Trowbridge Report Delivers far-reaching change on Insurance advisers

You have to wonder where some of these consultants are coming from when they make recommendations for our law makers (read politicians). The Trowbridge Recommendations which deliver far-reaching change on Insurance advisers freely states that the cost of writing an insurance policy for an adviser is between $1500 and $3000.
What Trowbridge recommends is that the Initial Advice Payment (IAP) is a maximum of $1200 or no more than 60% of the premium is below $2000. From there the adviser gets an ongoing commission of 20% per annum for the life of the policy.

This is a guaranteed way of losing money if this is your business. Governments can go for decades running up deficits just look at Australia however businesses cannot. This will be a far-reaching change on Insurance Advisers.

Lets look at the numbers. According to Trowbridge it costs the adviser between $1500 and $3000 to get a clients insurance underwritten. Remember this is Cost recovery, no profit. Read my point above, Governments can work on the no profit model however banks do not allow businesses to do that.

Lets assume your insurance policy has an annual premium of $3000. The maximum an adviser can get is $1200 in the first year and then $600 pa after that. The $600 will increase as the premium increases so that is good for the adviser business however dont tell any legislators or they will ban it.

For an adviser to write this policy it will take them 24 months to recover the cost of writing the policy and therefore will not make a profit for 36 months. I have five staff in my office and they like to be paid each 14 days so taking two to three years to get a positive cashflow from a client is not going to be too helpful in paying the staff if new life insurance is all that we do.

Trowbridge clearly acknowledges that the adviser will be losing money in writing insurance policies in this way. What is his message here ? He says he is trying to have a balance between what the true cost is for an adviser in writing a policy and eliminating any behavioural doubt as to whether the adviser is working in the clients best interest. Whose interest is Trowbridge working in here ? The staff of an advisers practice will not be too happy and how does the consumer benefit if the advisers are not here to speak with them anymore. When I said that it will take 36 months to make a profit from writing an insurance policy that assumes the adviser does not speak with the client in that three year period otherwise it will take longer to make a profit per client.

If advisers in small business cannot write life insurance policies as they are losing money with every policy they write who will write them ? Look at the Iron Ore industry now as a parallel.

The small miners are losing money with every tonne they produce and are going to be closing down really quickly if this continues for another 3 months. That will leave the giants BHP and Rio.

Who are the giants in the life insurance industry ? They are likely to be the ones to survive as they have the stored up capital which will allow them to run loss making advice ventures so long as they are funneling products through to the main business. That sounds remarkably like the funds management advice business for a number of years that FoFA was designed to overcome and now Trowbridge is heading that way for the Life industry as well.  Are the main players in the funds management industry also the main players in the life insurance industry? Interesting question. You will have to research the answer yourself.

My underlying question after this long preamble is how can a government consultant come up with a policy that freely acknowledges that anyone in a particular business is going to lose money for 2 or 3 years on each new client if their recommendations are implemented. What business school did this consultant go to and how does he expect a business to survive under this regime?

No doubt the answer will be that he doesn’t expect them to survive and that is the desired outcome of the proposals however how does a family benefit if no one will talk to them about what family protection should be in place. The BHP’s and Rio’s of financial services will still be there and no doubt if you go to one of the big guys they will have to have the other guys products on their recommended list as per the new proposals and those products from the other institution will get an equal representation in their advice documents. (I am really excited as the tooth fairy is expected at our house in the next day or so.)

ONeil Financial Planning will thrive in this environment. We charge an advice fee for the financial planning work that we are doing and have no strong interest in the products that form the outcomes of the advice. We love the idea of higher ongoing revenues and have been using hybrid or flat commissions for many years where we provide insurance solutions. I have no doubt the changes foreshadowed will come into being as the Financial Services council will be strong supporters as will the Industry Funds and the Banks. They will want to clean up the industry for the benefit of the consumers !  Are they already the giants in the life insurance industry and the funds management industry ? The answer to this question is becoming more important. According to the stats the major banks and one big life office already own and/or control 70%+ of the advisers in the industry and they want to clean up the industry. Surely they already have that option by looking internally at their current business practices.

Who are the BHP’s and Rio’s in the Financial services sector and who will benefit ? If you are not familiar with the current Iron Ore saga let us look at the retail options in Australia beyond Coles and Woolworths. Australia’s cost of living is going through the roof because concentration of ownership in key sectors of the economy are taking away price competition and the Trowbridge report is going to eliminate the only people that have been ringing the bell about price sensitivity in Insurance premiums in the past.

I know everyone is disgusted scoundrel advisers are twisting policies every two to three years for the huge up front commissions however ask yourself if you would change your existing policy to a new one if the premium was increased in the new policy compared to the old one. Under the new regime no one is going to be able to be paid for 5 years if they want to discuss with you a change in the policy to get a reduced premium so who is going to do it. Allowing that no one is doing it what will happen to the premiums in the future ?

No doubt we will review this blog in 5 years and see how stupid it looks. My next blog is going to be about life insurance as well and something that happened this week so read on. It will be designed to highlight some of the issues in life insurance and definitions in your daily life and why you need to deal with someone that knows what they are doing. Reading between the lines Mr Trowbridge believes you should be prepared to pay for the advice yourself rather than through paying insurance commissions.  Look out for my next blog on life insurance.



Australian Shares “The Chase for Yield”

During this company reporting period there has been a lot written about shareholders buying companies in the “chase for yield” . The discussion is that interest rates are low and investors some of them first time investors are buying shares in companies to increase their income for retirement.

The thing that I have noticed in looking at some of the company results is that some companies have increased their profits and the dividend has risen accordingly. Other companies have reduced profits however they have maintained or increased their dividend to keep investors on side.

Ask yourself this question,

Do you think the dividends from a company are more sustainable in the future from a company that is increasing its profits or from a company that is struggling this year and are maintaining the dividends to keep the market on side ?

One industrial company this week increased profits by close to 20% and increased the dividend by the same amount which is a nice pay increase for the shareholders.

Then there was another mining company that recently had a “statutory loss” of more than $100m however increased their dividend and the share price had a sharp increase.

There is a lot more questions to be asked before you purchase shares in a company and we normally use a combination of managed funds and direct shares to ensure good diversification for your portfolio’s capital protection.

The interesting fact about the industrial company that increased the dividend is that it is now trading on 1.5% dividend yield however it will not be purchased by shareholders chasing yield. However a client I was meeting with this week purchased that company a few years ago when it was on a 2% dividend yield. Their dividend yield is now over 5% on their purchase price which was $17.60 and the share price is now well over $60 per share so not only have they had a good increase in dividend yield they have also had an increasing share price as well.

An increase in share price is only sustainable in the long term by an increase in profit. Anything else is market hot air or short term talk by the company to retain shareholder support until things improve.

We still have clients, one of them only just turned 50 and others now in their 70’s and 80’s who bought 2,500 CBA shares on the float at approx $5.30 each. Their dividend yield is now over 60% as the CBA now pay over $3 pa in dividends and they still hold the shares.

They could have sold the shares at $10 when they would have made approx 100% profit however the good thing is they didn’t get scared out by good performance and they have made an extra $80 per share and do not have a days worry about their investment.

Simple message, Don’t buy shares based on their Dividend Yield alone. A company needs to have sustainable profits which means there needs to be a good prospect of increasing profits. That is the way that you will preserve your capital value and then spend the dividends.

You need to determine what cashflow you require from your investments and then your share portfolio needs to perhaps have some “chase for Yield” type stocks however more importantly it needs to have companies with sustainable and growing profits as that is what will give you the growing income yield as described in a couple of real life examples above.

When interest rates rise in the future which they will at some point the “Chase for Yield” stocks will be less attractive based on something that has nothing to do with the company and that is where the share price will fall and you will lose capital value which is not what you want if you can avoid it.

Share prices rise and fall all the time however you want some substance supporting your companies share price and that substance can only be growing profitability and not that the historic dividend yield is high compared to the cash rate in the bank which can change at any time.

It is critical to have a clear vision of exactly what you are looking for and why and that way you have a strong probability of getting what it is that you are after.

Expenses Key to Secure Retirement Income with Certainty

The key to a happy retirement is to understand your expenses. Most people don’t like to have a ‘Budget” which is fine however understanding your expenses has nothing to do with a budget. Understanding your expenses is to understand what it costs each year when you wake up on the 1st January to go about living a basic no frills lifestyle that you enjoy. On top of that you then add the cost of the things that you like to do and importantly your ” Bucket List” items.

What this does is gives you an understanding of your basic cost of living and then you add your discretionary cost of living. The base cost of living will increase each year as you get older. The discretionary cost of living will reduce as you get older as you wont be bothered doing things as you get older irrespective of whether you can afford it or not. Your health could also have a say in what you do in this regard so it is important to get the “Bucket List” things done whilst you can as you never know what is waiting for you around the corner.

The outcome of knowing what YOUR perfect lifestyle costs is that only then can you determine what level of income producing assets you need to live this glorious retirement lifestyle.

Don’t delay, contact us now to work out what you need to do to live YOUR PERFECT LIFESTYLE.  It is never to early to start planning. You wont regret it.



Investing for your risk tolerance

How do you know if your assets are invested in too aggressive a manner for your risk tolerance ? This is a question investors have been asking themselves for decades without coming up with a sensible answer.

Ask yourself these questions,

A. When you read the newspaper, watch the news on TV or go online to check your investment values, do you do it more than once per week ?

B. When you are looking at the value of your investments do you feel disappointed when the asset values have fallen?

If you answered yes to both of these questions your portfolio is probably too aggressive for your risk tolerance. If you are not convinced with my assessment how often do you check the value of your home?

If your answer is never it is because you are comfortable with the value of your home and you dont feel that a change up or down is relevant or worth worrying about. Some people check the value of their properties regularly and they are likely to have a lot of debt associated with the properties and are therefore again too risky for their risk profiles.

If the value of an asset is worrying you then it is too risky for your risk tolerance or it means you have too much invested. Life is too short to have these worries so realign your investments to some thing that you are comfortable with.

Financial System Inquiry Superannuation

The Murray Financial System Inquiry suggested that the Global Financial Crisis highlighted the strong role that the large pool of superannuation capital had in its “unleveraged capacity” in providing assistance and stability to the capital markets and broader economy at a time of high stress. The Inquiry goes on to say that the sharp increase in leverage in the superannuation system, although still low in the overall value of superannuation, if continued at this accelerating rate will reduce  the superannuation systems capacity to be that stabalising influence in the next financial crisis. As a result the Murray inquiry into the Financial System recommends that future borrowings should not be allowed in superannuation.

It also goes on to say that the risk of borrowings in superannuation and particularly in Self Managed Superannuation funds passes the risk of the strategies back onto the community as if the leveraged investments do not perform as they should in superannuation funds then the obligations falls to the taxpayer to fund the investor by way of age pension benefits and that is not fair to the community at large.

Following the GFC you dont have to go to far to find someone that borrowed money to invest in an asset that has lost 50 or 60% of its value or more and the problem they have is the debt is still there needing to be repaid. The recommendations from the Financial Services Inquiry will not stop people investing in assets that lose some or all of their money however in the future after an investment has performed poorly you wont have to repay a loan as well.

It is important to note that there has not been large leveraged losses in the superannuation system to date and this is a recommendation designed to take away that risk before it becomes an issue. Eg prevention is better than cure.

Financial System Inquiry Unclaimed Money

In a win for common sense the Financial system inquiry recommendation 41 said that the rules for unclaimed moneys should be changed back to 7 years inactive rather than the three years that it was changed to in 2012. Three years was always too short allowing that you may be wanting to save for school fees or other longer term ventures and then the government takes your money in 3 years. This was always totally unreasonable and it is a good outcome if adopted by the Government. This inquiry is partially designed to improve long term savings and this is a step in the right direction.

Financial System Inquiry Legacy Products

Recommendation 43 in Appendix 1 of the Financial System Inquiry discusses the 25% of invested funds in Legacy products are old products that are closed for new investment or obsolete as they presumably have uncompetitive charges or terms.
These products incur great costs for fund managers and are generally not that great for the investors that are still invested however there has always been the issue of capital gains taxes and other exit fees that may apply in these cases.
The financial services inquiry has suggested a no disadvantage test for the consumer however then discusses the consumer paying a fee to cover the administration cost of moving to another fund.
Two issues here.
Considering there should be cost savings to the fund managers you would think the fund manager would be happy to wind up the old fund by rolling benefits into a new fund. They perhaps dont want to wind up the funds because the new fund is going to have much lower management fees.
No doubt the Financial System Inquiry thinks the consumer should be happy to pay a small fee to get out of an old uncompetitive fund. The reality is they are still in the fund because they are not prepared to pay to move or are completely disinterested and will not want to send good money after bad.
The consumer has already paid a big price being in the old funds and that price has been paid to the fund manager so the fund manager should pay for the rationalisation which will be to their long term benefit.
A by product will be that they will potentially be able to re engage with consumers who should be happier in the current market priced products.

Superannuation and Retirement Incomes Murray FSI

Appendix One Recommendation 37 is to have superannuation funds provide retirement income projections for their members with their annual statements.
It is felt that this level of information will give more tangible interest to the member and they will have more “Buy in” to their own superannuation benefits and what it will mean to them in retirement.
This is a laudable goal from the Financial System Inquiry and will provide more and better information for consumers about their superannuation and retirement incomes however the inquiry acknowledges that it is an issue where people have more than one fund and it also highlights that calculators are required so that people can build on this information which would include useful information such as Centrelink age pension and other things.
It suggests that the ATO could be a place for these calculators to reside and it will be interesting to see if the ATO is prepared to divert some of its budget to these objectives.
This increase in information will be helpful to consumers however it still cannot touch the basic information that the average person needs to know which is how much will “My Retirement cost ”
Everybody is different in what their retirement will cost and true comfort and security in retirement will not be achieved until you know what your retirement lifestyle will cost you and how much income or cashflow you will get from your assets and any Centrelink age pension benefits.
These initiatives if activated will provoke more interest amongst members about what the ultimate objective of superannuation is and that should be applauded however more research will be required by consumers to ensure they achieve the lifestyle that they desire in retirement

Super Conversations Anne-Marie Corboy HESTA CEO

A great article in Financial Standard 17 November 2014 with retiring CEO from HESTA Anne-Marie Corboy who had been at the helm for 16 years of stunning growth in the fund.

She feels that the media has a “Lopsided Fixation ” with 10% of the members who earn a lot of money or have large balances and not on the 90% where superannuation is making a huge difference and who the SG system was designed for. I couldnt agree more and would include the politicians in that as well.

We see the benefits every day of the great work that superannuation is doing for the rank and file person that it was designed to assist. I have just had a teacher and gardener leave the office and super is a huge and growing part of their retirement plans and the teacher being in the SG system most of her working life is seeing a really strong balance as a result. They have a strong platform to build on and now that the home loan has been paid off life will really become much more secure for them. The combined super balance is 50% of the value of their home and set to explode over the next 10 years to retirement with greater contributions.

Anne-Marie also makes a number of other good points about superannuation benefits for the low income earner and how it really is benefiting their lives for the future.

Superannuation is producing great benefits for individual members and a by product is the economy as a whole benefits from the great pool of savings that can be used within the economy which was never better demonstrated in the early part of the GFC where the banks needed further capital quickly to ensure their financial security and viability and they were able to source it quickly and relatively easily in Australia from the superannuation savings pool.

This is a great article about a quality superannuation executive and lets hope we see more of AnneMarie Corboy in business and/or public life in the future. Volume 12 Number 22 17 November 2014

Orango Tango

Do you have superannuation? Life insurance policies or other investments and don’t see your adviser or know who they are? Contact us and we will help you take control of these important financial assets whilst supporting the Organutan Project.

Contact us regarding your super and we will review it. If we can improve it we will provide detailed recommendations for you. If it is already good then you can leave it as it is and have that comfort whilst having a productive relationship with us.

Super Video

We can do the same for your insurance policies and provided detailed information for you. If you have an adviser that you never see why not give us an opportunity as you cannot be worse off and the Orangutans will benefit.

You might not have a plan as to how you’re your hopes and dreams for a wonderful life works together with your finances. We can prepare a detailed plan for you that will prioritise exactly what it is that you would like to achieve with a time line as to when those things will happen. Wouldn’t you feel better as you cross things of your Bucket list?

Intro Video

If you feel that things are overwhelmed with home loans, school fees, cost of living issues then contact us and put a plan in place for you. It will be the best thing that you did as you take control of your situation. We will help you do that and monitor your progress along the way. . .

Please look at some of the video’s on the website and see what our clients say about our services. We value our long term relationships and would like to work with you for the next 10-15 years to set you up for your ideal lifestyle.

These are all different ways that we can assist you and your family and whilst we are doing that you are also contributing for Orango Tango.