Like many I have been saddened to hear the Royal Commission have, again, uncovered a number of systemic "cloudy" advice practices where an advisers "best interests duty" requires something a little purer.
This simple truth reminds me of why we chose to engage with clients the way we do 10 years ago, with annual opt in and flat dollar fees invoiced directly to clients.
As I set about writing a blog on a subject that many advisers find difficult, a valued client reminded me of why we do what we do. I think these words are more insightful than anything I can write and, I hope, demonstrates what a pure advice relationship should look like.
"I'm confirming I'd like to continue with your ongoing services. In the current context of the Royal Commission into banking highlighting the dangers of hidden percentage based fees for investments and self-managed super, your open, fixed fee service shines as an example of how it should be done!" Ben - Cardiologist
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There are only really three factors that contribute to achievement of your financial goals: what you earn, what you spend and what you do with the rest.
If you've completed your training your income should be reasonably stable and if you're getting professional financial advice what happens to "the rest" will be determined by a plan that may focus on investment, debt reduction or a combination of both.
That leaves what you spend.
Having helped doctors with their finances for nearly 15 years, what I too often see is a habit of overspending that starts as incomes increase. This combined with not knowing where all the extra income is going has far reaching consequences.
Firstly, the sooner you start investing, the sooner you get what Albert Einstein called "the most powerful force in the universe" compounding returns on investments. And secondly, if you create a lifestyle that uses all of your income it will be impossible to reach financial independence.
Understanding what your fixed expenses are along with what you are spending on discretionary items is a good place to start. Importantly, this also provides a clear view of how much money will be left over each month that can be put to work through investment.
Exporting online bank statements into a spreadsheet provides a starting point for checking where your money goes. The problem with this method is that it's time intensive and doesn't easily track activity moving forward.
Once you have an idea of what you have spent by category, the next step is to have a plan of what you intend to spend going forward.
Most practices use accounting platforms like Xero to track income, expenditure, assets and liabilities. If you have a good practice manager and the right tools they can easily tell you your practice's financial position in heartbeat. It's the only way to know your practice is running the way it should.
There's no reason why you can't run your personal finances the same way. Very soon Medical Financial will begin offering access to a platform that provides the same kind of insights as Xero, but for personal finances.
It will allow you to track your expenditure, understand where it's going and produce regular personal profit and loss statements. It can even track your change in net wealth via a personal balance sheet. And you will be pleased to know, that once set up, the time taken to keep on top of things will be around an hour a month. Armed with timely, relevant information about your finances you can start taking greater control.
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After years of watching the Federal Government tinker with superannuation rules, most professionals in the industry have been pleading for the system to finally be left alone. By its very nature super is a long-term investment - it's hard to plan for the distant future when every year the government shifts the goalposts.
Unfortunately we're going to need to put a good bend on the ball again because in 2017/18 those posts are moving once more.
Without doubt the biggest concern for most medical professionals is the reduction in the cap on before-tax concessional contributions. This is a particular issue for professionals who are mid-career and still very much in wealth accumulation mode.
At the moment the cap is $30,000 if you're under 49 and $35,000 if you're over 49. From July 1, everyone's cap will be $25,000. Anyone who makes extra contributions through salary sacrificing for example, should speak to an adviser and take a look at how the changes will affect them.
This is a particularly urgent issue for anyone who hasn't used all of this year's cap as there's still time to put additional money in your account before the rules change.
Probably the biggest change for those near retirement is that there will now be a limit of $1.6 million that can be placed in income stream accounts.
If you have more than $1.6 million you can transfer the balance into an accumulation account or you might want to consider making a contribution to your spouse's account. There are a number of options available, but again it's important to speak to an expert who can provide advice on the best strategy for your individual circumstances.
Yes! If there's a small ray of light in the midst of all this gloom it's that from 1 July anyone can make a deductible super contribution - not just the self-employed. This will make it much easier for everyone to fully utilise concessional contribution allowances and get maximum tax benefits.
The unfortunate reality is that the changes to super that will begin next month are so wide-reaching that almost everyone will be affected in some way. The most important thing to do is take a holistic view of your investment strategy and what role super needs to play in it from 1 July.
It is absolutely still worth maximising your superannuation, but many people will also benefit from some strategic changes to their investment mix.
In short - get some professional advice and do it quickly.
|Posted in: Tax Wealth Creation Budget Financial planning superannuation Planning Investment Financial independence Diversified portfolio||0 Comments|
It's a classic scene from James Dean's iconic movie, Rebel Without a Cause: two alpha males in hotted up cars driving towards a cliff. Whoever jumps first is the chicken. The trick is knowing when to make your move, so you don't end up plunging into the ocean like Jimmy's rival!
It often feels like you're playing a similar game watching interest rates drop. If you've got a mortgage, when do you flinch?
The first thing everyone wants to know is, will interest rates go any lower? While there's no way to know for certain the answer is, probably not. The current Reserve Bank cash rate is 1.5 percent - the lowest it has been in more than 40 years. While it is possible rates could go lower, most economists believe we have now bottomed out and the next movement - when it comes - will be up.
The short answer is no. Even if rates were to be cut by another quarter percent, the current rate of 1.5 percent is extraordinarily low and represents a huge opportunity for mortgage holders. There's very little to be gained by holding on for the possibility of another rate cut - it's time to jump out of the car!
The greatest opportunity mortgage holders have is to pay off large chunks of their principal while the interest component is relatively small. To do this, you have to resist the temptation posed by Splurge Fever and pour as much surplus cash as possible into your loan. Doing this will mean you'll be in a much stronger position when interest rates start to move north - and they will! It's only a matter of when.
The other thing to consider is fixing a portion of your loan as a hedge again further rate rises. What percentage you choose to fix is a discussion you should have with your financial planner, based on your individual goals and what level of risk you are prepared to accept.
Interest rates this low are extremely rare. While the fact it's been 40 years since they were last this low doesn't mean it will be another four decades before we see these conditions again, it does mean it's extremely rare. The smart move is to take every advantage possible of such a unique set of economic circumstances. Don't end up plunging into the deep, dark Californian ocean!
|Posted in: News Wealth Creation Budget Financial planning Planning Mortgages Financial independence Risk management||0 Comments|
So you've finally finished your medical specialty. The long nights of study are over (for now!) and you've got a shiny collection of new letters after your name. And of course, along with those letters goes a bigger pay packet. Time to reward yourself for all that hard work and start living a life of luxury, right? Well, maybe not...
Unfortunately a little extra income often brings with it a damaging illness. Fluids won't help and paracetamol is useless. It's splurge fever, the almost uncontrollable urge to make lifestyle purchases now that you've got a little extra coin.
Splashing out on holidays, fancy gadgets, expensive clothes, even upgrading your car or home can all be symptoms. And if you're not careful they can quickly add up to a cracking financial headache.
So what can you do?
The good news is splurge fever is easily treated. The bad news is the best cure is prevention (what, isn't there a pill I can take???). And in the world of finance when we're talking about prevention, what we mean is planning.
There's no reason why your extra income can't mean rewarding yourself or even looking at upgrading your home or car, as long as it's part of a planned, well-managed process.
The biggest financial danger for new specialists is uncertainty. Yes, you will likely be earning more money. The big question is how much more? Unfortunately many new specialists overestimate their new income and commit to spending that becomes like a weight around their neck.
It might not be as exciting as splashing out on a new private movie room for your house, but my advice to new specialists is to follow a four-stage process for approaching this new stage of their career:
|Posted in: Wealth Creation Budget Financial planning Planning Financial independence Risk management||0 Comments|
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