Financial Plan Craig Mattern 7 April, 2011 Statement of Advice Prepared by: Jenny Norman, Authorised Representative of AXA Financial Planning

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1 Financial Plan Craig Mattern 7 April, 2011 Statement of Advice Prepared by: Jenny Norman, Authorised Representative of AXA Financial Planning

2 7 April, 2011 Craig Mattern Unit 1, 10 Donal Place Bentleigh VIC 3204 Dear Craig It was a pleasure to meet with you on 24/03/2011 to explore ways that I can assist you in planning your financial affairs. Please find enclosed the Financial Plan we have prepared for you, setting out my recommendations to help you achieve your financial goals. Brochures for each recommended product are also attached. The Financial Plan is split into two parts, and must be read as a whole document: Our advice: Summarises your current situation, your goals, how we recommend you meet your goals, the benefits of our initial and ongoing advice and a summary of costs. Detailed section: Includes all the information you need to gain a thorough understanding of our advice. This section includes detailed investment and insurance recommendations, supporting calculations, fact sheets, implementation steps and forms, and advice agreements. I will contact you in the coming week to discuss the financial plan with you and answer any questions you may have. I look forward to working closely with you in the coming years. Yours sincerely Jenny Norman CFP Dip FP Authorised Representative of AXA Financial Planning Statement of Advice / Page 2

3 About you Page 4 Our advice Page 6 Your goals Page 6 Will you meet these goals Page 6 Our advice Page 7 Keeping you on track Page 10 What does this advice cost? Page 11 Other things to consider Page 11 What happens next? Page 12 Investment recommendations Page 14 Insurance recommendations Page 19 Supporting calculations Page 23 Key contacts Page 27 Ongoing service provided Page 28 Advice Fees Page 31 What else you need to know Page 33 Fact sheets Borrowing to invest Page 34 Selecting your investments Page 43 Implementation schedule Page 50 Agreement to implement initial advice Page 51 Ongoing advice agreement Page 53 Statement of Advice / Page 3

4 The information you have provided us forms the basis of our advice. It is important that you let us know as soon as possible if our records are incorrect. Personal details Personal details Full name Craig Mattern Date of birth 24/02/1963 Age last birthday Marital status Health Smoker Principal place of residence Home owner 48 years Divorced Good No Unit 1, 10 Donal Place Bentleigh VIC 3204 No Dependents Children DOB Age Support until age Travis 13/08/ David 13/12/ Employment details Employment details Occupation Employer name Employment status Operations manager Basketball VIC Full time Income $65,000 Expected retirement age 65 Current net worth Lifestyle assets Market value Home contents $30,000 Car Camry $12,000 Total $42,000 Statement of Advice / Page 4

5 Financial assets Ongoing investment Reinvest income Estimated value NAB Cash account Yes $5,000 Generations Investment Portfolio - Growth $200 per month No $19,700 Generations Personal Super Plan - High Growth No $21,548 Total $46,248 Net worth (includes lifestyle assets) $88,248 Personal risk insurance Insurance type Owner Insured Provider/ Insurer Sum insured Annual premium Death Generations Craig AXA $733,690 $1, TPD Generations Craig AXA $733,690 Bundled with Death Trauma Craig Craig Zurich $150,000 $92.00 IP Craig Craig Zurich $3,750 $1, You have also advised us that: You have advised us that you have no exclusions or loadings for your insurance cover. You didn t want to disclose details of your general insurance cover. You do not have any health insurance. Statement of Advice / Page 5

6 One of the most important steps of the financial planning process is mapping out a long term strategy that will help you achieve your goals. We are therefore pleased to present our advice below, which summarises your situation and details the recommended strategy we believe will be most suitable for you. Your goals During our meeting we undertook a fact-finding process to help define your goals and objectives. Scope of advice Our advice will focus on solutions that address the goals and issues that are important to you. Goals to be addressed Building wealth over the long term. You are prepared to borrow money to boost your investing potential. You would like us to determine if this strategy is appropriate for you and recommend some investment options. Making sure you have enough personal insurance to cover your income needs. Set aside $5,000 in a bank account so you can access it quickly in case of emergency. $30,000 each year to meet your current living expenses. Areas not addressed We have agreed to not address the following areas: How to fund your income needs in retirement. Will you meet these goals? Assuming that you continue as you are, we have determined that you will meet only some of your goals. You will meet your income needs You will continue to meet your income needs but you will not be maximising your investments which means you will have limited savings available for retirement. You need to review your insurance cover You don t have enough income protection cover. This means that if you have an accident or become seriously ill and can t work, you won t have enough income to meet your everyday expenses and your other goals will be put at risk. Statement of Advice / Page 6

7 Our advice Outlined below is our recommended strategy and why it is suitable for you. We considered alternative strategies and products when we prepared our recommendations. If you wish to receive a copy of these alternatives, please contact us. Keep $5,000 in cash Keep $5,000 in your NAB savings account to act as a cash buffer. A cash buffer will give you peace of mind that you have money to draw on if an emergency or extraordinary bill arises. Keep your Generations Investment portfolio Keep your Generations investment portfolio managed fund to continue to build wealth outside of super. Whilst you don t anticipate that you will need this money, you are comfortable knowing that you will have access to it. Borrow $20,000 from Colonial First Choice to invest Borrow $20,000 to invest using your Generations Investment Portfolio as security for the loan. This is known as margin lending. We recommend you use Colonial First Choice Margin Lending. This is a simple and cost effective loan. By using borrowed funds to invest, you have a better opportunity to increase your non superannuation savings as you will have money invested. The recommended loan is an interest only loan, therefore based on an interest rate of 9.49% p.a. the repayments will be $1,898 a year. You will be able to claim your total interest costs as a tax deduction in your tax return. Please note that the interest rate is variable, so your repayments may increase or decrease throughout the year. Our calculations suggest you will be able to afford an increase of at least 2.0% p.a. on top of the current interest rate. A margin call occurs when your portfolio drops below the level of security required to fund the loan. Based on your initial investment of $59,700, your portfolio will need to fall below $20,000 for you to receive a margin call. As part of our ongoing service, we will manage any risks of a margin call. Please refer to the Borrowing to Invest fact sheet for information on margin calls. We anticipate your investment loan will be repaid in at retirement. At this time, we will look at ways to repay your loan and consider ways to reduce any capital gains tax that you may incur. We strongly recommend that you seek advice from your accountant before implementing a gearing strategy. Statement of Advice / Page 7

8 Important information about borrowing to invest Borrowing to invest can accelerate your investment returns. It also works in the opposite way by magnifying any losses. Regardless of how your investment performs, you will always need to meet the interest costs, and ultimately repay the loan. When borrowing to invest, you need to make more money from the investments than you pay in borrowing costs. We have calculated that over the long term, as your investments grow, the returns will outweigh the costs. Please refer to the supporting calculations section for our detailed analysis. Important information about withdrawals from your portfolio When and if you need to withdraw money from your investment, any investment gains (on this amount) will be taxed (capital gains tax). We will manage the tax consequences at this time. Invest $20,000 into Generations managed fund Use the $20,000 from the margin loan to invest in your existing Generations managed fund Continue to invest the $200 per month for the foreseeable future. This is an easy and disciplined way to save as the money comes automatically out of your bank account. The aim of investing over a period of time, rather than in one lump sum, is to smooth out some of the effects of short-term volatility by buying investments at various prices. Your investments will be managed by investment professionals with proven experience. A managed fund allows you to invest in a range of investments assets, such as Australian and international property as well as shares, fixed interest and cash. This allows you to spread your savings over a number of different asset classes. Your savings will increase by $2,400 each year, totalling approximately $68,800 in 5 years (or $48,800 if we deduct the outstanding loan). The income from the managed fund will be reinvested on your behalf, adding more to your savings. It will still be included in your tax. Important information about selling your investment When you need to withdraw money from your investment, any investment gains will be taxed (capital gains tax). We will manage the tax consequences at that time. Your investment strategy You have financial goals you wish to achieve over the short and long term. We have developed investment strategies designed to match these timeframes, which are listed below. For more detail, refer to the Investment section of this financial plan. Statement of Advice / Page 8

9 Short term for cash reserve Cash only allocation Your short term investments will be invested entirely in cash investments. This means you will have access to this money immediately if or when you need it. Long term for wealth creation 85% Growth allocation Your long term investments will be spread across shares, property, fixed interest and cash. The asset allocation will focus on growth investments, with 85% of your money allocated to shares and property. We expect your portfolio to move in value both up and down over the short term, in order to achieve stronger returns over the medium to long term. Long term for super savings 99% Growth allocation Your long term investments focus entirely on growth style investments, with a 99% of your money allocated to Australian shares and international shares. This portfolio aims to achieve strong long term capital growth. We expect your portfolio to move in value both up and downwards in the short term, in order to achieve stronger returns over the long term. Apply for income protection via super We recommend that you apply for $4,430 per month of salary continuance insurance through your Generations super fund. Cancel your Income protection cover with Zurich You no longer need this insurance because it will be replaced with insurance held via your superannuation account. Keep your Life, TPD and Trauma cover We recommend that you keep your existing life, TPD and trauma cover as you are comfortable that they provide you with sufficient cover. We have found this product still suits your situation and offers competitive premiums. The benefits of the recommended insurance strategy The insurance cover will allow you to continue to receive an income of $53,160 until age 65 if something happens to you. The recommended insurance will allow you to cover the cost of your loan, and provide for your children so you don t have to sell your geared investments to meet expenses, should something happen to you The insurance held in super will not impact your cash flow. Detailed insurance calculations & product You can view the calculations and details of the recommended Statement of Advice / Page 9

10 recommendations insurance products in the Insurance section of this financial plan. Keeping you on track It takes more than a financial plan and a single meeting to meet your goals. Your current situation, goals and strategy need to be reviewed regularly to keep you on track, because it s difficult to predict if and when things may change. It is equally as hard to predict the effect these changes will have on your goals and our advice. Apart from unexpected changes, there are particular areas of our advice that will need to be continually maintained. Monitoring your margin loan portfolio If the value of your investments drop below $20,000, Colonial FirstChoice will need you to invest more money or pay back part of the loan. This is called a margin call. Should this happen, and you can t meet the margin call, the lender could sell your investments, at their discretion, to pay back the loan. This is why it s important to monitor your margin lending portfolio on a regular basis. Interest rates and your repayments Interest rate increases will change your repayments, increasing your everyday expenses. We have calculated that if interest rates increase by 2 per cent you will still have a cash surplus of $600 a year, but this will need to be reviewed regularly as your expenses and income change. Your investments When investing there is a chance that the returns won t meet your needs or that your savings reduce in value just when you plan to withdraw them. How much your savings go up and down over the short to medium term depends on which asset class (such as shares, property, fixed interest) your savings are invested in. Different asset classes perform well at different times. To make sure that your investments are still suitable, you will need to review your portfolio on a regular basis. We invest your money in assets that match the timeframe of when you need the money. The reference section of this plan explains how we recommend you invest your money. Statement of Advice / Page 10

11 Appropriate insurance and sum insured Over time as your net wealth increases we can investigate opportunities to decrease your insurance cover and reduce your premium costs. Alternatively, changes to your income, your expenses, your spousal relationships, number of dependants or increased borrowings, may require you to increase your insurance cover. Ongoing service Please refer to Ongoing Services Provided in the detailed section to see what ongoing services we will provide as part of our agreement. Keep in touch Don t feel like you need to wait for a specific review to contact us. You should contact our office if there is anything that you think may impact your financial plan. Other things to consider In addition to our advice above, there are other areas that may need your attention. Confirm your tax position We strongly recommend you speak to your accountant to confirm the impact our advice will have on your tax position. You will need to consult your accountant before implementing our recommendations. Meet with a solicitor to review your Wills and other estate planning matters We recommend you meet with a solicitor to discuss your estate planning needs, in particular: Your Wills Establishing an Enduring Power of Attorney A solicitor can make sure that your wishes can be carried out if you are unable to look after your own affairs or die. What does this advice cost? Financial planning costs can be separated into advice fees and product costs. The advice fees are payable by you to research, prepare, implement and maintain this financial plan. You pay product costs from your investment balance and insurance premiums to the provider to manage and administer your investments and insurance. Statement of Advice / Page 11

12 Advice fees This section summarises the advice fees you pay to us. More information about the advice fees and commission we receive is located in Advice Fees. Initial advice fees There are no initial advice fees to research, prepare or implement our advice. Ongoing advice fees Our ongoing advice will cost $2,500 p.a. You have requested this amount be deducted in monthly instalments from your investment. Your product costs Each product we have recommended charges you a fee or a premium to professionally manage your investment. These products form an important part of your financial plan they make sure that the strategy we have recommended can be implemented. Craig NAB savings account costs $0 each year, and is based on 0.00% of the investment balance. Generations Investment Portfolio costs $560 each year, and is based on 1.41% of the investment balance. Generations Personal Super costs $325 each year, and is based on 1.51% of the investment balance. The fees above will be deducted from your investment in monthly instalments and will vary according to the investment balance. Your insurance premiums Craig, your annual insurance premiums are: $92.00 for your Trauma insurance through Zurich Wealth Protection Plus - Basic Trauma. $1, for your Salary Continuance insurance through Generations Personal Super Plan $1, for your Death & TPD insurance through AXA Generations Death Cover. What happens next? We recommend you take this Financial Plan with you today and read it in full to make sure you fully understand our advice. We will contact you in a week to see if you have any questions, and to arrange another appointment. The Implementation Schedule on page 50 explains the steps we need to take to implement your Financial Plan. Statement of Advice / Page 12

13 Before you agree to implement your Financial Plan or agree to receive any of our Ongoing Advice Services, you should make sure that you have: Read and understood both parts of your Financial Plan: Our Advice and the detailed sections. Understood the risks associated with the strategies and investments we have recommended. Asked us any questions you have about your Financial Plan and our advice. Read and understood the Product Disclosure Statements (PDSs) about each of the financial products we have recommended. Read and understood the Agreement to Implement Advice. Read and understood the Ongoing Advice Agreement. Completed and signed any forms and agreements. Statement of Advice / Page 13

14 Which investments are best for me? Matching your investments to your needs During our meeting we discussed investments and explained how we select investments that are appropriate to your goals, investment timeframe, attitude to investment risk, and the strategies we recommend. Timeframes We have designed investment strategies to match the timeframes of the goals you want to achieve. Matching investment strategies to each of your goals ensures your overall blend of assets is appropriate. Short term investment strategy We have based your short term investment strategy on your desire to have some cash available as a cash reserve. Recommended investment strategy Cash Your short term investments will be invested entirely in cash investments. This means you will have access to this money immediately if or when you need it. Recommended short term investments Investment Owner Final balance Regular Investments / withdrawals ($) pa Reinvest income NAB savings account Craig $5,000 Nil Yes Total $5,000 Statement of Advice / Page 14

15 Long-term investment strategy We have based your long term investment strategy on your goal to build funds for retirement. Recommended investment strategy Gearing portfolio - 85% Growth Your long term investments will be spread across shares, property, fixed interest and cash. The asset allocation will focus on growth investments, with 85% of your money allocated shares and property. Your portfolio is likely to move in value both up and down over the short term, however we expect it to achieve stronger returns over the medium to long term. You do not know how long you will hold this investment for or if you may need to draw on it in the future. You are not prepared to take on quite as much investment risk as you are with your retirement savings. Retirement savings - 99% Growth Your long term investments focus entirely on growth style investments, with 99% of your money allocated to Australian shares and international shares. This portfolio aims to achieve strong long term capital growth. Your portfolio is likely to move in value both up and downwards in the short term, however we expect it to achieve stronger returns over the long term. As you are 17 years from retirement, this will give your superannuation plenty of time to ride out any negative returns that this type of allocation may experience. Recommended investments Generations We recommend you use Generations, as it is a cost effective investment option that allows you to invest in a broad range of underlying investments. Generations is managed by AXA Australia. AXA Australia is a member of the Global AXA Group, one of the largest financial services groups in the world. The world wide group has 65 million superannuation, investment and insurance customers. They invest A$1.6 trillion dollars on behalf these clients. Generations will send you regular reports on your investments as well as giving you 24-hour/7 days-per-week access to your account information via the internet. Additionally, you already have an investment account established with Generations. We have provided you with a Generations brochure (Product Disclosure Statement) that has more information on this investment. Statement of Advice / Page 15

16 Underlying investments Multi manager diversified fund As the name suggests, multi manager diversified funds invest across the range of asset classes drawing on the expertise of specialist investment managers in each asset class. Extensive research, both locally and globally, is carried out by ipac. ipac have been selected for their scale, expertise and experience in managing diversified multi manager investments. They will ensure appropriate investment managers are selected for each of the asset classes. These managers are then blended to construct a portfolio that is suitable for the investment objectives of the fund. The various managers are then subject to a rigorous monitoring and review process to ensure the managers are continuing to work with the agreed strategy. The managers may be changed or the allocated amount of the portfolio varied at any time without prior notice. Recommended long term investments Investment Owner Final balance Regular Investments / withdrawals ($) pa Reinvest income Generations Investment Portfolio Growth Craig $59,700 $2,400 Yes Generations Personal Super High Growth Craig $21,548 $0 NA Total $61,248 $2,400 Your long term asset allocation Gearing strategy - 85% Growth Asset class Target asset allocation (%) Recommended allocation (%) Difference Cash 2.0% 1.0% -1.0% Australian Fixed Interest 8.0% 6.0% -2.0% Overseas Fixed Interest 5.0% 7.0% 2.0% Australian Equities 43.0% 38.0% -5.0% Overseas Equities 32.0% 36.0% 4.0% Property 10.0% 7.0% -3.0% Other 0.0% 5.0% 5.0% Total 100.0% 100.0% 0.0% Statement of Advice / Page 16

17 Superannuation savings - 99% Growth Asset class Target asset allocation (%) Recommended allocation (%) Difference Cash 1.0% 1.0% 0.0% Australian Fixed Interest 0.0% 0.0% 0.0% Overseas Fixed Interest 0.0% 0.0% 0.0% Australian Equities 45.0% 43.0% -2.0% Overseas Equities 49.0% 47.0% -2.0% Property 5.0% 4.0% -1.0% Other 0.0% 5.0% 5.0% Total 100.0% 100.0% 0.0% Your long term investment portfolio asset allocation closely reflects your target asset allocation. Statement of Advice / Page 17

18 Important information about growth assets We have allocated a portion of your money to shares and property which are growth assets. By allocating money to growth assets, you take on more investment risk than if you were to invest into cash or fixed interest investments. This increases the chance that your money will earn more over the long term, but it also means that there is a greater chance your investment could go down in value. If you need to withdraw money from your investments in a year when your investments have gone down in value, it could significantly impact your goals. Summary of our investment recommendations Investment Owner Start balance Change (+/-) Final balance NAB savings account Craig $5,000 $0 $5,000 Generations Investment Portfolio Growth Craig $19,700 $20,000 $39,700 Generations Personal Super High growth Craig $21,548 $0 $21,548 Total $46,248 $20,000 $66,248 The change of ($20,000) in the above table represents the amount borrowed from Colonial First Choice. Statement of Advice / Page 18

19 During our meetings we discussed the importance of securing your future. To achieve this you need to be able to meet your financial commitments both now and in the future. The most important asset you have to help you achieve this security is your ability to earn money. If you were unable to work and generate income, not only would your financial goals be unachievable, your ability to meet everyday costs could be in jeopardy. The best way to ensure you can be financially secure if something happens is with insurance. The cover you need To work out the insurance cover you need we examined your current and future financial commitments and the amount of money you would need to fund them. We also discussed the priority you place on insuring your future. Our insurance recommendations have been based on these discussions. Income protection insurance In case you can t work Income protection insurance protects you financially if you are unable to work due to illness or injury. It provides regular payments to help you meet your normal living expenses. How much cover you need We recommend you insure 75% of your gross income. This is the maximum level of cover you are allowed by most insurers. This level of cover will allow you to meet your regular living costs in the event of a claim. We recommend you also add super contributions protection to your cover. This means you will receive a further 9% of your salary, paid to your super fund, in the event of a claim. Your waiting period The waiting period is the amount of time you have to wait, after you are unable to work, until you can lodge a claim to receive income payments. We recommend that you select a waiting period of 30 days. This is the shortest waiting period available, and will ensure you will receive a regular income in the event of a claim, as soon as possible. Your benefit period The amount of time you receive income protection payments for is called the benefit period. Craig, we recommend you select a benefit period to age 65. This is the maximum benefit period available, and will provide protection until your expected retirement age. Statement of Advice / Page 19

20 The structure of your income protection cover We recommend that you apply for $4,430 per month of cover inside of super with a 30 day wait and a 2 year benefit period. The insurance we have recommended through your superannuation fund is a low cost policy. This is because the premiums are offered at wholesale rates. You should be aware that this insurance is not as comprehensive as income protection policies offered outside of super. This policy meets your needs because it will provide you with a higher level of cover without impacting on your cash flow. Tax implications of your income protection insurance Any benefits paid will be taxed at your marginal tax rate, even if you are aged over 60 at the time of receipt. Income protection premiums are tax deductible to you personally, or to your superannuation fund, depending on where the cover is held. Indemnity policy You have advised that you are in stable employment and your income is secure and constant. You have also advised that you would like to minimise the cost of your insurance protection insurance. As a result, we recommend you apply for an indemnity policy. An indemnity policy means, when you make a claim, you will need to provide evidence of your income over the 24 months immediately preceding your claim. If your income at claim time is less than when you applied for the policy, you can only claim on the lower amount. Important information about income protection insurance Income protection insurance provides cover if you are unable to work due to illness or injury. It does not provide a payment if you are made redundant or lose your job. Recommended products The core benefits of insurance policies are similar (e.g. life insurance providing a payment upon death). But the secondary benefits, which can provide extra protection and comfort, can be complex and vary greatly. We have reviewed policies from a range of market leading insurance providers, and selected insurance products based on your individual needs and personal situation. Our recommendations are summarised in the following pages. Please be aware that the premiums quoted below are subject to underwriting and may change. Statement of Advice / Page 20

21 Craig Mattern Death TPD Trauma IP Policy Owner Generations Generations Craig Mattern Generations Amount of cover $733,690 $733,690 $150,000 $4,430 Insurer AXA AXA Zurich AXA Waiting period 30 days Benefit period To age 65 Premium each year $1,049 $92 $1,584 Stepped Stepped Stepped Stepped Replace your existing insurance We recommend you replace your existing insurance with the recommended policy because: The new insurance will cost you less and provide you with more cover. A comparison of the costs of your existing insurance and our recommendation is provided below. Don t cancel your existing cover until your new cover is accepted We will make sure the new insurance is in place before we cancel your existing cover. If the insurance company does not accept your application (for reasons we can not foresee), this will ensure you are not left without cover. Benefits of the recommended policy The products we recommend have been selected to meet your insurance needs in the following manner: We have recommended AXA Generations for your income protection insurance because it allows you to return to work for up to 5 days during the waiting period, without affecting the timing of your claim. Stepped (increasing) premiums We recommend you apply for stepped premiums. This type of premium provides initial cost savings, when compared to a level premium, but the cost of your insurance will increase each year with your age. The premiums will be cheaper for you now, which allows you to use your surplus cash flow to build up your non super investments. Super ownership We recommend your salary continuance insurance be owned by the trustee of your Generations super fund. As your insurance benefits will be owned by your super fund you will need to meet a condition of release, such as permanent ill health, to have your insurance benefits paid to you. Please refer to the section above, The cover you need, for other benefits and implications of having your insurance owned by your Statement of Advice / Page 21

22 super fund. Taxation implications Please seek professional tax and legal advice Capital gains tax may apply if ownership is transferred. We strongly recommend you discuss this with your tax adviser and legal representative before proceeding with the advice. It is important that you seek legal advice from a specialist legal firm to establish an appropriate buy / sell agreement. We are happy to refer you to an appropriate professional in this area if needed. Replacing your insurance: Product comparison The table below compares your existing insurance against the insurance we have recommended. Income protection Existing Insurance Recommended Insurance Insurer Zurich AXA Generations Level of cover $3,750 $4,430 Waiting period 30 days 30 days Benefit period To age 65 To age 65 Annualised premium $1,769 $1,383 Policy fee $57 Stamp duty $144 Total annual cost $1,769 $1,584 Statement of Advice / Page 22

23 Our assumptions The following tables show your current tax and cashflow position. The projections were prepared using the following assumptions. General assumptions: Start date for projections: 1 st July 2011 Inflation rate (per annum): 2.5% Centrelink payments (indexation) 2.5% Investment Amount Income (%) Growth (%) Reinvest income (Y/N) Franking (%) Superannuation $21, % - - Bank account $5, % 0% Yes - Managed fund $39, % 3.8% Yes 80% Loans Amount Owner Interest rate Tax deductible Monthly repayment Margin loan $20,000 Craig 9.49% 100% $158 Please be aware that: Income and growth rates used are considered reasonable, but are only estimates and can t be guaranteed. They are provided as a guide only. We have used the information you provided us for our projections, which is detailed in the About You section. Please check the information is correct and let us know if there are any errors or missing information. While we have carefully considered the tax consequences of our recommendations, we ask that you confirm your exact annual tax liability with your accountant. As your circumstances and the legislation surrounding superannuation, taxation, and Centrelink is constantly changing, it is important to regularly review your financial plan to make sure the recommended strategy continues to be suitable. We have assumed you will receive employer super guarantee contributions of 9 per cent of your salary while you are employed. Statement of Advice / Page 23

24 Income & tax position The table below shows your likely income and tax over the next five years. Projection year Year 1 Year 2 Year 3 Year 4 Year 5 Income received $65,000 $66,625 $68,291 $69,998 $71,748 Salary $65,000 $66,625 $68,291 $69,998 $71,748 Income reinvested $1,145 $1,317 $1,497 $1,685 $1,883 Regular savings plan $1,145 $1,317 $1,497 $1,685 $1,883 Total gross income $66,145 $67,942 $69,787 $71,682 $73,631 Franking credits $265 $305 $346 $390 $436 Deductible interest $1,898 $1,898 $1,898 $1,898 $1,898 Taxable income $64,512 $66,349 $68,236 $70,174 $72,168 Tax payable before rebates and credits $12,904 $13,455 $14,021 $14,602 $15,201 Less Tax offsets and credits Imputation credits $265 $305 $346 $390 $436 Tax offset - Low income $120 $46 $0 $0 $0 Total tax offsets and credits $385 $351 $346 $390 $436 Tax payable after tax offsets and credits $12,519 $13,104 $13,674 $14,212 $14,765 Add Medicare levy $968 $995 $1,024 $1,053 $1,083 Net tax / (refund due) $13,487 $14,099 $14,698 $15,265 $15,847 Tax attributable to income $13,487 $14,099 $14,698 $15,265 $15,847 Please be aware: The tax calculations in year one do not take into account any salary paid up to leaving employment / employer termination payments expected to be received upon retirement / the withdrawal from superannuation / the withdrawal and re-contribution from your superannuation / nor the tax consequences of these payments. This may result in some income tax being payable on your account based pension income in your first year of retirement. Tax offsets can only be used to reduce your income tax liability to zero. You cannot receive a refund for unused tax offsets. Tax offsets (except Pensioner and Low income aged persons tax offsets) are not transferable between partners. Statement of Advice / Page 24

25 Disposable income The table below shows how much disposable income we estimate you will have over the next five years. Income position Year 1 Year 2 Year 3 Year 4 Year 5 Income received $65,000 $66,625 $68,291 $69,998 $71,748 Total income $65,000 $66,625 $68,291 $69,998 $71,748 Less income tax $13,487 $14,099 $14,698 $15,265 $15,847 Less regular loan repayments $1,898 $1,898 $1,898 $1,898 $1,898 Less planned additions to investments $2,400 $2,400 $2,400 $2,400 $2,400 Less surplus assumed to be allocated to investments * $1,043 $3,302 $3,185 $3,113 $3,037 Net income $46,172 $47,326 $48,509 $49,722 $50,965 Less budgeted expenditure $46,172 $47,326 $48,509 $49,722 $50,965 Surplus income $0 $0 $0 $0 $0 * We have assumed that you will direct all of your suruplus income to your Generations investment. We have estimated that you will have a surplus ranging from $1,000 to $3,300. Statement of Advice / Page 25

26 Can you afford an interest rate rise of 2% in a year? The table below shows how much disposable income we estimate you will have, if interest rates were to increase by 2% per annum. Our calculations below demonstrate that you will be able to afford this increase. Sources of income and expenses Recommended ($) If interest rates rise by 2% ($) Gross salary $65,000 $65,000 Total income $65,000 $65,000 Income before tax $65,000 $65,000 Net tax/(refund due) $13,487 $13,345 After tax income $51,513 $51,655 Amount remaining $51,513 $51,655 Less cost of living $46,172 $46,172 Disposable income surplus/(deficit) $5,341 $5,483 Less regular loan repayments $1,898 $2,298 Additions to regular savings plan $2,400 $2,400 Surplus/(deficit) $1,043 $785 Additions to Generations Investment portfolio $991 $0 Net cash surplus/(deficit) $52 $785 Total assets The following table aims to show the estimated value of your investments over the next five years. All investments Year 1 Year 2 Year 3 Year 4 Year 5 Investments Bank account $5,000 $5,000 $5,000 $5,000 $5,000 Regular savings plan $45,843 $52,249 $58,962 $66,045 $73,521 Rollover fund $26,404 $31,714 $37,513 $43,837 $50,725 Less liabilities Less investment loans $20,000 $20,000 $20,000 $20,000 $20,000 Total investments $57,247 $68,963 $81,475 $94,883 $109,246 Present day value of total investments $55,850 $65,640 $75,658 $85,959 $96,557 Statement of Advice / Page 26

27 Your adviser Jenny Norman Authorised representative (No: ) of AXA Financial Planning 10 Smith Street Leongatha VIC 3953 Phone: Fax: Web: Who your adviser is licensed through AXA Financial Planning Limited ABN Australian Financial Services Licensee, License No: Andrew Mayne Paraplanner For questions about your statement of advice when I am out of the office andrew@fo.com.au Claudia Frank Administrator claudia@fo.com.au To assist you with questions about paperwork, statements and any other general queries. Statement of Advice / Page 27

28 We provide a range of ongoing advice services because you need more than a single financial plan to ensure you keep on track to meet your goals. Our service offer ensures your financial plan keeps up to date with your changing needs. Information and communication We will contact you each year to reassess your personal and financial situation. This includes: re-establishing your goals and confirming your income, expenses, assets and liabilities, and considering changes in legislation and assessing whether new products on the market can better suit your needs. Financial Planning legislation is regularly reviewed and updated by government. These changes can create opportunities to help you to reach your personal and financial objectives. We ensure you take advantage of available strategies maximising your potential to meet your goals. When you should contact us You don t need to wait for us to contact you if you have ongoing questions about your financial plan. You should also contact our team immediately if you experience changes to any of the following: Strategy Management Your goals and objectives The timeframe to achieve your goals Dependant family members Your family home Income and expenses Assets and liabilities Savings and emergency funding Throughout the year and during our regular meetings, your financial plan will be monitored in line with the recommended strategy management services. Some areas of our advice need to be continually monitored to ensure you progress towards your goals. From time to time it will be necessary to alter your financial plan based on changes in your circumstances and legislation. Borrowing to invest Borrowing money to invest increases the risks associated with investing. We continually monitor this strategy to minimise your risk, and ensure you are on track to achieve the goals you set out with. Statement of Advice / Page 28

29 Ensuring the strategy remains appropriate We continue to assess: your level of debt, your repayments, your affordability if interest rates rise, tax deductibility of ongoing costs, and when and how the strategy will be finalised. Margin calls If notice of a margin call is announced, we will take all reasonable steps to contact you immediately. The margin call must be satisfied quickly and we will discuss your options and recommend a suitable solution to meet the lender s requirements. Insurance Your need for insurance changes as you move through different stages of your life. The amount and types of insurance you require will be influenced by changes to your personal and financial situation. Appropriate types and sum insured Over time as your net wealth increases we can investigate opportunities to decrease your insurance cover and provide you with cost savings. Alternatively, changes to your income, the change in cost of living, your spousal relationships, number of dependants or increased borrowings, may require you to increase your insurance cover. Re-assess loadings and exclusions We investigate opportunities with your insurance provider to have any premium loadings or policy exclusions reassessed by taking into account decisions you have made to improve your health or change your employment conditions or occupation. This can result in substantial premium savings or more comprehensive insurance cover. Premiums We analyse research provided by to ensure your insurance policy continues to represent value for money. Insurance providers regularly change their offer creating opportunities to save money on your premium or access more comprehensive cover. Structure Changes to your situation can create opportunities for you to structure your insurance so that premiums are more cost effective, or more tax effective when proceeds are paid to you or your beneficiaries. Investment Review Over time, market fluctuations, contributions and withdrawals from your investment cause the asset allocation of your fund to change. The asset allocation plays a key role in determining the return achieved by your investment and is critical to minimising investment risk in your portfolio. Statement of Advice / Page 29

30 Asset allocation We re-align your investments with the recommended investment strategy for your short and long term goals. Over time, we may recommend you change investment strategies to suit your goals and timeframes. Fund managers We analyse research provided by to ensure the fund managers we have recommended remain appropriate. Minimise costs Wherever possible, costs associated with making changes to your investment will be minimised. In particular, we seek to offset capital gains so that you are not paying more tax than is necessary. Statement of Advice / Page 30

31 - As discussed in our Financial Services Guide, we receive initial and ongoing fees for our advice. Initial advice There is no fee for the initial advice we are providing you. Ongoing advice The strategy outlined in this plan should be reviewed on a regular basis so that it continues to meet your needs. Our service offer is outlined in the previous section and will make sure the advice we provide remains appropriate for you in the future. Ongoing Advice Provided Fee Based on Payment method Advice fee Outlined in ongoing advice agreement Ongoing advice agreement Investment deduction $2,500p.a. Ongoing advice fee payable by you (each year) $2,500 p.a. Insurance commission If your application for insurance is accepted by the insurance company, we will receive upfront and ongoing payments known as commission. This is only payable once your policy is completed. We choose to be remunerated by way of a commission because it is a more cost effective way for you to pay for our insurance advice. We do not rebate insurance commission because the savings the insurer would pass on to you, in the form of a premium reduction would be lower than the commission rebated. The amount we receive as commission will vary according to your annual premiums and is payable for the life of the policy or until you cancel your insurance. Based upon the insurance we have recommended for you, we will receive the following commissions: Insurance Product Premium ($ pa) Upfront (once-off) Ongoing (each year) $ % $ % AXA Generations Death Cover $1,049 $0 $0 $ % Zurich Wealth Protection Plus - Basic Trauma $92 $0 $0 $ % AXA Generations Salary continuance $1,584 $1, % $ % Total $2,725 $1,960 $402 Please note: The above premium amounts include stamp duty and policy fees which are not usually included when calculating initial or ongoing commissions. Premium increases on indexed sums insured will be subject to the upfront commissions as noted above. Margin loan commission We will receive an ongoing commission on your margin loan balance of 0.06%. This is factored into the interest rate. Statement of Advice / Page 31

32 How our advice fees are collected and distributed AXA Financial Planning collects our fees (inc. GST) and retains 3% to support our business. This includes investment and strategy research, continuing education, compliance consulting and business coaching, allowing us provide you with the highest quality service and advice. The remaining 97% of our fees are distributed in accordance with our Financial Services Guide. Other benefits we may receive We may be offered or receive the following non-commission benefits at no extra cost to you. Value Participation Scheme: AXA pays us up to 0.25% of total funds under management in AXA wealth management products and up to 3% of total premiums on some AXA insurance products. For example: If our clients have invested $11million of funds into Summit we will receive $500. If our clients pay a combined annual premium of $150,000 for insurance with AXA, we may receive $350. Technology and Education: provides us with points when our business revenue exceeds $50,000. One point is received per $1.25 (incl GST) over $50,000. Points are only redeemed for office equipment and staff training to ensure you receive up to date information and advice. For example, if our business receives net earnings of $100,000, we will receive 40,000 points ($50,000 qualifying earnings divided by $1.25). The points are multiplied by cents to produce a benefit worth $325. Top 25 business award: For operating a top 25 business, based on revenue and the retention of the Certified Quality Advice Practice status, AXA Financial Planning covers our cost of attending the national conference and financial planning software (total value of approximately $15,000). Statement of Advice / Page 32

33 In this plan, we have included specific information to help you understand our recommendations and how you will benefit from them. This page provides important information about things that you should know. Can I change my mind? Yes. If you are not happy with our advice, you do not have to accept the recommendations. If you proceed with our advice and change your mind about a product we have selected, you may be able to get your money back. Insurance products and managed funds generally have a 14 day cooling off period. You should refer to the product disclosure statement for further details. What happens if the information I provided wasn t accurate? If the information you gave us was incomplete or inaccurate, the advice may not be appropriate for you. Please let us know if any of the information does not reflect your current situation. Do I need to contact a registered tax agent or Centrelink? Yes. Any tax and Centrelink references in this plan are estimates only. You should obtain advice from a registered tax agent or accountant regarding the taxation implications and confirm the estimates of your entitlements with Centrelink directly. How does my adviser select the recommended products? AXA Financial Planning maintain an approved product list developed using research from external research houses. From this list we select products to suit your situation. The approved product list is continually reviewed and can be supplied to you on request. We can provide advice on products from a wide range of financial product providers, some of which are part of the global AXA group and are affiliated with AXA Financial Planning. A full list of our relationships and associations are detailed in our FSG. Are my investment returns guaranteed? No. We have chosen strategies and products to suit your goals, but we cannot guarantee that the products will perform in a particular way. Unfavourable market conditions can reduce the value of your investments and the investment returns generated. Does my advice have a time limit? Yes. Our advice is current for 30 days from the date of this plan. After that time you should not act on any of the recommendations without contacting us. Will my personal information be provided to anyone else? We will not provide information about you to anyone else without your written permission, unless the law says that we must. We may appoint another adviser to manage your affairs. Of course, we will notify you when this happens. Your new adviser would have access to your personal information unless you instruct us otherwise. Is my adviser responsible for advice provided by referrals? No. Where we provide a referral, we do not endorse, recommend, nor are we responsible, for the products or services that you purchase from them. Statement of Advice / Page 33

34 We are often told that debt is bad, so most of us try to clear it as quickly as we can. We are also told to avoid taking on new debt where possible. While this is certainly true in some cases, debt can also be a powerful tool for creating wealth. When done sensibly, there are many times where borrowing may be appropriate, including purchasing a house and borrowing for investment. Borrowing to fund your investments is called gearing. Traditionally, gearing has been more commonly associated with property investment, however over the years gearing to invest in shares has become more widespread. Many people now use gearing as part of their overall investment strategy to help build their wealth. Why should I gear? Depending on your circumstances, gearing can provide a number of benefits. Accelerate your investment returns The benefits of gearing Borrowing allows you to invest more money than using only your own funds. It gives you greater potential to build your wealth because you have more money in the investment market. Keep all of the profits After you cover the borrowing costs and tax, 100 per cent of the growth and the income you earn on the invested money are yours to keep. Tax advantages When you borrow to invest in income-producing investments, the interest on your loan is treated as an expense for tax purposes. This means that you can claim the interest as a tax deduction. Who should gear? The higher your marginal tax rate, the greater the benefits of any tax deductions you receive. Borrowing to invest is not a suitable strategy for everyone. It is best suited to people who are comfortable taking extra risk with their investments and those who can cope with potentially large fluctuations, both up and down, in the value of their investments. Gearing is best suited to people who: Have a high level of comfort when it comes to investing. Have high disposable income. Are prepared to hold their investments for at least seven to nine years. Can afford the interest repayments without relying on the investment. Have funds, other than the borrowed money, that can be accessed at short notice should the need arise. What effect do investment returns have on a gearing strategy? Borrowing to invest can accelerate your investment returns. It also works in the opposite way by magnifying any losses. The following examples show you how gearing works: Statement of Advice / Page 34

35 Investor 1 Investor 2 Investor 3 Own funds $100,000 $50,000 $10,000 Amount borrowed $0 $50,000 $90,000 Total investment $100,000 $100,000 $100,000 Market rises 10% Value of portfolio $110,000 $110,000 $110,000 Loan outstanding $0 $50,000 $90,000 Investor s equity $110,000 $60,000 $20,000 Gain in investor s equity 10% 20% 100% Market falls 10% Value of portfolio $90,000 $90,000 $90,000 Loan outstanding $0 $50,000 $90,000 Investor s equity $90,000 $40,000 $0 Loss in investor s equity -10% -20% -100% Market falls 20% Value of portfolio $80,000 $80,000 $80,000 Loan outstanding $0 $50,000 $90,000 Investor s equity $80,000 $30,000 -$10,000 Loss in investor s equity -20% -40% -200% Here, gearing has given Investor 3 a significantly greater return than that earned by Investor 1. This sounds great, but as you can see when the markets fall, gearing has multiplied the losses experienced by Investor 3. Worse still, if the investment falls by $20,000 or 20%, they lose not only their original $10,000 but a further $10,000. The extra $20,000 is money they owe and still have to repay. This example highlights that while sensible borrowing can be an effective wealth creation strategy, gearing can derail your investment plans when the levels of borrowing are high and markets drop. Remember, regardless of what the market does and how your investment performs, you always have to pay the interest! How do I gear? There are broadly three different ways you can borrow to invest: Using your home as collateral to borrow money, known as home equity lending; Contributing a portion of your own money, with the amount being matched by a lender, allowing you to invest a greater invested sum, known as margin lending ; and Investing money with a Fund Manager that uses your money (and its other assets) to borrow. These funds are known as geared share funds. Each of these methods will be discussed in detail. Statement of Advice / Page 35

36 Home equity lending What is a home equity loan? It involves borrowing against the equity in property you already own (e.g. your home) using current mortgage rates. How much can I borrow? The amount you can borrow is limited by: The value of your property, and The amount of any existing loans you have against your home. The equity you have in your property is calculated by subtracting the debt from the value of the home. Typically, a bank will allow you to borrow, in total, up to 90% of the value of your property. Benefits of home equity The simplest and perhaps the most cost effective way to gear. Home loans commonly attract the lowest rates of interest. The only costs are the ongoing interest and any initial fees to set up the loan. Very little restriction on what you can invest in. No requirement to contribute other funds to the investment. The lending institution will generally only require the regular payment of interest to fulfil your obligations. Disadvantages If the investments fall in value, your home could be at risk if you cannot otherwise repay the loan. Paperwork (and some Government and legal costs) may apply to the loan. Tax benefits and implications The interest and any costs associated with the loan are tax deductible where the funds are borrowed to purchase incomeproducing investments. In order to claim a tax deduction for the interest payments, your loan statements must be able to distinguish between existing money you owe on your home and the money you borrow to invest. Statement of Advice / Page 36

37 Margin lending What is margin lending? It involves contributing your own equity (usually cash, shares or managed funds), and borrowing additional money from a lender so that you can invest a greater amount. The loan is secured against the equity you have contributed, as well as the investment into which the borrowed money is placed. The interest charged on margin loans tends to be at variable rates. How much can I borrow? This depends on the value of the assets that you are contributing and where you invest the borrowed funds. The lending institution will lend up to a specific level depending on the asset the loan is secured against. This level is called the loan to valuation ratio (LVR). If you contribute $50, and you borrow $50, your LVR is 50% ($50 loan $100 total value). The maximum LVR permitted is usually between 66% and 75%. Benefits of margin lending There is generally no fixed term. Margin loans can often be terminated on seven days notice. You can borrow relatively small amounts. Borrowing minimums start at around $1,000. Relatively broad range of investment choice. Simple paperwork - generally no need to complete borrowing applications. The lender does not require you to provide them with detailed information about your financial position prior to the commencement of the loan. You can borrow either a lump sum or regular ongoing amounts over a period of time. Borrowing ongoing amounts is called instalment gearing. Disadvantages You must have your own equity to contribute cash, shares or managed investments. There are some restrictions on what you can invest into. The margin lender will determine the boundaries for your investment. The lender usually charges an ongoing fee, in addition to the interest rate, for keeping the loan. If the value of the investment falls, you may be asked to invest more money. This is called a margin call. Instalment gearing People new to the concept of gearing can take a more conservative approach by using margin lending to borrow small ongoing amounts. This is called instalment gearing. Rather than contributing and borrowing a lump sum, you can Statement of Advice / Page 37

38 slowly build up both your investment and the level of debt by making regular smaller investments. An example of an instalment gearing plan is contributing $200 cash and borrowing $200, to invest a total of $400 each month. It has the potential to reduce the risks associated with trying to time the markets because you are not investing all of your money at a single point in time. Margin calls A margin call is where the lender asks you to contribute more money to the investment. Margin calls occur when the overall value of your investment falls and the borrowed amount represents a greater proportion of the overall value. The lender asks you to contribute additional equity (i.e. shares, managed funds) or cash to repay a part of the loan. The purpose is to reduce the proportion of borrowed funds to a level that the lender is comfortable with. If you are unable to meet a margin call, the lender is empowered to sell some or all of the investments, pay out the loan, and seek payment from you for the difference between the proceeds of sale and the loan. We have provided more information on margin calls later in the fact sheet. Tax benefits and implications The interest costs associated with the loan are tax deductible. Statement of Advice / Page 38

39 Geared share funds What is a geared share fund? Geared share funds are similar to ordinary managed funds, but they are 'internally' geared. Basically, the fund manager uses the assets it already owns as security for borrowing. Benefits of geared share funds You do not have to borrow directly. Your liability is limited to the amount you invest, so there are no margin calls or requirements to contribute additional money. There are no interest costs. The funds are usually actively managed, which means the fund manager regularly reviews where the money is invested to take advantage of opportunities it identifies. Simple paperwork there is no need to complete borrowing applications. Disadvantages Greater volatility (relative to regular non-geared equity funds) due to the gearing within the fund No obvious visible tax deduction, although the gearing benefit is received by you. Tax benefits and implications You do not receive any tax deductions directly. All of the tax savings are received by the fund, and reflected in the performance of the investment. You receive the benefits through the value of your investment. What does gearing cost? The cost of your gearing strategy depends on the method you use to borrow. Generally your costs may include: Interest costs Loan set-up costs Ongoing loan management costs Insurance costs Remember, there will also be costs associated with the investment into which you place the borrowed money. It is important to understand all of the costs before you consider a gearing strategy. What are the repayment options? Depending on your gearing strategy, there may be a number of options available to you to pay your interest expense. Each option has its own benefits and should be considered in light of your own circumstances. Your financial adviser can help to determine the best repayment option for you. Interest-only payments. This allows you to maximise the tax deductions and minimise the impact on your cashflow. Principal and interest repayments. As you are paying off the loan, your interest repayments will reduce, and so will the available tax deduction. As the debt is repaid, your overall wealth increases. Statement of Advice / Page 39

40 Prepaying the interest in advance. This allows you to claim a tax deduction on the interest expenses earlier. This can be appropriate if you have surplus income available at the end of the financial year. What effect do interest rates have on a gearing strategy? The success of a gearing strategy depends on interest rates. If interest rates rise during the period in which you hold the loan, your cost of borrowing increases. This requires additional cashflow from you, but it also means you require a greater return on your investment to cover the costs. If interest rates rise dramatically and you are unable to afford the payments, you may be forced to sell your investment at an inappropriate time, such as when it is valued at less than the amount outstanding on your loan. If interest rates fall during the period in which you hold the loan, your cost of borrowing decreases. This reduces the impact on your cashflow and can help to increase the net return of your gearing strategy. The implications of an increase in interest rates on a gearing strategy cannot be ignored. As such, we will only recommend gearing if you have the ability to withstand an interest rate rise of at least two per cent. It is therefore extremely important that your annual expenses and cashflow are calculated correctly. We can help you with this process. Why is insurance a vital part of any gearing strategy? Adequate life and income protection insurance are necessary parts of any gearing strategy. This will ensure your family is protected from financial strain at a time of high stress and emotion. Life insurance can be used to repay your debt, if you pass away. This can help your family avoid a situation where they are forced into selling your investments to eliminate the debt. This is especially useful in times of poor market performance when selling the investments would result in a loss and eliminate the future potential benefit of the strategy for your family. Income protection insurance will ensure you have an income should you be unable to work for an extended period of time. Income protection insurance will help you service your loan commitments and hopefully avoid having to sell some or all of your investments to honour the loan. The cost of income protection insurance is tax deductible, however the maximum cover available is generally 75 per cent of your salary. Benefits payable from income protection will be taxed at your marginal tax rate. What are the tax consequences of a gearing strategy? In previous sections of this fact sheet we outlined some of the tax benefits associated with a gearing strategy, such as receiving a tax deduction for interest costs. However, you should never make a decision to gear for the tax deductions alone. Given the risks that you need to take when gearing, you should view the tax benefits you receive along the way as a bonus. There are also other tax consequences that you should be aware of. The income generated by your investment will be subject to income tax regardless of whether the income is paid to you or reinvested. As an investor you always hope to sell your investment for more than it was originally purchased. If this happens you will be liable for capital gains tax (CGT) the amount of tax payable will depend on the amount of the gain and your income at the time of the sale. At this time, we will assist you with strategies to minimise the impact on CGT on your portfolio. Statement of Advice / Page 40

41 Because of the tax consequences we encourage you to have your accountant review your gearing strategy to ensure it is appropriate for your personal situation. We also suggest you ask your solicitor to check the legal aspects of your loan agreements. Further information about margin calls If you choose a gearing strategy using a margin loan, you must be aware of the potential for margin calls. A margin call is a requirement by the lender for you to provide additional funds to re-establish the original loan to valuation ratio (LVR). You are allowed a limited fall in the value of your portfolio before a margin call is made. Your exposure to margin calls will depend on the amount of money you borrow compared to the amount of money you contribute. The greater the proportion of your money, the less likely you are to receive a margin call. Your portfolio can fall by a greater amount before the lender requires you to contribute additional capital (margin call) or reduce the loan amount. The following example illustrates the effects of margin calls on a portfolio of $100,000 with borrowings of $60,000. This represents a loan to valuation ratio (LVR) of 60 per cent ($60,000 loan $100,000 total value). If there is a 20 per cent fall in the value of the portfolio to $80,000, the LVR would reduce to 75 per cent and a margin call would be required to restore the LVR to 60 per cent. This could be achieved by either: (1) Lodging additional capital. That is, contributing an additional $20,000. (2) Reduce the loan amount by $12,000 to $48,000 (by selling down assets). This would bring the LVR to 60 per cent. This option crystallises some of the losses on your portfolio. Is gearing for me? If you are considering a gearing strategy, it is important to have other money available to cover the cost of borrowing rather than relying solely on investment income to meet the interest costs of your loan. Investment income may be irregular and your interest payment may be due before the income is received. Negative gearing is the term used to describe a situation where your borrowing costs, i.e. interest and any other loan costs, are greater than the income you receive from the investment. Negative gearing reduces your cashflow in the short term; however, the intended purpose of the strategy is that over the longer term, the growth of your investment will outweigh the negative effect on your cashflow Negative gearing highlights a need for you to have surplus cashflow before considering a gearing strategy. Unless you are investing the borrowed money in an investment with a guaranteed return, the amount of income you receive from your investment can fluctuate and at times may not meet your loan costs. Similarly, if the income from your investment does not change, but the interest rate on the borrowed funds increases, your borrowing costs will increase. It is therefore extremely important to have money available from other sources to help in these situations. Other types of gearing There are also other, more complex and less common, methods of gearing. These include: Instalment warrants - often used in self managed super funds; and Structured products. The following table illustrates the features of these less common types of facilities. Statement of Advice / Page 41

42 Lending facility Benefits Disadvantages Instalment warrants May be suitable for self managed super funds Leveraged exposure to individual or basket of underlying securities. Boosted yields via higher levels of dividend and franking credits. Generally higher interest and borrowing fees relative to other options. Must retain the instalment warrant until the end of the term to be able to own the shares outright. It takes time to administer and manage these products. Structured products / Protected equity loan These comments are general in nature as product features vary significantly. Guaranteed not to lose money if the investment falls in value and it is held until maturity No margin calls Able to borrow up to 100% of the money being invested The interest rate is substantially higher to pay for the guarantee Only a portion of the interest expenses may be deductible due to the capital nature of the protection Strict restrictions on investment options and rules governing the extent of the protection Very high break even point to cover high finance costs, usually in the vicinity of five per cent per annum after-tax capital growth Some funds may move your money into cash when the markets are experiencing periods of negative returns. This can limit future growth of your investment. Statement of Advice / Page 42

43 Whether you are putting aside $2,000 to use in 3 months or saving for your retirement, the things you need to consider before investing are the same. These are outlined over the following pages. Investing increases the value of your money to help achieve your goals and objectives. Meeting your objectives Reasons for investing will vary from one person to another. Common objectives include saving for a house, managing cash flow, paying for children s education, creating wealth, saving for retirement or managing retirement income. Different investments There are five different asset classes you can invest in: cash, fixed interest, property, Australian shares and international shares. Each has its own level of risk as well as a potential return. Types of investments Cash Cash is the most secure investment. The return you receive will depend on interest rates at the time. While cash is very low risk, the increasing cost of living (known as inflation) can decrease the buying value of your money. Tax on the returns should also be considered when working out the real, after tax, return of a cash investment. Cash investment can usually be accessed immediately ( at call ). However, if invested in superannuation and pension accounts, legislative restrictions must also be considered. Cash investment offers no growth. Fixed interest Fixed interest investments arise from loans. An investor lends money to a borrower who must then repay the loan as well as interest. Fixed interest investments differ due to: The type of loan issuer, The security/asset that backs the debt, The loan timeframe, and The interest rate. Generally, the longer the loan timeframe and the less secure the lender, the higher the interest rate. Typical fixed interest investments include: Term deposits that provide a regular income at a fixed rate for a set timeframe. Mortgage trusts provide regular interest income at variable Statement of Advice / Page 43

44 rates and a high level of capital security. Investors funds are pooled and invested mainly in registered first mortgages secured against a spread of freehold property. Usually only 66% to 75% of the properties value is lent. Bond trusts provide regular interest income through pooled investment in Government and corporate bonds. These funds offer high long-term capital security and the potential for some capital growth in addition to interest income. Generally you can only access money from fixed interest investment at maturity. Again, when investing in superannuation and pension accounts, legislative restrictions must be considered. Australian shares Australian shares are investments in companies listed on the Australian Stock Exchange. As a shareholder you become a partial owner of the company and therefore benefit from the profit and capital growth the company achieves. Investment returns are paid in the form of dividends (a distribution of the companies profit) and capital growth (reflecting the increased value of the company over time). The upside of growth and profits comes with the risks associated with owning any business, cost increases, regulation changes and increases in competitor presence. International shares International shares allow you to become a partial owner of an international company, the same as you would in an Australian company. This can offer opportunities that are not available within the Australian share market and provide further diversification to your portfolio as different countries' economies grow at different rates. The Australian share market only represents about 1% to 2% of the world share markets. Returns on international shares are affected by changes in currency exchange rates. While the purchase and sale of Australian shares is relatively easy and the cost to buy Australian shares is relatively low, investing directly into International shares is difficult for the general investor. Most investors have exposure to international shares through pooled investment structures, such as super and managed funds. Statement of Advice / Page 44

45 Property Residential For many Australians, property is their first and most significant investment. Generally property is purchased to meet housing needs, not as an investment to make a profit. Some people may also buy a rental investment property. The risks of direct property include interest rate changes, tenant vacancy and property damage. Property is an all or nothing investment you can not sell a room if you need some cash, you have to sell the whole asset. Commercial Commercial and industrial properties generally generate higher rental incomes, however, most people cannot afford to invest directly i.e. buy a whole office building. An easy way for Australians to invest in commercial property is through pooled investments such as a managed fund or listed property trusts. Property is a valuable inclusion in most people investment portfolios because property values tend to move independently of share prices. Including property in your portfolio can smooth out the overall return on your investments. Selecting your investments Only take as much risk as you need to Investment risk is crucial to achieving higher investment returns over the long term. It is also important to remember that you should only take as much risk as you need to achieve your goals. If you can achieve your goals by taking on a low level of risk, then why risk your money and your goal by taking on a higher level of risk? Statement of Advice / Page 45