Retirement | Slack Investor

May 2018 – End of Month Update … and the Productivity Commission creates new Hero

Slack Investor remains IN for US, UK and Australian index shares.

The Australian Index (+0.5%) has been a bit of a laggard with the banks still generating bad news and signs of the Australian property market starting to slow. The UK Index (+2.3%) and the US index (+2.2%) have continued to have solid growth.

The good news on the Australian Index (ASX 200) is the opportunity for Slack Investor to crinch up his stop loss from 5629 to 5724. A small movement upwards, but I always like doing this as it means that the Index has now set a new “higher low” The explanation for this technical stuff can be found here. A new “low” (or minimum) has been established at 5724 and this is my new stop loss on the monthly chart

Monthly chart for the ASX 200 – From Incredible Charts

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Productivity Commission gives the Super Industry a bit of a “Ginger Up”

I have been a fan of Australia’s Productivity Commission (PC) ever since I read their 2010 report into the sorry state of Gambling in Australia. The report is full of thought provoking and shameful material like- Australia is the world leader in number of poker (slot) machines per capita and Australia leads the world in gambling losses per person – but I digress…

The “Ginger Up” refers to an ancient horse racing practice that I wont elaborate on here – but it does make me squirm! The PC have just delivered their draft report on the state of Superannuation in Australia. God bless them .. they have put in “black and white” the rorts that exist in Australia’s good but not great superannuation system – and they have created a new Slack Investor hero.

The lead author in the report is the Productivity Commission deputy chair Karen Chester who has delighted Slack Investor with the following refreshing quote. Ms Chester’s attitude was like a snowball in the face after the my last depressing post on the mostly self interested world of banks and financial advisers.

Karen Chester – Photo from Quentin Jones

“the only thing I care about is member outcomes” from source

The Productivity Commission identifies two structural problems with Australia’s super model. The unintended creation of multiple accounts and the entrenched underperformance of some of the super funds that are allocated to the employee.

From Productivity Commission Superannuation report.

“Members are really lost in the weeds of product proliferation with 40,000 products. They’re bamboozled by poor disclosure and … poor advice.” Karen Chester from source

I am hoping that Ms Chester will get the final report out with haste. Slack Investor loves the smell of the draft report. The Federal Government would do well to take up her recommendations. The info graphic above puts some real world figures on what might happen if the PC recommended changes to Australia’s superannuation model are adopted.

It is a promising sign that the current Finance minister seems to recognize the problem.

“Super has become worse than a honey pot; it’s a trough.” – Financial Services Minister Kelly O’Dwyer source

Slack investor will look at the “trough” and PC draft recommendations in the next post. There are things you can do right now to protect your super.

The Royal Commission into Finance … Yes Please!

David Rowe cartoon From the Australian Financial Review – May be subject to Copyright

The incomparable David Rowe has a daily habit of drawing great cartoons. This image describes the current situation with the excrement covered big 4 Australian bank pigs dragging the Australian Treasurer and the Minister for Revenue and Financial Services along for the ride in front of the Royal Commission.

Lets start again with the astounding ASIC revelation

ASIC found that in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients. Further, 10% of the advice reviewed was likely to leave the customer in a significantly worse financial position.

Lets get this straight … I rock up to to a financial planner and I only have a 1 in 4 chance to get some advice in my best interests …. and, I have a one in ten chance of ending up in a significantly worse situation … What is going on !!!! – these are the people who many depend upon for sound financial advice.

The sad case of Sam Henderson

Sam Henderson outside the Royal Commission from news.com.au

Slack Investor writes about Sam only because he is still gobsmacked with the evidence presented to the Royal Commission on 24/04/18.

A bit of background … Sam Henderson is the very public and enthusiastic face of Henderson Maxwell, a financial advice and accounting firm. Sam has been everywhere in the Australian financial media for the past few years with his own weekly TV show and newspaper columns. Slack Investor admits to being a great fan of Sam’s podcasts Sky News “Your Money Your Call” presented weekly on Thursdays. In these podcasts Sam, and others, dispense generally good advice about retirement issues and superannuation.

I have found their program to be extremely informative. They have talked a lot about Self Managed Super Funds (SMSF’s), retirement strategies and taxation – Advice that Slack Investor has found very helpful.

However, Sam has fallen foul of the Royal Commission. Henderson Maxwell charged $4950 up front to give advice to a client that would have been to her detriment – to the value of at least $500 000. It appears that Sam’s firm has acted in their own self interest rather than the clients. Specifically, Mr Henderson urged his client to establish a SMSF and remove her super investments from a generous public sector deferred benefit fund to invest in Henderson Maxwell products, which would have earned him ongoing fees.

The fees proposed by Sam Henderson’s advice would have annually amounted to $19,000 while the client’s existing strategy was costing her $2768.

Although, through this public shaming, Sam has carried a lot of the heat for the widespread malpractice by the banks and financial planners. This case represents the huge problem with the financial industry in Australia and the reason why Slack Investor has educated himself in the dark art of finance rather than rely on a financial advisor to dictate strategy for him.

One of the most galling things about this case is that Henderson Maxwell is considered to be one of the leading firms for giving financial advice. They are the winner of the 2016 Australian Association of Financial Advisers (AFA) award for practice of the year. The AFA advertise their advisers as “Trusted, Knowledgeable, Reputable, Respected”

Slack Investor admits to being a flawed human – but he would hope that he would act ethically even as the financial system drapes its lucrative reward tentacles tantalizingly in front of him. In the case before the Commission, Sam Henderson responded to financial incentive.

What is wrong with the Financial Advice Industry?

Charlie Munger -Source

“Show me the incentives and I will show you the outcome” –

Charlie is vice- Chairman of Berkshire Hathaway and dispenser of financial common sense – another Slack Investor Official Hero

This sums things up. At the moment most financial advisors are given incentives to sell their own products – there is no incentive to represent the best interests of their clients. The regulator ASIC has done a review of the quality of financial advice that had been provided to SMSF’s, and found that

90% of cases had failed to be in clients’ best interests.

It is hoped that the Royal Commission will accelerate change. The Financial Review reported that four years ago the head of the Financial Planning Association (FPA) called on financial planners to unite and push for the separation of product from advice. In the meantime, the vertically integrated financial planning money machine with its fees and trailing commissions has kept on rolling on …

The Hayne Train should address these issues before finally pulling up to the station – While we are waiting, if you really need a financial planner, only use a truly independent advisor registered with IFAAA – No affiliations with product, no commissions and no asset fees . There will be an upfront fee for the advisor’s service – but this fee should be small in comparison to the ongoing costs associated with the lifetime tenure of an affiliated advisor.

Fat Pigs and Fat Cats

From fithfath.com – The image is from the action rhyme “… this little piggy had roast beef” – but its such a great picture .. it’s in!

“… the farm had grown richer without making the animals themselves any richer — except, of course, for the pigs and the dogs.”

George Orwell – Animal farm (1945)

There is a bit of an animal theme in this post as Slack Investor pays tribute to George Orwell and his book Animal Farm. The “pigs and the dogs” have all the power in Orwell’s allegorical tale – and, with Australian’s paying $31 billion annually in super fees, there are plenty in the superannuation fund industry that are getting richer like the “pigs and the dogs”.

In common with most of the school essays that I wrote … after an interesting start, things start to fall apart … and I can’t stretch this narrative too much further. In Animal Farm, two of the leading pigs inspired the other animals to revolt against the humans … and, I cant see any of the retail super fund executives (who are benefiting from the status quo) getting us to demand lower fees – So it is up to us … Come on other animals … Let’s break out of our “profound disengagement” with our retirement savings and … Let’s revolt against these fees!

A good start would be to avoid most of the large institution owned retail funds (big banks, Macquarie, AMP) which creamed $12 Billion in super fund fees during 2016. While they were doing this, they delivered returns of 2 per cent less (pa) when compared to Industry super funds over 10 years. This under-performance, if continued, could cost $200,000 in retirement savings over a working lifetime.

So stand tall on your hindquarters all you downtrodden animals and firstly check where your current employer-paid super payments are going.

With few exceptions, you have a legal right to choose where your employer pays your superannuation contributions. If you formally notify your employer of your preferred fund, they must direct their employer contributions into the superannuation account of your choosing.

From Goodsuper.com.au

A recent survey by Stockspot “Fat Cats Fund Report 2017” looked at 4,102 Australian funds, sorted them into categories from Conservative to Aggressive then filtered them for relatively poor performance after fees over 1, 3 and 5-years. Stockspot calls these poor performers “Fat Cat” Funds.

At the other end of the scale, there are the “Fit Cats” with relative outperformance – these are the ones that you want! Stockspot found that fees were really important when measuring performance – if you are in a fund charging more than 1.5% per year, it is at high risk of becoming a Fat Cat Fund – to check how your fund rates according to Stockspot, go to this link.

A comparison of Retail Super funds and Industry Super funds – and how they fit into the Stockspot FatCats and Fair Cats rating system – From Stockspot.

So, as banged on about in a previous post, Industry funds generally have lower fees but Stockspot recommends looking further into the relative performance of each industry fund (after fees) over a period of at least 5 years as there is considerable variation in performance.

To flog a dead horse ( You will have to read Animal Farm to really get this pun … Sorry Boxer, Vale!) … and with apologies to George Orwell again …

Not all industry super funds are equal … some are more equal than others

Spaceship … Let Me Out Here!

Hey you Millennial dudes and hipsters… Suh!

Space … sounds good … its so snatched! … Spaceship … even better. Come on … lets get on board. Superannuation is so boring … but Spaceship .. Its so now – isn’t Elon Musk working on one?

What Slack Investor is referring to is the reach out to the younger crowd of cool new investor products that will look after your superannuation in a really cool way. Spaceship, is just one of the new breed of disruptors (e.g, Zuper, MobiSuper, Grow Super) that is encouraging you to put your super investments into a high tech sounding enterprise that focuses on new technology companies. It seems that their marketing push has been successful with at least $100 million in funds under management for Spaceship.

Now, Slack Investor has a soft spot for disruptors that make use of new technology to help the investor work more efficiently through lower costs and new platforms. However, Spaceship and their ilk are not, so far, disruptors. They are just a repackaging of the same old greedy financial industry that are trying to separate the investor from their hard earned loot.

We had a look at the critical importance of fees in investment in an earlier articles here and here. Despite the marketing fluff, Slack Investor is getting off the couch and drilling down. A highly recommended process before you part with your money to anyone. Spaceship fees are 1.6% plus administration, MobiSuper fees 1.5% plus admin fees, Grow Super fees are 1.85%! Fees are critical to investment returns.

The same drilling down process can be done in the USA with Individual Retirement Accounts (IRA) or employer sponsored 401(k) plans. Google is your friend – Long term performance and Fees Fees Fees is what you are looking for. A good articles for the USA on fee impact can be found here, And for the UK here.

The Australian Securities and investment commission (ASIC) says

A 1 % difference in fees can lead to a 20 per cent difference in the value of a superannuation benefit over 30 years.

From Hostplus – Money Magazine Best of Best 2017

The above table shows some existing funds that have established long-term returns and with a fee structure less than 0.5% for $50000 invested.

So get out of the spaceship … and relish life on planet Earth with some low cost super funds … they are so “On Fleek” as far as your money is concerned.

Superannuation … Engage! – Part 2

You have been busy (and definitely not Slack) and gone through the paperwork that combines your super funds into one fund that you will keep for your working life. You have probably found an Industry Super Fund provider with established performance and low fees … Sorted!

Slack Investor is proud of you!

However, a little more work is required. The default investment option for most funds is called “balanced” – that sounds pretty cool – who wouldn’t want to be balanced! Generally Balanced options comprise 60-70% in growth assets and 40-30% in income assets.

The options that your fund may offer you are … in terms of increasing risk are

Cash – Invests 100% in bank deposits or other ‘capital guaranteed’ products.
Conservative – Around 30% in shares and property with the majority in fixed interest and cash.
Balanced – About 70% in shares or property, and the rest in fixed interest and cash.
Growth – At least 85% in shares or property.

If you are young … go for Growth, or High Growth … every time! Your super will be invested for 40-50 years and this is plenty of time to ride a few bumps that Growth assets such as shares and property can sometimes throw … Embrace risk and ride these bumps …. It is a good lesson to realise that the beautiful dance between risk and growth must be part of your investing life – Without risk, it is impossible for your investments to grow substantially.

Depending on your time frame, your tolerance to risk will vary. There are good reasons for someone approaching retirement to step back from a growth at all costs investment strategy. But, if you are just starting your working life, and want to grow your superannuation in a meaningful way … time is on your side … and risk is part of this process …

Australian Super have crunched the numbers and found that

YOUNG workers choosing “low risk” investments for their superannuation may be up to $170,000 worse off

The appealing sounding “low risk” options mostly deliver returns not much higher than inflation … And, we are not interested in just tracking inflation … we want growth!

If your superannuation amount is low and you want to give it a bit of a boost, and you earn less than $51,021 (2016/2017 year), the Australian government runs a co-contribution scheme that will reward you on a sliding scale – If you earn less than $36,021, the tax office will automatically kick in a maximum $500 for a $1000 after tax contribution to your super fund – This reward gradually tapers to zero as your income approaches $51,021. This is a pretty good return for your investment!

Grandparents and parents please note – if your wonderful offspring have a part-time job and a compulsory super fund – and you have a windfall that you would like to pass onto the next generations that cannot be frittered away on teenage pleasures – I am reminded of the fantastic George Best quote here.

I spent a lot of money on booze, birds and fast cars. The rest I just squandered.

Despite the wisdom of George Best, a gift of $1000 that would go directly to your loved one’s super fund would attract this govt co-contribution and be a great lesson in the benefits of compounding interest.

Superannuation … Engage! – Part 1

Most Australians, particularly young Australians, rarely show interest in their superannuation(retirement)fund. I can understand this when you are just starting your working life and your experience with super is just to see a slab of your pay earmarked for some obscure fund that you wont be able to access until you are almost fossilized at the age of 60.

However, it is time to engage … our super fees are too high in Australia … and a lot of the problem is the design of the system … and apathy. The Australian compulsory superannuation system is much envied – However, it could be improved – your default fund is decided by your employer and this, annoyingly, could change with each new job – it is time to take control!

According to the Super Sting report put out by The Grattan Institute, Australian’s pay $21 billion a year in super fees. Australians pay fees at almost 3 times the rate of other OECD countries. The report states

… a 30-year old Australian today will have his or her super balance reduced by almost $250,000 in fees (in today’s dollars) at retirement!

This is too much! Set aside an evening where you hunt down the latest super statement from your fund and do a bit of google research. I would throw in a glass of wine … but that’s just me!

Sure … there is a delay in getting your super … but it is your money, why give to the bloated financial industry!

Many super funds ask you to pay fees of up to two per cent per year to have your compulsory superannuation ‘managed’ However, with a tiny bit of effort, it is possible to restrict your super fees to around 1% (or less!) per year. This means a person with a fund balance of $50,000 could reduce their fees from around $1,000 per year to less than $500 – just by filling out a few forms .. the whole process is outlined on the ASIC Moneysmart site – I will borrow and paraphrase these steps …

Choose a fund – The Slack way is to let someone else do the legwork for you and go to the independent site SuperRatings – they list a top 10 funds (I have shown the top 5 – over a 5-year period below). Note that on this trawl, they are all Industry funds. Retail funds usually have lower returns as they have higher fees.

TOP 10 RETURNS AS AT 28/02/2017
Rank	Fund Investment Option	Return	Return Period
1	HOSTPLUS – Balanced	10.80%	5 year
2	Cbus – Growth (Cbus MySuper)	10.66%	5 year
3	UniSuper Accum (1) – Balanced	10.56%	5 year
4	AustralianSuper – Balanced	10.54%	5 year
5	CareSuper – Balanced	10.54%	5 year

Don’t get carried away with small differences in returns but, as well as previous returns, take a look at the other important factor, yearly fees – RateCity has sponsorship deal with some super providers, but their listing on performance comparison here shows typical yearly fees on $50k balances – If you can get fees $500 or below (<1%), you are doing OK.

Check your insurance cover – Income insurance is usually a good idea, and this is a separate component to your fees- life often can sometimes throw up something unexpected and a basic policy might help you out in times of trouble. For older folk … near retirement with equity in your house … this insurance is not so important.
Open a new account – Contact your proposed new fund and set up an account – no upfront transfer of money is required … this will come later. Ask them for all details to tell your employer – Choose well … and this will be your super fund for your working life.
When your new fund is established, tell your employer – Make sure they know where to pay your super and make sure you have your new account number. Your employer will have to enter these detail in the payroll software- Keep this fund for ALL of your jobs when you fill out your employee information forms!
Rollover super to your chosen fund – This is simple if you have only only one existing fund – your new fund will have a form that you can use to request a rollover from your existing fund. OR, if it is complicated and you have several funds going, you can combine these online through myGov,

There is more to say on this topic … stay tuned for part 2. For more information take a look at the ATO’s keeping track of your super page.

Most Australians Struggle in Retirement – What to do? – Part 2

The previous post identified residential property or shares as likely growth investments that all investors should become friendly with.

The economist Shane Oliver has collected some data on the performance of each of these investment vehicles that goes back to 1926. The graph below uses a logarithmic scale which is quite appropriate for such long term reviews where there is a big range of values. The good thing about this scale is that in percentage terms, a vertical movement of, say 10%, moves the same distance whatever the year However, the downside is that it does visually compress the dollar gains for the higher achievers shares and property – the dollar values on the left axis should be considered in detail.

Looking at the above, it is clear that Australian residential property (blue) and shares (orange) both represent good investments. These values indicate Australian averages and in some markets (Inner city Sydney and Melbourne), property has done even better!

What stands out to Slack Investor is the raw dollar values for each investment class that 90 years of investment would reap. $100 in shares or property would be worth at least a million dollars now. The raw figure returns for bonds (light green) and cash (black) of around $50000 and $20000 in 2016 are much less impressive – If you want growth … shares or property are the big games in town!

The graph above shows that over 90 years, Australian shares are a slightly better investment than Australian property – However, over different time frames, property has done better than shares. Russell Investments have put out a report analysing returns for the last 10 years to December 2015. Australian residential property gained on average 8% p.a. compared with 5.5% for Australian shares.

As well as the past returns from each asset class, there are other considerations such as tax, liquidity,, transaction costs and ability to gear – Banks have traditionally allowed higher gearing ratios for property (80-100%) compared with shares (typically 50-70%).

Despite these complexities, if you want to prepare for retirement with more than basic superannuation, you must get involved with investing in either shares or property – they are growth assets that, with careful selection, will always do well in the long term – and do especially well in times of economic growth. Investing in these assets inside or outside of superannuation will help provide for your financial independence.

Most Australians to Struggle in Retirement – What to do? – Part 1

At some stage in your life, if all goes well, you might be on your way to buying a house to live in and starting to think about the next step of your financial future. If you are lucky enough to be an Australian employee, you will already be exposed to the share market through your work-funded compulsory superannuation (thanks Paul Keating!). The compulsory super now stands at 9.5% of your wages. So, you might think that your financial future is all taken care of … But wait, some crackpot naysayer from the ridiculously named Committee for Sustainable Retirement Income says

“Even after contributing to superannuation at 12% for most of their working life, most retirees will still not meet the comfortable retirement benchmarks.”

Cripes! We had better do something about this … and the more time that you have to work on this, the better!

A good place to start is adding tax-advantaged “salary sacrifice” contributions to your super. This is a great idea if you are in the last 10-15 years of your working life, but the downside is that you will be locking up your savings until you reach your, quaintly termed, “Preservation Age” – the age when you you will be able to access your super.

If you were born after 30 June 1964, the preservation age is 60 … and, If I was 20-30, I would think that this is too long away off to worry about – It is a long time to lock up your money! Also, one of the few things that you can guarantee is that future governments will gradually increase the preservation (and pension) age.

So, what can we do to fortify our financial future – The only easily accessible games in town are

Money in the Bank (Online of course!)
Bonds (or Fixed Interest)
Residential Property
Shares

The latter two are generally what I would consider to be growth (above inflation) assets and, although there are risks involved with each, to be serious about growing your money, you must get involved with one or the other, or both!

Through your home or compulsory superannuation you might already be a little invested in each of these asset classes and might be looking for new opportunities.

A flick through the paper will show you some great opportunities – Investment seminars conducted by self-made millionaires who, for a small fee, would be willing to impart the secrets of their financial success. In this case, Slack Investor would take the advice of ASIC on their MoneySmart site and show great caution.

ASIC suggests seeking independent advice before investing in any such scheme. Slack Investor suggests that you first educate yourself in these matters – and then avoid these seminars like the plague. My Dad would suggest you ask the question – “What are they selling?”

After all these suggestions, Slack Investor is pooped, stay tuned for the next instalment on this exciting episode as we explore further the shares vs property dilemma.