally strong
negative correlation has broken down recently, in fact displaying a postive correlation in early 2009.

While a period of deflation is plausible, another plausible scenario is that the unprecedented fiscal and monetary
measures aimed at stimulating economic growth will lead to a period of strong reinflation as the global economy recovers. While treasuries can print cash and central banks can lower the cost of money by reducing interest rates, the relatively finite supply of gold makes the yellow metal the asset of choice in high inflation environments. Gold prices posted their highest nominal price on COMEX in 2008, driven by inflation concerns as well as a sharp depreciation in the US dollar. Prior to the 2008 record high, the previous nominal high for gold was US$873 an ounce posted in January 1980 at the peak of the high inflation period of the late 1970's and early 1980's.

While it is too early to forecast with any certainty the effectiveness of expansionary policy measures, gold prices would benefit from rapid reflation in the case of a global economic recovery in the medium to long term. However in the near term it is likely that further weakness in equity markets would also be price-constructive for gold given that a strong negative correlation has developed between stock markets and gold prices in recent months as investors flee equities for the 'safe haven' of gold.

Chart 3: COMEX Gold price (blue) vs Dow Jones Industrial Average (pink), continuous daily contracts. Note the
negative correlation between the pair in recent weeks.

Peter McGuire - Managing Director - Commodity Warrants Australia    www.cwa.net.au
Peter is a regular commodities commentator on Bloomberg Television and CNBC and appears widely in the Australian financial press.

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