Browsing articles in "Financial advice"
Wednesday 30th July 2008 - 7:54 am

Wall Street snaps back as world trade talks collapse

by Alan Thornhill

Share prices snapped back on Wall Street overnight, as traders found their confidence and oil prices approached a three month low.

However Australia suffered a severe blow in Geneva overnight as late hopes of a breakthrough, in the world trade talks, in the seven year long DOHA round collapsed.

That happened when the United States refused to accept safeguards against import surges that China, India and other developing countries had sought.

The Dow Jones industrial index surged 266.48 points to close at 11,397.56.

The S&P 500 also rose strongly, gaining 28.83 points to reach 1,263.20.

And the tech heavy NASDAQ composite index rose 55.4 points to 2,319.62.

Traders were encouraged when steel profits exceeded expectations and the $US strengthened against the Euro.

The $A was trading early today at 95.08 US cents.

But oil futures closed $US down at $US.

Oil futures fell $US2.94 a barrel to $US121.79.

Australia’s trade minister, Simon Crean, was bitterly disappointed at the collapse in the world trade talks.

“It matters in a big way to Australia,” he told the ABC.

“There were significant gains on the cards for Australia out of this round,” Crean said.

“Not just in agriculture, but some important ones in sectors of manufacturing…and important offers in services as well,” he added.

The European Union’s negotiator, Peter Mandelson, described the collapse as “heartbreaking.”

And Mr Crean said it had been “a great disappointment.”

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Wednesday 30th July 2008 - 6:02 am
Comments Off on Super benefit statements would raise engagement:industry

Super benefit statements would raise engagement:industry

by Alan Thornhill

It’s the carrot without the stick.

One of Australia’s biggest financial industry associations has declared its support for the principles set out in the Australian Securities and Investments Commission’s consultation paper, Superannuation Forecasts.

Richard Gilbert, the chief executive officer of the Investment and Financial Services Association, has declared his support, for the principles spelt out in that paper.

He said end benefit estimates are the best way to capture the attention of superannuation fund members.

The commission wants to develop simple snapshots of those benefits, so that super fund members know what they are likely to get, on retirement.

Mr Gilbert is supporting that idea, enthusiastically.

“If implemented correctly, estimates will help Australians to see how their current super savings are tracking,” Gilbert said.

“Ultimately, these estimates will will help boost the levels of engagement in super,” he added.

He warned, though, that the proposal would need to be managed carefully.

His association set out seven principles.

  1. Gilbert said end benefit estimates are different from online calculations The regulatory approach would need to recognise that.
  2. The statements should be used only as an educational tool.
  3. The system should recognise members’ concerns about liability.
  4. Standardised assumptions are crucial
  5. All end benefits should be represented in today’s dollars
  6. The assumptions used in the calculations should not change too often and
  7. Specific and consistent disclosures are required.
Tuesday 29th July 2008 - 10:10 pm

It’s super:don’t ignore it

by Alan Thornhill

By R.U. Reddy

Keeping an eye on your super is now more necessary than ever before.

A good superannuation fund will help you live well, in retirement.

That’s a big job.

Even if you retire at 65, you will need to finance 25 to 30 years of good living.

That won’t be cheap.

Sadly, the credit crunch, which has sent share prices spiralling downwards, means that watching your super fund is now more urgent than ever.

It has raised a new danger.

Put bluntly, that is robbing yourself, in what should be your golden years.

Superannuation is, essentially, an investment.

And, like other investments, it involves both choices and risks.

These are unavoidable.

But there is no need to panic.

With good information, an intelligent approach and good advice, you should do well.

Remember, always, that it is your, particular, circumstances, that matter most.

And what works for some-one else might not work for you.

There are no typical cases.

You will need to do your homework regularly.

But even that might seem confusing, at first.

Especially with newspaper reports warning that fund members are now facing their worst returns, since the introduction of compulsory superannuation in 1992.

Those losses, over the past year, could hit 10 per cent.

But figures produced by an expert company, SuperRatings, help to put some necessary perspective on that figure.

Much depends on where you choose to invest the savings you invest in your superannuation.

You might , for example, have decided to go for growth.

In that case, we will assume that you have told your super fund to put all your money into international shares.

If you did that, your returns, according to SuperRatings, would have fallen by 17.3 per cent, in the year to the end of June.

That figure would be even higher now because share prices have kept falling, since then.

Super, essentially, is a long term investment.

So SuperRatings did some calculations, over a five year period, as well.

These show that, over that time, the brave investors, who took the same option, would still have seen their earnings rise by an average 6.1 per cent a year.

That’s because there were four good years, on international share markets, before the latest bad one.

Those who took the more conservative option, of cash only investments, would have been well ahead, over the past year, enjoying 5.4 per cent return.

And, even over the five year period, they would have received an average returns of 4.8 per cent a year.

Not too bad, eh?

Take care.

The right answer to that question is not, necessarily as obvious as it might appear to be.

The thing to remember about superannuation is that it is, essentially, a compounding investment.

So over a 20-30 year period, that apparently small difference between between, say, annual returns averaging 4.8 per cent and those averaging 6.1 per cent, will be substantial.

A whole heap of retirement money, in fact.

These figures, of course, represent extreme positions.

Fortunately, Australia’s superannuation funds offer other choices, too.

These include “balanced options” which mix share and cash investments.

SuperRatings has done it sums on them, too.

So what were the results?

Over the past year, their earnings fell 6.4 per cent.

But over the five year period, their average annual return was 11 per cent.

These figures are all products of the basic economic forces that lie behind them.

So there are more basic issues to be settled, before you make your decisions.

Business cycles were, traditionally, thought to happen over three to five year periods.

However, something odd has been happening over recent years.

There hadn’t been a big downturn, in a business cycle, between 1991, when the last recession ended and August last year, when the credit crunch hit.

The years, in between, mostly saw strong economic growth.

You have worked very hard for your money.

So you should expect it to work hard for you, when it is invested.

People who told their super funds to invest all of their money in fixed interest investments, would, largely, have missed out on any rewards for that growth, over that 15 year period.

They could be said, in effect, to have robbed themselves of that money, by being too cautious.

Equally, though, those who put all their money into international shares would have suffered a serious set back, over the past year, as the share market fell.

That would be particularly serious if those investors were, say, 64 years old.

That’s because they probably wonn’t have a chance to recoup their losses, before retirement.

But they would still have that extra money, from the preceding good years.

The examples, that we have taken from the extremes, certainly make a middle path, the so-called golden mean, look attractive.

But that, too, can be deceptive.

The intelligent approach is to try to work out where the global and Australian economies are heading and adjust your strategies accordingly.

Nobody is pretending that will be easy.

The American economist Paul Krugman, for example, says the US government, so far, has done little more than apply bandaids to the struggling American economy, with its well publicised rescue of that country’s housing finance institutions, Fannie Mae and Freddie Mac.

If he is right, the present downturn in the American economy, is likely to run for some time yet.

But the signs, in Australia, are much more positive, with exports of iron ore and coal still on an upswing.

And there is, certainly, no need for despair.

Even those of us, who do not have higher degrees in economics, can do well.

But that is much more likely if we keep watching our investment in super and making the necessary adjustments, regularly.

Don’t expect to get the best out of your super, though, if you just put your policy in the bottom draw of your filing cabinet and ignore it.

Confronted with the SuperRate figures, in a radio interview, the Superannuation Minister, Nick Sherry, said it is important to keep the longer term in mind.

Those who like to panic, will probably recall the famous words of the great economist, John Maynard Keynes, at this point.

It was Keynes, after all, who once said:“in the long run, we are all dead.”

The point he was making there is that the short term matters, too.

That is, indeed, a very good point.

Especially as very often, short term indications are all we have to guide us.

That’s why regular checks on your super are necessary.

SuperRatings CEO Jeff Bresnahan said his agency’s latest figures are certainly no cause for alarm.

He says, on his firm’s website,( that in a balanced fund, a negative return can be expected about once in six years.

Fortunately, too, keeping an eye on your super is likely to be easier in future, than it might have been in the past.

Both the Federal government and the Australian Securities and Investments Commission are currently working on ways to present likely outcomes, in a simple form.

ASIC is recommending what it calls superannuation “snapshots.”

It is important to assess, too, what fees and administration charges are costing you.

How you pay those charges is also important.

Good financial advice is very valuable.

Paying for it upfront is always worth considering.

The usual alternative is an apparently modest charge of , say, 1.4 or 1.5 per cent.

But that can add up to a very tidy sum, over the years.

The choice is yours.

But do your calculations, before you make it.

Your choice of super funds is important, too.

You might, for example, be eligible to join one of the so-called industry funds, launched by Australia’s unions.

They, generally, have lower charges than the commercial funds.

So more of your money comes back to you, when you retire.

Tuesday 29th July 2008 - 8:09 am

Wall Street plummets:Swan tries to sooth fears

by Alan Thornhill

US stocks plunged overnight, with banking stocks falling sharply, and the International Monetary Fund warning that global financial markets are still “fragile.”

The Dow Jones industrial index closed 239.61 points down, at 11,131,08, after sliding sharply throughout the day.

The S&P 500 fell 23.39 points to 1,234,37.

And the tech heavy NASDAQ composite index fell 46.31 points to 2,264.22.

The optimism that had been generated by the rescue of Fannie Mae and Freddie Mac simply evaporated overnight, Australian time.

And oil prices edged higher.

Oil futures rose $US1.53 a barrel to $US124.79.

The Australian dollar was trading at 95.71 US cents early today.

The Federal Treasurer, Wayne Swan, issued a special statement, in response to the warning that the IMF issued, in its Global Financial Stability report.

He said, once again, that Australia is “well placed” to withstand the global financial turmoil, that the IMF had described.

“Our banking sector is taking prudent steps by putting in place provisions to cover off the potential impact of the difficult financial conditions and poor investment decisions of the past,” Swan said.

“The Australian economy and financial sector are better placed than most other countries to withstand the current global economic turmoil.

“We have a strong well-regulated banking sector and a disciplined budget position,” Swan said.

“We are also continuing to receive high prices for our commodity exports.”

He said that while most losses from the US credit crunch now appear to have been realised, the US economy and its housing market are still weak.

And structured financial markets “remain effectively shut,” Swan said.

Swan said Australia fully supports the efforts the IMF is making to promote reforms that would strengthen international markets.

Monday 28th July 2008 - 9:50 pm
Comments Off on Double bubble trouble:where will it end?

Double bubble trouble:where will it end?

by Alan Thornhill

Wayne Swan and Guy Debelle are, certainly, right.

There is no doubt that Australia does have “a well regulated banking system, capable of withstanding the fallout from…international developments,” as the Treasurer says.

Mr Debelle’s remarks are forceful, too, if a little more technical. But that is to be expected of a Reserve Bank Deputy Governor, who has special responsibility for financial markets.

Debelle surprised no-one, at a credit summit in Sydney yesterday, when he admitted that global credit markets had been “turbulent” over the past year.

But he saw reason for hope, too.

“While there have been areas of dislocation in the Australian credit market, there have also been areas of strength,” he said.

Such as?

Mr Debelle answered that question, too.

“The process of re-intermediation has seen strong issuance by financials, particularly the major banks,” he explained.

“This has substituted for the dislocation in asset backed corporate bond markets.”

In both cases, these words are comforting.

Especially so, after two of Australia’s big four banks, the NAB and the ANZ,  announced that they are increasing their provision for bad debts.

Equally, though, it might be said that neither of these men is telling the whole story.

We can’t blame them for that.

These troubles spring, primarily from the US credit crunch.

That, in turn, arose from what the US economist, Paul Krugman, calls the “double bubble.”

Mortgage originators, in the US, lent recklessly, on a huge scale.

That produced both a lending bubble, then a bubble in US property prices.

Predictably, both bubbles burst, with disastrous results, which have still to be fully played out.

Krugman has hailed the rescue of Fannie Mae and Freddie Mac as “good news.”

But he adds “it won’t change the fact that that this decade’s double bubble in housing prices and loose lending has been a disaster for millions of Americans.”

And not just them.

As we have now seen, the collateral damage has already spread to two, well regulated, Australian banks.

But what happens, now?

A reporter, who attended a brief press conference, that Mr Swan held in Canberra yesterday, asked a particularly succicnt question.

“Bank lending,” he said, “has fallen by about 20 per cent so far this year.

“Do you think that increases the risk of a hard landing for the Australian economy?”

The Treasurer’s response was blunt, but not entirely convincing.


“I don’t necessarily accept that at all,” he said.

Once again, it is hard to blame him.

The full story of the credit crunch has yet to be told.

So what can be done?

Krugman says the financial regulation, which flowed from the Great Depression of the 1930s, must now be updated, to suit current conditions.

“The desperate rescue efforts of the past year make expanded regulation even more urgent,” he says.

But can the US Fed chief, Ben Bernanke, rise to that challenge?

That is still not known.

Monday 28th July 2008 - 11:08 am

Debt crisis:Australia escapes the worst, so far

by Alan Thornhill

Australia has escaped the worst of the US credit crunch – so far – according to an Assistant Governor of the Reserve Bank, Guy Debelle.

Mr Debelle, who has special responsibility for financial markets, made the observation while addressing a debt summit in Sydney today.

He admitted the world financial markets are in turmoil.

“It has been a turbulent time in global credit markets over the past year,” Debelle said.

But he said Australia had stood up well to the challenge.

“While there have been areas of dislocation in the Australian credit market, there have also been areas of strength,” the Reserve Bank chief said.

“The process of re-intermediation has seen strong issuance by financials, particularly the major banks,” he added.

“This has substituted for the dislocation in asset-backed and corporate bond markets.”

But Mr Debelle said there had been other effects.

“The rating downgrades of mortgage insurers and monoline bond insurers have had an effect on parts of the local bond market,” he said.

But that had not been widespread.

“…that exposure has been confined to a few relatively small pockets,” he said.

And, even there, the impact had been light.

“Those parts of the market which have been directly affected have proven to be relatively resilient to these downgrades,” Debelle said.

“In the case of the mortgage insurers, in part this has reflected the strength of the underlying asset class which has reduced the importance of mortgage insurance in the value of the security,” he added.

Thursday 24th July 2008 - 6:19 pm

What happens to your family if you die, but your mortgage lives

by Alan Thornhill

For about $1.60 a day, a typical 35 year old non smoking, healthy, white collar worker can buy $800,000 to $1 million worth of life insurance.

And that may well be worth doing, in a typical family, with, say, a $340,000 mortgage.

Men who  die unexpectedly, can leave their wives and children with big debts, that they have no hope of paying.

But how do you protect them against that risk?

Thousands of Australians do that by seeking the help of a financial planner.

Those planners like to compare themselves with fitness trainers.  They often remind their clients that building wealth, too, requires discipline.

Right now, the Federal government is reviewing the costs and structure of Australia’s superannuation industry.

And the nation’s financial planners are, understandably, apprehensive.

Richard Gilbert, the chief executive officer of the Investment and Financial Services Association, is urging caution.

He says sthe government should not do anything that would stop good people becoming financial advisers.

The industry does get a bad press, at times.

A Four Corners report, on a financial adviser, who persuaded his clients to invest in Firepower, is just the latest example.

The Association, though, insists that the reality is very different, in the vast majority of cases.

With share prices down, some levels of customer dis-satisfaction might well be expected.

But Mr Gilbert says early results from a survey, conducted by the independent research firm TNS, suggests otherwise.

“Despite the market, 98 per cent of those currently seeing an adviser say they are satisfied or extremely satisfied with the expericence,” he says.

This compares with 94 per cent in 2006.

And Mr Gilbert said commissions are still a popular way of paying for financial advice.

The industry hopes the government’s review won’t produce artificial caps on fees.

The Blair government tried that, in Britain, but was forced to alter its decision, after rich clients exploited the system.

And it was forced to  raise the fees advisers could charge on new low cost savings products from 1 per cent to 1.5 percent after pressure from insurers and money managers.

The average fee in Australia, on comparable products, is about 1.6 per cent.

nt, after pressure from insurers and money managers.

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Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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