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Is your planner on the ball?

At a time when financial stocks have been trashed on the stock market and banks are having trouble attracting funding, Macquarie Bank has applied its usual lateral thinking to help itself. The problem is as Mac Bank wins, others - clients and advisers - lose.
And the whole incident underlines the problems that exist for investors, customers of financial planners and planners themselves with ASIC regulation hanging over them.
Don’t get me wrong, the behaviour of planners in the past meant regulation had to be ramped up but there are practices that prevail right now which ASIC seems powerless to do anything about. I am talking about over-servicing and overcharging.
The Mac innovation shows advisers have to be vigilant for subtle changes in the offerings of their financial institution buddies. They also have to continually review the state of money knowledge and they have to show that they are on the money when it comes to picking the best options for their clients.
Let’s start with the Macquarie Bank Limited (MBL) incident. Earlier this year advisers who have their clients in Macquarie’s wrap account learnt the bank had changed its cash account investment from the Macquarie Treasury Fund (MTF) to a bank deposit with MBL.
Now that sounds pretty innocuous. In fact, one writer in a rival newspaper talked about MBL “finding money right under its nose”. However, he failed to tell his readers about the implications.
Busy or poorly trained or simply dumb advisers might have allowed this to slip under their radar screens.
When advisers thought MBL’s wrap was one of the best and cheapest, they liked the fact their client’s money was in the MTF.
Now their money is a bank deposit at MBL. And even though the bank is an authorised deposit taking institution regulated by APRA, the new account is not the same as the old one.
Advisers will have to contact all of their affected clients and inform them. Some will want to shift their cash holdings and this is all work. The advisers who ignore the change and something goes wrong could be in trouble with their clients and ASIC.
Macquarie’s early response to adviser queries was dismissive and I hope this is not an early sign that this is a new bank in an era of the credit crunch and Nicholas Moore.
You see, the crunch has made deposits the name of the game and that’s why Macquarie has turned the MTL, which invested in government securities and bank backed securities, into a deposit with MBL.
Admittedly they are paying 0.2 per cent more for the switch of cash accounts but I don’t know if the reward matches the risk. There are better returning deposits at other banks.
The vigilance of advisers and investors is critical to making money. I am surprised how so many homeowners have ignored the value of throwing windfalls at their mortgage.
The eChoice website shows the value of financial insights. It looks at a couple with a 25-year, $100,000 home loan @ 7 per cent who could not afford higher monthly repayments to KO their loan quickly.
However using a $2000 tax return they cut the loan term by nine years and saved close to $45,000 in interest.
And now for a good Mac Bank story, which proves my point that inside knowledge is something to be valued.
The pointy-heads in research looked at the big hip pocket question: “Should I pay down my home loan, increase my super or negatively gear a pile of shares?”
As the Mac team rightly pointed out: “The most frequent answer given by financial advisers is ‘it depends.’”
The key considerations are your current and future marginal tax rates, current and future borrowing rates, expected returns on investments and the risk that the Government changes the rules of the game.
Making 10 fair assumptions and looking at a 50-year old with pre-tax income they projected for 10 years on.
The researchers created three charts to show the impact of changing interest rates and rates of return on investments. The important take home message is as your tax rate increases, going long on super is better than paying off your home or gearing into shares.
At a 31.5 per cent tax rate both geared shares and paying off the home look attractive bets but super is still a good conveyance. At 41.5 per cent super becomes substantially a better bet.
However, with a 46.5 per cent slug, super is a stand out best bet. That said, if borrowing rates go 9 per cent plus and rates of return are around 12 per cent, then a geared portfolio would be better.

Of course, interest rates over 9 per cent would soon kill rates of return bringing super with its 15 per cent tax back into the front-runner’s role. 

Published on: Thursday, June 12, 2008

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