Recently we held our Annual Client Briefing at the National Gallery of Victoria, taking in the art of the modern world that usually would only be reserved for those who are visiting New York’s Musuem of Modern Art. In case you were unable to attend Rob, Hayden and Carol’s presentation we have made it available below;

https://vimeo.com/287961673

It is with great pride that APC announces to you that Luke Price is transitioning from his current Para Planning Team Leader role to that of Financial Adviser.

Luke joined APC in 2012 and it was self-evident early on that Luke possessed a great work ethic with a sincere focus on excellent client service.

It won’t surprise you that Luke’s transition to this new role has been in APC’s planning for several years.  APC believes that if our firm can align our business needs with the personal and professional aspirations of our team then we have the best chance of maintaining our team composition as well as having a happy team.  We do not believe that unhappy staff can deliver great service for our clients.

Luke’s new role is that of Financial Adviser and Team Leader.  Over this current financial year he will still have responsibility for the day to day management of APC’s para planning team, however he will also start to manage some client Regular Planning Meetings.

Over the next couple of years he will progressively relinquish his Team Leader responsibilities and move to the role of Financial Adviser full time.

These are very exciting times for Luke who is going to marry his fiancé Amy in January 2019. Amy and Luke purchased their first home together last year and being a passionate Melbourne fan, the Dees first finals campaign in 12 years is icing on the cake.

We are all very proud of Luke.  He is a valued member of our team and we are delighted his professional and personal life is so positive for him.

Congratulations Luke!

by Robert Sarafov – Director of APC

In our recent Annual Client Briefing at the NGV, we mentioned in our presentation that the Royal Commission highlighted many examples of reprehensible behaviour on the part of the banks and AMP.  However their review of Industry Super funds had much to be desired and focused on somewhat trivial issues such as HostPlus’ use of the Australian Tennis Open to reward staff.

A far more concerning issue relates to the arbitrary definition applied by some super fund asset managers of defensive assets in their portfolios, which allows the inaccurate description of a ‘high growth’ portfolio as a ‘balanced fund’.

This inaccurate description, which is perpetuated by ratings agencies and the media, then provides a level of legitimacy to the portfolio performance which investors accept as gospel.

It is a situation which is being allowed to continue by ASIC, APRA and the ACCC and is completely unacceptable and should have been reviewed by The Royal Commission, but wasn’t.

Why? 

The information contained in this article has been drawn from an article written by Chris Brycki in July of this year.  

Defensive assets

ASIC defines defensive assets as cash or government bonds. Cash is defensive because when the market falls it holds its value.  High grade bonds can do one better and rise when share markets fall. History backs this up too; in each of the 6 times Australian shares had a down year in the past 20, bonds rose to cushion the impact.  If this is ASIC’s definition, which APC would fully support and agree with, why is it that this definition is not mandated to be adhered to by super fund asset managers?

Can other assets be defensive?

This very much depends on the opinion of the fund manager and there is strong history to demonstrate why their opinions might not end up as fact.

High income stream and low growth assets

Just because an asset delivers a big income stream does not make it inherently defensive. Take Telstra. Most of Telstra’s returns come from regular fully franked dividend income but its share price has dropped 60% since 2015.

Creative definitions of defensive assets

In recent times many super funds have invented their own definition of a defensive asset which has helped to push them up the ratings. Let’s look at how some funds do this in practice.  The following Industry Super default ‘balanced fund’ claims a 24% allocation to defensive assets.

The fund’s website explains that in addition to cash and fixed income “some asset classes, such as infrastructure, property and alternatives may have growth and defensive characteristics”.

Their self-defined defensive assets include infrastructure, credit, property and alternatives. These make up 22% of the 24% portfolio allocation to ‘defensive assets’. Government bonds make up just 2% and there is zero cash!

This enables the fund manager to publish a return that is included in the ‘Balanced’ table of returns however the portfolio is in fact 98% growth!   As you could imagine, when compared to true Balanced Funds, it’s performance looks very good…however this is a fabrication.

Many of the top funds counted some other assets as defensive to make the Balanced fund table.

The Productivity Commission asked many super funds about returns for individual assets. Only 5 of 208 funds were prepared to disclose them!

Unfortunately and some would say amazingly, super funds aren’t required to disclose how they classify their investments on their website or to anyone. Not to members, nor the Australian Prudential Regulatory Authority (APRA) or ASIC! They also aren’t required to share how each asset has performed or even what it is. This allows fund managers to play the ratings game without anyone holding them to account.

By all means fund managers should be free to invest in illiquid unlisted infrastructure, alternatives and property assets.  There are very real diversification benefits in doing so.  Just don’t call them defensive assets!

Compare this behaviour to APC’s transparent approach where we publish each individual asset within the Defensive and Growth components of our portfolios AND their individual performance.  This information is provided to our clients every six months in your Regular Planning Meetings.

How fund managers sell the ‘success’ of their balanced default fund

An Industry Super fund chief executive when asked about their ‘balanced’ fund’s performance cited active management!

“Over the past three years our balanced option did 10.16 per cent, while the index balanced option did 7.29 per cent, so that’s almost a three percentage point differential.

The [active] balanced option has outperformed across every time horizon” he says. It’s absurd to compare an accurate indexed balanced fund option which has an allocation of 25% to cash and bonds to a pseudo default balanced option with an allocation of just 2%.

How ratings agencies support the misleading self-reporting

The ratings agencies don’t properly query the allocations reported by the funds. This provides no check as to the real risk of the self-reported defensive assets.

Valuation of unlisted assets

Many infrastructure and property assets are held in unlisted vehicles which raises 3 concerns:

• The value of the investment is quite often based on the opinion of the fund manager and there is no way of knowing whether that value is credible given that there is no open market for the asset.  This happened a lot in the aftermath of the GFC
• The financial structure may see a return of capital reported as an income distribution.
• The investment is very illiquid and a sale is often extremely constrained by agreements with co-investors, including first right of refusal and so-called ‘tag-and-drag’ conditions. One critical characteristic of a defensive asset is to be able to sell it in a deep and open market.

During the Financial Crisis some super funds stopped members from transferring money out because they were unable to sell illiquid unlisted assets.   This can be done for good reasons such as protecting investor capital by not allowing ‘fire sale’ prices and therefore large losses if a manager is a forced seller in a falling market.

One industry super fund lost $1.6 billion due to poor hedging of unlisted assets. It lost its spot as one of the best performing funds in 2008 to become the second worst according to Super Ratings.

Conclusion

The fact that the Royal Commission did not even attempt to review this situation at all is quite frankly unbelievable.  It represents a manifest misunderstanding of risk, as it applies to member investments.  For this reason alone it should have been reviewed and the issue addressed.

However, further to this most important point, there are questions to be answered in relation to the cosy relationships between ratings agencies and the funds that they rate.  The inherent conflict of interest that exists here due to the fact that the funds themselves pay the ratings agencies for their services is a structural fault of the system and does not lead to reviews of funds without ‘fear nor favour’.

We should not forget that it was the inaccurate ‘head in the sand’ approach of ratings agencies’ reviews of Collateral Debt Obligations (CDOs) that lead to the GFC.  You would think that given this recent history, the Royal Commission would have allocated appropriate time to understanding and addressing this issue.

The Royal Commission has performed an important community service in highlighting shoddy practices in the financial services industry. However it has passed up the opportunity to shine a light on this particular systemic conflict of interest in the financial services sector, which is a real shame.

The lack of accuracy of portfolio information and how Growth assets are defined as Defensive  impacts on the level of risk taken by unsuspecting super fund members.

This issue is gaining some traction in the media, so stay tuned.

Suzanne Duncan’s inspiration to help others, especially single parents, comes from her own very personal awareness of the challenges facing all parents today. Suzanne truly never imagined she would be living as a single parent, but she was thrust into that challenge when her husband tragically lost his battle with cancer in 2011. With her husband’s death, Suzanne has raised her children on her own, and she has an inherent understanding of the difficulties single parents face. Promoting a strong, loving relationship between children and parents became the focus and is the topic of her latest book.

All by Myself & Rocking It! (How to Be Successful at Single Parenting) is not just another single-parenting guidebook, but rather it provides insightful, practical, doable ideas to help you manage life as a single parent and teaches you how to look after yourself while nurturing your children, how to raise children with a good sense of self-esteem, and how to find the inner courage to be successful at raising happy, healthy children on your own.

The book has been an unqualified success in helping those who need support. As one single parent said, “I needed a book like this to help me, to inspire me, and remind me I wasn’t completely alone with everything, and that life can get good again.”

Suzanne Duncan had been interviewed on many notable radio and podcast shows namely The Positive Phil Show, Twelve Minute Convos with Engel Jones, Mom Talk Radio, School for Startups, and The Timeless Family Podcast. She has also been featured and is a regular contributor to various media outlets such as She Savvy, Family Capers, WOW Magazine – Women of Worth, Carol Roth Business Unplugged™, and The Coaching Institute.

The Author

Suzanne Duncan started her own coaching consultancy, Discovery Within, as a single mother of three. She holds a science degree, a graduate diploma in education, and is an accredited coach. She routinely draws on her own experience to inform, educate, and support others to rediscover their potential, embrace their learning opportunities, and generate positive relationships.

Betrayed, Released and Free to Fly

An Unconventional Path to Freedom

A few days before Christmas, some years ago, Evelyn’s husband confessed that he had committed corporate fraud and was likely to go to jail.  She was flabbergasted as she had no inkling of these activities.  At that time he was a recently retired partner of a globally recognised accounting firm in Melbourne.

Ostensibly, Evelyn was living in a comfortable home, married to a man who had experienced the rewards of professional success.  They had two older children in tertiary education, and she was looking forward to a life of semi-retirement. The fraud amounted to seven figures.  The legal process was confronting and painful.  The adjustment to a less comfortable lifestyle was emotionally and physically exhausting.

At the time, the prevailing (and unspoken) attitude was to cover over the activity and just move on: adopt the “stiff upper lip”.  Obviously the accounting firm did its best, successfully, to avoid any publicity.  Evelyn feels that while her experience was not unusual, her response was unique.   She wanted to share to empower others.  Many women have found themselves in similar situations.  Interesting that now the #MeToo movement is encouraging women to speak up about abuse at all levels.

In her book, Evelyn talks about some of the unconventional tools she used to not only help her deal with her situation, but also propel her forward into a happier, more stable and fulfilling life. She would like to encourage others who face difficult situations to find the strength within and move through the pain to a better place. Evelyn’s book about her experiences, “Free to Fly” was released in 2014.

At the time of the confession, she recalls that her thoughts were “Oh $%#@@, I have always said to others that it is not what happens, but how you deal with it that counts.  What are you going to do now, Evelyn?”.  Despite the trauma, she forced her thoughts to fly to the future and how that might look for her.

In time she gathered together her past life collections and gave away, sold or threw out that which no longer served, including the large family home.  Fortunate to have connections with Michael Tratt through the University of Melbourne, she was drawn to APC for advice and support to manage what she had been able to salvage financially.

Today she lives on the Gold Coast, having created a new way of life, new friends and businesses.  In reviewing the experience, it has been a gift that has allowed her to find the strengths she did not know she had.

The Author

Born overseas, like so many in our amazing Australian population, Evelyn came to live in Melbourne with her family when she was 11 years old. Educated at Camberwell Girls Grammar School on a scholarship, she went on to complete an Arts degree at Monash University, majoring in Latin and Greek.  From Monash, she was recruited into the same Computer Programming Course as Michael Tratt, with the organisation that is now Telstra. 

A career in IT followed, during which she also completed an MBA at Melbourne University.  Leaving full-time employment while raising her family, she pursued a number of part-time activities before returning to study a Post Graduate Diploma of Internet Software Development in anticipation of returning to the work force full time.

As a result of her husband’s activities, she found herself back in the workforce more quickly than anticipated.  Full time employment allowed her time to gather some resources while at the same time completing her Yoga Teacher Training for which she had enrolled prior to her husband’s confession.

Alongside her conventional education, Evelyn studied Yoga, Astrology and Esoteric studies from her mid-teens.  As the general population is now more open to these concepts, Evelyn is sharing her knowledge through Yoga and Astrology, whilst addressing the needs of the ageing physical body with supportive products. Evelyn enjoys life in Queensland, and still finds time to connect regularly with her son and his family in Melbourne and her daughter in Vancouver.

More information about current activities can be found on her website www.qalma.com.au.

Free to Fly is available on-line through Booktopia, Amazon;  hard copies can be obtained by contacting Evelyn directly at evelyn@qalma.com.au.

The focus of this year’s budget was on reining in spending, cutting taxes for middle Australia and small to medium sized enterprises, and giving older Australians a bit of love.

The Government revealed a seven-year personal income tax plan for “lower, fairer and simpler taxes” with relief for low and middle income earners, starting 1 July 2018. The measures will also tackle bracket creep. From 1 July 2018, the Government will provide a tax offset of up to $530 for tax payers in the 2018-19, through 2021-22 financial years. Those earning up to $37,000 who currently face a 19 per cent tax rate will have their tax bill reduced by up to $200. These savings will increase incrementally between $37,000 and $48,000 to a maximum saving of $530 for those earning between $48,000 and $90,000. The benefit will then gradually reduce to zero at an income of just over $125,000.

Bracket creep measures will see the upper threshold of the 32.5% tax bracket increase from $87,000 to $90,000 from 1 July 2018 and to $120,000 from 1 July 2022. The Low Income Tax offset will also increase from $445 to $645 from 1 July 2022. This will be followed by a flatter personal tax system by 2024-25 where the 37 per cent tax bracket will be abolished completely. Australians earning more than $41,000 will then pay only 32.5 cents in the dollar all the way to the top marginal tax rate threshold that will be adjusted to $200,000.

The top marginal tax rate of 45 per cent will apply to incomes above $200,000.

Small to medium sized enterprises

Attention to small to medium sized enterprises was targeted at keeping them competitive globally. The Government extended the $20,000 instant asset write off for a further 12 months to 30 June 2019 for businesses with a turnover of up to $10 million.

Tax cuts for small business began in 2016-17 when companies with a turnover of less than $10 million had their tax rate cut to 27.5%. This rate was extended to companies with annual turnover less than $25 million in this financial year and from 1 July 2018 will be expanded to include companies with annual turnover less than $50 million. The Government also announced tough new antiphoenixing measures to stop businesses who deliberately go bust to avoid paying their bills and potentially affecting other businesses through their demise.

Superannuation

The focus on superannuation was on lost super and allowing Australians to build their super balances by saving unnecessary fees and unwanted insurance. The ATO will be given powers to send lost super to people’s active super accounts. Fees on accounts with balances of less than $6,000 will be capped at 3 per cent and superannuation fund exit fees will be abolished for those wanting to switch funds.

For superannuation fund members aged under 25, they will need to opt in should they wish to have insurance within their super policies.

For SMSFs, the maximum number of members will increase from 4 to 6 people from 1 July 2019. This will allow for greater flexibility for larger families. In addition, the audit requirements for SMSFs will move from annually to three year periods for funds with a history of good record keeping and compliance.

For Older Australians

The Pension Loans Scheme will be open to all Australians, including full rate pensioners and self-funded retirees to enable them to boost their retirement income by up to $17,800 pa for a couple, without affecting their eligibility for the pension or other benefits.

An expanded Pension Work Bonus will allow pensioners to earn an extra $1,300 a year without reducing their pension payments. This will also be extended to self-employed individuals who can now earn up to $7,800. People aged 65-74 with a total superannuation balance below $300,000 will now be exempted from the work test for voluntary contributions for the first year they would otherwise fail to meet the work test.

Aged Care, Skills Training, Medicare and the PBS

For older Australians who would like the choice to remain in their homes and avoid residential aged care facilities, there will be a total of 74,000 high level home care places funded by 2021-22.

A new Skills Training Incentive will provide mature aged workers with the opportunity to update their skills. And, employers will be incentivised with $10,000 wage subsidies for employing mature workers.

Extra funding into Medicare and the PBS will see new medications being funded including those to treat spinal muscular atrophy, breast cancer, refractory multiple myeloma and relapsing-remitting multiple sclerosis and an HIV preventive drug.

Someone said to me recently, ‘if you want to understand employee behaviour, understand how they are remunerated’.  It was a discussion about ethical behaviour in the workplace and I believe it has significant relevance to what is being highlighted in the current Royal Commission into Banking and Finance.  The ‘sales’ culture in banks and the payment of bonuses based on ‘sales targets’ promotes behaviour that is not, in my opinion, consistent with the concept of acting in the ‘client’s best interest’.

Australian Private Capital’s remuneration policy has always been structured to encourage our team to deliver to our published client service standards. Our team are all salaried and have no individual ‘sales’ targets for which they are measured against.  Their personal performance review includes measurements such as the scores our clients provide APC in our regular client survey as well as specific activity KPIs that relate to their role and how they help deliver on our ‘client first philosophy’. The team’s internal KPI’s unambiguously promote APC’s expectation that everyone performs an important role in the overall delivery of timely, accurate, conflict of interest free and highly personal financial advice.

Conflicts of Interest

Recently, APC produced an Adviser_Q_and_A document to help individuals who were considering working with an adviser. It highlights what some of the questions they should ask are, if they wanted to understand where (if any) conflicts of interest existed.  I attach this for your information and would encourage you to read it. I would also encourage you to give it to anyone you know who is considering obtaining advice or developing a long-term relationship with an adviser.

Also attached is the advertisement as part of our 2017 Principal Partnership of the MBS Dean’s Leaders Forum.  It controversially was entitled ‘Does Conflict Free Advice Really Exist?’.  The answer is YES but it is rare.

Commissions

Unlike many, over the years APC has successfully removed nearly all of the embedded commissions from our implementation solutions.  We have done so by using where possible wholesale offerings, which unlike their retail cousins, have no adviser commissions included.

Where this is not possible, APC’s Commission rebate policy ensures that any commission received is returned to our clients 100%.  Australian Private Capital will this year in July once again return commissions received from insurance companies and banks over the financial year, to our clients.  It is anticipated that the cumulative value of our policy will exceed $750,000 of rebated commission this year. 

For our clients it lowers the cost of personal insurance by approximately 30% per annum.   Importantly it ensures that our clients have no more insurance than their strategy requires at any given time. Our commission rebate policy also lowers the cost of borrowed funds.

A final word

As like many, I look at the findings of this ongoing Royal Commission with some disbelief.   The lengths to which large and some not so large companies have gone to place their interest ahead of their client’s is disappointing to say the least. It reinforces in my mind the validity of the decisions Australian Private Capital took many years ago to be ‘ahead of the curve’ when it came to removing any possibility of conflicts of interest in the delivery of personal advice in Australia.

We continue to look at ways to further enhance our implementation solutions and this remains an ongoing theme at APC.  There are several projects underway with this in mind and over the course of the coming months you will see these come to fruition when you are in our offices for your next Regular Planning Meeting. However underpinning them all is our central commitment to delivering timely, accurate, conflict of interest free and highly personal financial advice to you.

My warm regards,

Robert Sarafov

Director – Australian Private Capital

We here at APC consistently hear about the amazing stories and experiences of our clients from around the world. This E-news’ shared experience comes from Barry Goss who walked 50km with a team of 4 in the OXFAM Trailwalker event to raise money and awareness, “Challenging Poverty”.

We firstly would like to thank all those who donated to the team and some who apologised but wished us well. We finished in 57 place in the 50km walk winning the over 60’s with ease. Elapsed time was 12:07 with a walking time of about 10:30 (we did have three breaks).

The thunderstorms along the way slowed our progress and I had a few strange back problems on the flat rail trail. A few of Gregs neurofen  helped so i came good for the final hilly sections. Dinner was supplied at Millgrove by our wonderful support crew of Lorraine, Toni and Gay and a special thanks to our drop off driver Geoff who made sure we did not miss the start.

We had stayed dry until check point 1 on the 50k trail, then it poured after the lightening and thunder warned us of what was to come. Not too bad but slower than planned on the rail trail but on the last leg after a pleasant stroll along the old O’Shannesy aqueduct we headed up over Mount Little Joe. Donna Buang was being lit up by lightening across the Yarra Valley to our north, and as night fell a flash followed by a clap of thunder told us that we were about to be cooled down again.

Down came the rain and the once dusted track turned to mud. Navigation became tricky as the markers were being obscured by rain on glasses and the fog of hot breathes. The girls almost lead the train of walkers down the wrong path over a yell from me and a whistle from greg brought them back on track. After that I navigated w=down the long decent towards the bottom of the famous last climb. (remember that climb Emma?). I found the going very difficult as I had to not only try and see my feet though the rain coming straight on but also look out for markers to show we were on the right trail. We had passed numerous teams of 100km wakers but had not been passed by any 50km teams until we started up Little Joe. In the rain we were still catching 100km teams but I only met 1 lone walker who might have been a 50km entrant who might have gone down the wrong track (the one the girls started down) as he joined from the right and said oh a marker at last. he headed off up the last climb and I waited for the team to appear.  We then started up the climb, I tried to keep track of where the team was but looking back in the pouring rain one set of lights looks much the same as any other.

The old saying that you do the flats and the down hill together but “you climb alone” is very true as everyone has there own pace and method, I am the “don’t stop to the top” slow plodder, while others are fast forward, stop rest then fast forward. I plodded up to the top where the last turn before the down hill was  known gathering spot. Going up the sides of the runoff trenches cut across the track proved to be tiring as they were now mud. Thank god for walking poles. At the top I looked back again and i thought our team was not far behind me as I thought the light I had been keeping track of was Wendy’s, however there were now 25 lights all coming up the slope in the rain, normally a pretty sight but not then. A number of 50km teams passed by as I waited usually a climber lead to the top and waited until the rest arrived then headed for home. All the teams that were chasing us from Millgrove now seemed to appear at once.

Our light appeared and the team regrouped and headed off down the final slippery slope together Greg acted as the sheep dog keeping Wendy on the best track until we reached the bottom, then a quick dash through the final path to the finish line awaited. I suggested a running finish to catch the team in front but this was overruled. Our support was waiting with champers, chips and dry cloths.

Greg suggested we do it next year ro try for the >70 category, Gay did point out the name of our team (One Last Time) while Wendy said “never again”. Greg, Chris and myself are now all Oxfam legends having completed at least 5 Oxfam’s, Greg and Barry having completed the first 100km and now the first 50km walks. Maybe they will have a 25km for the over 80’s!!!

We always like to hear about the talents and successes of our clients. Budding artist, Tom Anderson has had his painting, “Look Malcolm! A Windmill” nominated for a ‘Bald Archy’ award. Some of Tom’s work is on display in our office with an underlying political satire theme addressed in many of his works. The winner is announced in Sydney on March 20th and we wish Tom all the best, and hope his painting wins the award!

Don Quixote, ancient knight and seeker of windmills, had tried to describe them to the non-comprehending Prime Minister. When he finally spots one, he attempts to alert the sleeping politician. Unfortunately, neither is able to recognise the wind turbine for what it is, and the window of opportunity passes by.

You may have noticed our APC website has undergone a slight renovation with much of the information having been updated to reflect more succinctly the values of APC and the process that you have all undertaken as Private Clients of APC. We now have videos presented by different members of the APC team outlining some key aspects of our services. The website is now better suited for you to direct family, friends or colleagues, where you may wish to introduce APC’s services to them.

The links to “Knowledge Centre”, “APC Perspectives” and our “Team” page have been moved into a menu at the top of the screen so there is no longer a need to scroll to find what you’re looking for on our page. Our “renovation” has also seen the addition of a new client sign on area which is called the “Client Portal”. The link is in red writing on the top right hand corner of the home page and gives you access to three new items (see below):

• The APC Event Schedule – You all should have received an invite to our Bitcoin and Blockchain event on the 7^th.This is the first of several client information events we shall be hosting throughout the year on hot topics or topics of interest. The event schedule will provide you with all you need to know about these upcoming events.

• SMSF Admin – If you have your own Self-Managed Superannuation Fund and it is administered by XpressSuper or SuperGuardian then you will have received a login from APC allowing you to use this area of the website. This will give you member balance details, asset valuations and other important SMSF information.

• Client Dashboard – This section is reasonably new for all clients although some of you will have used this area to download Wealth Management Review Reports for teleconferences or to update your Key Information Document. Over the coming weeks we shall be rolling out access to this “Client Dashboard” to all our clients. It shall provide details such as portfolio valuations, Insurance and Net Assets while also being a place to update your Key Information document before your Regular Planning Meeting and completing your Risk Profile Questionnaires as required. Please keep an eye on your emails for your login information coming soon. 

If you have any questions regarding the website and its functionality please don’t hesitate to give us a call on (03) 9621 1000 or email us at enquiries@apcas.com.au.