Statement of Advice

INVESTMENT

 

ASSET CLASSES

There are four basic asset classes that you can invest in:

• Cash
• Fixed Interest
• Property
• Equities (Shares)

These assets classes are available both in Australia and overseas.
Fund managers, responsible entities and trustees of superannuation funds can invest in cash, fixed interest, property or shares or a combination of two or more of these classes. They may label them as Capital Guaranteed, Capital Stable, Balanced, Diversified, Growth and Managed.

Cash

Cash investments are investments where the funds are typically “lent” to Australian Government bodies, banks (including building societies and credit unions) and companies – they are borrowers of funds. These “borrowers” pay an interest income that usually rises and falls over time in line with short-term interest rates. Cash is a very low risk investment and pays an investment return in the form of interest.

Examples of cash investments include:

• Cash Bank Account
• Cash Managed Trusts
• Bank Bills
• Treasury Notes

Advantages of cash investments:

• They can be redeemed at short notice
• They are generally very stable investments where the capital invested is unlikely to be affected by market and economic conditions; and
• Cash is appropriate for investors wishing to achieve short-term investing and savings goals

Disadvantages of cash investments:

• Interest is payable in line with short-term interest rates – therefore if interest rates are low, then the yield will normally be low also
• All interest earned is potentially taxable at your marginal tax rate; and
• Inflation usually erodes the value of the investment

 

Fixed Interest

Fixed Interest investments are also known as debt securities and they have a fixed rate of interest payable. Typically, an investor lends their money to an organisation, such as a bank, in return for a fixed return to be payable set at a future date. Fixed interest investments tend to be low to medium risk for Australian fixed interest and medium to high risk for international fixed interest (known as international bonds).

Examples of Fixed Interest Investments include:

• Term Deposits
• Commonwealth government bonds and debentures
• Semi government bonds and debentures
• Corporate bonds and debentures; and
• First mortgage managed funds

Term Deposits
Are deposits with a bank, building society or credit union for a specified period of time and in return, the investor receives a fixed rate of interest for the duration of the deposit. The rate is defined prior to the deposit being made and is fixed for the duration of the deposit. Term deposits can range from one month to five years in duration.

Bonds
Are issued by government and semi-government bodies in Australia and overseas. You can invest in a bond from one to thirty years in duration and at maturity, the borrower will return the money to the investor plus interest.

Mortgage Funds
Lend out investor’s funds to institutional or large commercial borrowers who can provide acceptable security for the loan. It is WealthSure’s policy that we only allow mortgage funds that are backed by first mortgage security on to our Approved Product List (“APL”). The income derived from a mortgage fund is usually fully taxable at the investor’s marginal tax rate.

Mortgage funds normally lend up to 66% of sworn valuation of property and in some cases may lend above 66% by purchasing mortgage insurance. They will also maintain some funds in short term money market instruments to meet withdrawals. There is not usually an entry fee to these trusts but there is often an exit fee in the early years of an investment.

Mortgage trusts can be a sound source of income as part of an investment portfolio. Income can be paid monthly, quarterly, half yearly or annually depending on the rules of each trust. In a market where interest rates are falling they can maintain higher rates of interest than other investments for some years. Conversely in a rising market they may produce lower rates. Current market conditions should therefore be considered when selecting this type of investment.

Risk level is higher than most other fixed interest investments but is commensurate with the returns:

Advantages of fixed interest investments include:

• They are relatively easy to redeem, giving the investor liquidity
• They provide the investor with a certain income amount over the term of the deposit or investment; and
• They are low risk investments and the risk of losing capital is minimal

Disadvantages of fixed interest investments:

• If variable interest rise after you purchase the investment, then you have forgone the opportunity of earning higher interest rates in the market. This effectively reduces the face value of the investment
• International fixed interest is affected by currency fluctuations; and
• A fixed interest investment is locked in for the full term of the investment otherwise there are penalties for an early redemption

 

Property

There are two ways a manager can invest in property. They can either own it directly or they can invest in listed property trusts. The term listed refers to listing on the stock exchange.

These property trusts invest directly in property (either commercial or domestic) and investors purchase units in the property trust. It is WealthSure’s policy to not approve property trusts that invest predominantly in property development.

Listed Property Trusts
Are considered by many to be an equity investment as the trust itself is listed on the stock exchange and investors purchase shares in the Trust. The shares can be traded on the stock exchange, and are therefore subject to fluctuating market sentiment. Whilst “listed property” trusts have an equity-based structure, the underlying asset of this trust is property which is generally less volatile than the equity market.

Listed property trusts will normally produce quite good levels of income, which is reasonably tax effective, together with reasonable levels of capital gain over time. A major benefit of a listed property trust is liquidity, as the shares can be sold to a ready market at any time.

Managers who invest in listed funds can give investors the benefit of a spread of property throughout the market and this can be appropriate in a portfolio, especially for the smaller investor.

Unlisted Property
Investments are now subject to stringent rules, which in turn make them a relatively illiquid investment with long redemption periods. Provided this suits the investor and it is a smaller part of their portfolio this may be an appropriate form of property investment.

Equities / Shares

Fund managers use investor funds to invest in shares listed on the stock exchanges of the world. The primary objective with share investment is capital growth through the value of the share, but they also can pay income in the form of dividends. Dividends are the company’s distribution of a portion of its profits payable to shareholders. Dividend income from investment in Australian companies can also have significant tax benefits attached under the dividend imputation system.

Shares are generally medium to high-risk investments. You are relying on the company to perform well and grow over time, whilst at the same time being subject to market fluctuations and economic and regulatory change. Given the level of risk associated with share investments, it is recommended that most investors invest for the medium to long term in order to smooth out volatility.

Different managers may invest principally in all or specific market areas:

• Aust. Industrial
• Aust. Resource
• Aust. Emerging Co.
• International Shares
• Overseas’ Industries
• Overseas’ Regions
• Specific Countries

Additionally the portfolio may be weighted towards more or less speculative stocks, or may be designed for income rather than capital growth or vice versa. Some fund managers invest in Australian shares that are fully franked with the aim of producing a tax effective income stream coupled with reasonable growth. International managers may hedge the currency risk or may not. They may also invest around the globe or only in specific countries or regions.

Advantages of equity Investments:

• They provide for good long-term capital growth and performance through careful selection and consideration
• Most Australian shares have some form of franking credit attached. This means that the company has already paid tax on the income. And this is passed on to the investor in the form of a tax credit; and
• Shares can be traded on the stock exchange very easily. By investing in shares, an investor is able to own small parcels of many different companies, thereby diversifying the investment portfolio

Disadvantages of equity Investments:

• The value of share can fluctuate at a high rate in the short-term
• Dividends are not guaranteed. Company directors are not obliged to declare a dividend payment; and
• Ordinary shareholders are usually towards the bottom of the list for repayment of capital when a company winds up or liquidates

 

LIFE ISURANCE

 

Stepped Vs. Level Premiums

Stepped
This will help you to maintain affordability for your cover in the short term. Furthermore due to your age the difference between a stepped and level premium is minimal over the longer term and therefore stepped premiums provide that little more flexibility.

Level
Premiums remain at a similar level for the life of the policy, however, the initial cost is much higher than stepped premiums and therefore have not been recommended. In addition, you are apprehensive about insurance and require the control to terminate the policy each year, without financial penalty.

Any vs. Own Occupation Definitions

Any Occupation
As defined by some insurers, you have suffered a sickness or injury and you have been absent from and unable to work because of the sickness or injury for a continuous period of at least 6 consecutive months; and in the insurer’s opinion, after consideration of medical and any other evidence, that you are incapacitated to such an extent that you are unlikely ever to be able to work again in any occupation for which you are reasonably suited by education, training or experience which would pay remuneration at a rate greater than 25% of your earnings

Own Occupation
As defined by some insurers (Not available under Superannuation), you have suffered a sickness or injury; and have been absent from and unable to work because of the sickness or injury for a continuous period of at least 6 consecutive months; and in the insurer’s opinion, after consideration of medical and any other evidence, that you are incapacitated to such an extent that you are unlikely ever to be able to work again in the occupation in which you were last engaged before becoming unable to work

Indemnity vs. Agreed Value

It is imperative that your Income Protection will supplement your income at your current income values, as all calculations within this statement of advised, has been assessed at this amount.

Agreed Value
Under the Agreed Value, the monthly amount insured is the Monthly amount you are paid and is guaranteed not to reduce, irrespective of future changes to your income. Proof of your annual income must be provided, prior to the commencement of the policy.

Indemnity Cover
Under the Indemnity benefit policy, the Life Insured will only be entitled to the lesser of the two monthly benefits: * Monthly Benefit shown in the Policy Schedule – 75% of the life insured’s – Pre-claim earnings over the previous 12 months prior to the date of claim.