Turn adversity into an advantage

Despite the best efforts of many, including government policymakers, it seems investors cannot win a trick. The problems created by the economy are driving business owners to face some very unpalatable decisions.

With increasing regularity, we see on the news that companies are retrenching employees and sadly it’s the tip of the iceberg.

Acknowledging that an employee retrenchment strategy is the very last expense control action taken in many companies, we need to reflect on some home truths.

1. The challenges of an ageing, under-funded population are still here

Irrespective of the financial crisis, we still have a longevity issue. That is, we have an ageing population that is predominantly under-funded for a pre-retirement or retirement phase of life.

Downsizing the work force means many of the working population, who were considering a period of wealth acceleration of 10 to 15 years, and perhaps a gradual and lengthy transition into full-time retirement, are now facing the possibility of receiving their last sizeable pay cheque or possibly their last regular pay cheque.

2. A large segment of our client base is now risk averse

Rather than maintaining their investments in the market, many investors have moved to cash and realised substantial capital losses and now they have to swallow the bitter pill of taking a real capital loss.

Their risk profile in the lead-up to the end of the long-term bull market is very different to their profile today. At least they can now sleep easy with the comfort of a Government guarantee of cash deposits, for what it’s worth, and in a market that is overweight in cash.

3. Mixed messages create headaches — and maybe uncertainty

The latest message from Canberra is to spend and spend. So, if that’s the case then I must go out and buy a new television.

The previous Government’s main message was save and put your money into superannuation. Those who did would be rewarded with an additional incentive of no tax on their pension income from age 60. And as an added teaser to keep you in the workforce a bit longer, the incentive of a transition into retirement pension.

A prudent way to manage this confusion is to compromise. Would I be acting against the national interest if I accept the $900 from Canberra and put it in my superannuation account as a non-concessional contribution and get, say, another $1,350

Government co-contribution? Then I could either retire or take a transition to retirement pension and receive a bigger and better television. Maybe this would trigger bipartisan support in Canberra.

4. Financial advice has never been needed as much as it is now

It is still a fundamental truth that clients need to make their dollars work harder and last longer. We have to convince a large segment of the working population that they simply need to take on a degree of investment risk, to invest in equities; they need capital growth if they are to have dignity in retirement.

Somehow we have to get back to basics and re-engage in the simple proven concepts and opportunities provided by dollar cost averaging and time in the market, salary sacrifice and the power of compound interest.

Admittedly as an industry, we have major challenges going forward.

In a perfect world, we could do without the evangelical and often misleading diatribe emanating from the not-for-profit superannuation funds.

We probably have to make things simpler and far more efficient from a back-office perspective. It is the financial advice industry that has never been needed like it is needed now.

Financial advisers have the national reach to assist all of the working population. It is the local financial adviser that has the personal contact, the trust, the knowledge and the personal integrity to talk and provide advice to local communities.

The message is simple: markets will recover and we have to make up lost ground. It makes sense to buy now at a low cost and participate in the gains.

If you have gains, would you rather they be in a concessionally taxed environment? I know many would prefer a zero tax rate and that is only achieved through superannuation pensions.

5. Price and value tradeoffs

Many advisers are now entering the life insurance market to diversify their business income streams and many are now seeking to achieve cost savings for their clients.

Placing life insurance cover in superannuation is a wonderful means of giving clients a convenient, drip-feed, economical pack of cover. The real value of using pre-tax dollars as superannuation contributions to fund the cost of the life insurance premiums is significant.

But remember at claim time that this is now a superannuation benefit, with all the inherent tax issues, possible claim staking and delays.

What will make the difference?

Probably the adviser’s experience with the product provider, that is, the checklist of value adds, such as:

• Do they provide ant-detriment benefits in super and pension phase?
• Do they waive policy fees if the life cover is in the client’s super fund?
• What is their claim payments philosophy?
• Who benefits if my client accrues a significant amount of imputation credits?
• Does the fund have a pension division and allow a transfer of assets intact from accumulation to pension phase?
• Can I have the income protection cover with benefits to age 65 in superannuation and, if so, how will they handle a long-term claim where the insurer wants to negotiate a lump sum settlement?

That is one line of exploration. It may have to be drastically modified when we are dealing with an educated Generation Y or X investor.

Acknowledging that superannuation preservation is anathema to them, salary sacrifice combined with geared super investments operating in the background plus margin lending arrangements outside of superannuation will probably be appealing.

Only experienced advisers can know what questions to ask to get these answers.

Whatever the outcome, superannuation and superannuation advice are absolutely necessary. It has been an interesting 18 months but the fundamental truths remain:

• we have an ageing population and Australian baby boomers are largely underfunded for retirement;
• we need to make the boomers’ retirement nest eggs work harder and last longer;
• clients have become increasingly risk averse and we have an education challenge ahead of us;
• we need to get back to the basics with such things as salary sacrifice and dollar cost averaging; and
• the search for value differentiators that are visible to clients will become increasingly important.

There seems to be consensus that the next couple of years will be tough.

Out of adversity, however, comes true opportunity, and it is being in a position to recognise opportunities and act on them that will really create value for the future.

Martin Breckon is a technical marketing manager at Aviva.