Risk assessment is a little obtuse. Photo: Karleen Williams
I was informed by an investment firm, with which I wished to invest some of my money, that I had to disclose all details of my finance and assets. This led to it offering a full portfolio covering all my finances and assets, which was not requested by me. The firm told me: ''We are required by law to have a complete understanding of all personal and financial situations, as well as the attitude to and understanding of what risks may be involved. Under legislation recently introduced, all advisers in the Financial Services Industry must have a formal agreement with their clients in order to provide advice.''
Is it essential for a risk-assessment type questionnaire which has rather ambiguous and obscure questions? Why cannot a person just state that they want minimum risk investments, for example?
Could I please have some clarification as to the above points? R.T.
''Minimum risk'' is a misunderstood term. To a client, it means, ''I don't want to lose any capital, ever!'' To an adviser, this request would need consideration of bank-guaranteed savings accounts and term deposits. But if he or she then explains the low returns currently available from such investments, this often engenders an acceptance of at least some more volatile investments.
A clearer method of self-categorisation would be for you to say: ''I don't want to see my total portfolio fall more than 10 per cent under any circumstances''. I suggest that might profile you as low risk; ''… not less than 25 per cent'' could be medium risk and ''… not less than 50 per cent'' as high risk.
Our main sharemarket index has fallen 50 per cent, temporarily, three times in living memory - in 1974, 1987 and 2007-08 - and can take 10 years to recover, but in individual shares, tax-driven schemes, mortgages and property trusts, people can lose from 50 to 100 per cent of the investment, which is why you spread investments.
Risk assessment is a little obtuse. Under the new Future of Financial Advice law that came into force from July 1, an adviser ''must act in the best interests of the client''.
How that is done varies with the stringency of the legal advice given to the adviser. The act says, in section 961B, that the adviser must prove he or she has identified (i) the objectives, the financial situation and needs of the client, (ii) the advice that is being sought, (iii) the client's relevant circumstances, and (iv) ''any other step that … would reasonably be regarded as being in the best interests of the client''.
The differences in viewpoint between the client and adviser usually fall into (iii) and (iv) above.
For example, a client might want to know where to invest a $100,000 term deposit coming due next week, and think it is not necessary for the adviser to know that he is in the middle of a divorce (a good adviser would want to know the terms of the divorce and how much cash will be needed) or that he is awaiting the results of a possibly cancerous biopsy (a good adviser would ask when the results would arrive and want to discuss what effect a positive result would have on his work and income).
What is meant by ''best interests''? In brief, it is advice given by an adviser with a ''level of expertise in (that) subject, who has exercised care and objectively assessed the client's circumstances''.
This leaves it wide open for advisory firms to set broad limits for the information they need, to avoid being later taken to the Financial Ombudsman or even sued. So wisdom is required on both sides, unlike the person who named the Queensland state emblem the bigibbum orchid.
There was considerable press in May, when the federal budget was released, that it was going to legislate to stop the practice of dividend washing. With the recent turmoil in government, I was wondering if the legislation and regulations were enacted to stop this activity. If the regulations were enacted, what are the holding requirements for investors who hold shares over the ex-dividend period? Is the old 45-day rule still in force or has it been replaced? If the regulations were not enacted, what are the holding requirements? A.S.
To the best of my knowledge, nothing has happened along those lines. To be eligible for any franking tax offset, the holding period rule requires you to continuously hold shares at risk for at least 45 days (90 days for preference shares), not counting the day of acquisition or disposal, i.e. 47 days all up. The rule does not apply if your total franking credit entitlement is below $5000, and this exception would apply to any proposed changes.
How best to invest?
I am 53, my wife 57, and have one dependent 20-year-old at university.
I am an IT contractor with earnings of $120,000 a year and expecting to work for the next two years. My wife earns $65,000 a year and expects to work for the next eight years. Our super is $125,000 and $60,000. We have no mortgage on our $800,000 family apartment and an interstate investment unit worth $550,000 with a mortgage of $270,000, rented at $550 per week and we own it 90/10.
We have $8000 in shares and $40,000 in savings. We are about to receive our last inheritance in the coming months, expected to be $300,000. Should we pay off the investment property mortgage, and invest the rental income? Should we consider buying another investment property with a $200,000 deposit and pay $100,000 off the existing investment property mortgage? Should we split the money between super and shares? Or are there other options we could be considering? R.E.
If you retire in two years' time, you will not need a negatively geared asset but would also not have enough in savings to finance your retirement, even when counting the investment unit.
The latter is giving a return of roughly 5 per cent, presumably indexed to CPI, which is quite a good yield, but could mean the unit is sited in a regional area where there is less likelihood of capital growth.
If you feel confident about the unit as a good investment, use the inheritance to pay off the debt, thus allowing you to each make the maximum deductible contributions into super in the years before retirement, and not have mortgage repayments act as a drag on your income once retired.
If you have a question for George Cochrane, send it to Sunday Money, PO Box 3001, Tamarama, NSW, 2026. All questions answered. Help lines: Financial Ombudsman, 1300 780 808; Centrelink pensions, 13 23 00.