Why the interest in index funds?

An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the S&P/ASX 200 index. An index fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their nominated benchmark index regardless of the state of the markets[1].

An index investment fund seeks to deliver a similar return, less fees, as the index it has chosen to benchmark. In its simplest form, an index fund purchases the same shares in the same proportions as its index. For example, an S&P/ASX 200 index fund will hold shares in Australia’s 200 largest companies. An MSCI BRIC index fund will invest in major companies in Brazil, Russia, India, and China. Index funds cover shares, commodities, precious metals, and other asset classes.

With a vast range of indices to choose from, index funds are a useful tool for investors seeking access to both broader and more narrowly focused segments of global investment markets.

The alternative to index (or passive) investing is to either pick individual shares or invest in an active fund. Through stock picking and active trading, active fund managers seek to outperform their selected indices.

Both index and active funds may be listed, in which case units are traded on a stock exchange in much the same way as shares. Or they may be unlisted, with investors buying and redeeming units directly with the fund manager.

What are the advantages of index funds?

There are several reasons why index funds have become so popular:

  • Lower fees. Without expensive investment analysts picking shares, and with relatively low levels of buying and selling, it costs less to run an index fund.
  • More tax efficient. Active funds have higher turnover rates of their underlying shares, which triggers more capital gains tax events. Tax paid along the way can reduce the total capital pool on which compound interest can work its magic.
  • Better returns. Many studies have shown that, on average, index funds do better than active funds. In part that’s because of the lower fees and tax efficiency, but it also reflects how difficult it is to pick winners in the share market.

What are the disadvantages of index funds[2]?

Index funds do have some downsides:

  • No outperformance. Some active managers do have good records of beating the market. However, it’s difficult to identify who these are in advance.
  • More risk in a falling market. Index fund managers don’t use stop-losses, hedging, or shorting to protect their portfolios when things head south. Index funds follow the market down, as well as up.
  • Lack of choice. You invest in the assets that make up the index, even if that includes companies you don’t approve of, perhaps due to poor records on environmental or social responsibility.
  • They’re boring. Many people enjoy backing their investment hunches, either through direct stock picking or selecting specialist managed funds. That fun isn’t available to the pure index investor.

How can index funds be accessed?

Index funds can be held directly, just like any managed fund. Many investment platforms include unlisted index funds on their investment menus and may also provide access to listed index funds. Public offer superannuation funds that provide a wide range of investment options will usually have index funds on their lists.

What’s right for you?

At one extreme there will always be determined DIY stock pickers with no interest in managed funds of any variety. On the other hand, there are investors for whom index funds provide all the tools they need to construct well-diversified, low cost investment solutions.

Between them is a large group of investors who use index funds to build the foundation of their portfolio, while looking to add some icing to the cake via active funds or share selection.

There are many ways in which index funds may be used to help you reach your investment goals. To find out more, talk to your Lifespan Financial Planning authorised financial planner.

[1] https://www.investopedia.com/terms/i/indexfund.asp

[2] 5 reasons to avoid index funds: https://www.investopedia.com/articles/stocks/09/reasons-to-avoid-index-funds.asp

Index Funds vs. Actively-Managed Funds: https://www.thebalance.com/index-funds-vs-actively-managed-funds-2466445

What is money really?

That $50 note in your pocket. What’s it worth? “$50,” you say, probably thinking it’s a dumb question. But is it really? Or a sheet of plastic and a bit of ink that likely cost the note printer less than a cent? Your $50 note only has value because the government declares that it does.

This lack of intrinsic value means your $50 note, and the balances of bank accounts that represent most money in circulation, might better be described as currency rather than ‘real money’. For the majority of us, most of the time this distinction is of no great importance, but there are times when it matters a great deal.

Over the past few thousand years, all sorts of items have been used as currency, from shells and cocoa beans to soap and cigarettes. But to be considered real money, several key criteria need to be met. The most important are that it is:

  • Recognised as a medium of exchange and accepted by most people within an economy.
  • Portable, having a high value relative to its weight and size.
  • Divisible into smaller amounts.
  • Resistant to counterfeiting.
  • A store of value over long timeframes.
  • Of intrinsic value, i.e. not reliant on anything else for its value.

Throughout history, gold and silver have come closest to meeting these and other criteria, though nowadays you’ll have difficulty paying for your groceries with gold Krugerrands. Also, you’ll want to keep your gold and silver in a safe place, and it was people seeking to do just that which gave rise to paper money and our current system of bank-created money.

What started as a good idea…

Centuries ago, goldsmiths would take in gold and silver for safekeeping and issue the owners receipts, or notes, confirming the amount of gold held. The depositors soon discovered that these notes could be used for payment in place of the physical gold, making them an early form of paper currency. But the goldsmiths noticed something else. It was rare for anyone to redeem all their notes at once. They saw the opportunity to issue notes as a loan that borrowers paid back over time, with interest. And, because the redemption of the gold was relatively rare, they could create loans worth many times the value of the gold they held. Provided borrowers paid back their loans on time and only a small proportion of owners wanted their gold back at any given time, all was well, and goldsmiths transformed into bankers.

But this didn’t always work out. An economic shock might see everyone wanting their gold back, and if the bank couldn’t deliver the full amount that was demanded, it went broke. To help prevent this, many countries created central banks, with some governments even acting as lender-of-last-resort.

While government control and the rules around banking have evolved over time, private banks are still the source of most currency created today using a process that is much the same as that used by goldsmiths of old. However, gold no longer plays a part. Most countries did away with the gold standard during the 20th century.

Banks may be better regulated than they were in the past, but that doesn’t prevent crises happening from time to time. Reckless selling of mortgages to people who had no hope of repaying them, then bundling them up in complex financial instruments that multiplied debt was the cause of the sub-prime lending scandal that sparked the Global Financial Crisis.

When things get real

In economically stable times it’s easy to think of currency and real money as the same thing. However, a couple of examples reveal the difference between the two.

One is when a government starts printing money to pay for its programs. Inflation usually results, and the value of the currency can plummet. In the case of hyperinflation, paper money and bank deposits can quickly become worthless as happened in Germany in the 1920s.

And banks still go bust, as Lehman Brothers proved in 2008.

In Australia, depositors are protected by a government guarantee, but this is limited to $250,000 per person per Authorised Deposit-taking Institution (ADI).

In both situations ‘real’ money such as gold retains its intrinsic value. All else being equal, if a unit of currency halves in value due to inflation, the price of gold will double. And provided gold is stored securely, it can’t be consumed by the debts of a mismanaged bank.

The difference between currency and real money and the issue of intrinsic value has implications for other investments. If you would like to learn more, talk to your Lifespan Financial Planning authorised financial adviser.

Avatars in action – helping advisers engage with preferred clients

Successful advisers understand that marketing is about developing meaningful conversations with their preferred clients (and referral sources).

So, what makes a conversation meaningful? How do you make sure you’re engaging with your preferred clients and not timewasters? How do you provide them with helpful information instead of annoying them?

The first step is to understand who your ideal or preferred client is. Then, the more you know and understand them, the better you will be able to truly engage with them. Developing client avatars (aka client personas) can help you develop that level of understanding.

In this podcast, we’re joined by Jenny Pearse, Owner of Jenesis Consulting, and avatar expert. Lifespan advisers may remember Jenny from her fabulous presentation at our National Conference last year.

WHAT: What’s an avatar? 

An avatar (or persona) is a representation of your ideal or preferred client. Rather than simple demographics of your target audience, avatars are semi-fictional characters based on detailed research of your actual clients. They look to uncover the needs and wants of your ideal client. 

Ideal client profiling with avatars looks at psychographics – or what makes people tick. This includes a person’s values, politics, secret fears, secret desires, and what wakes them up at 2am.

WHY: The Power of the Avatar

At the most basic level, developing personas allows you to create content and messaging that appeals to your target audience. It also enables you to target or personalise your marketing for different segments of your audience and how to articulate the needs in the words of that particular target or “avatar”. It helps you to develop a clear compelling message that attracts ideal prospects to you.

If developed and used well, avatars can change the way you do business, not just your marketing. They can be an integral part of creating and maintaining a client-centric practice. By orienting your team around your avatar/s, you assure that your entire practice is working together to reach the right clients and serve them well. 

HOW: Understanding Your Ideal Client

Your avatars should reflect your best client relationships – relationships that generate the most revenue over the longest period and sustain a working partnership. Think about your best clients. How do they communicate? What are their persistent and emerging challenges? How can your services provide meaningful solutions they can understand and value? 

With well-defined avatars, your practice will have insights into questions like:

  • What pains are you solving for your clients?
  • What form of content is meaningful to your ideal client?
  • How do your potential clients want to engage with you?

Well-developed avatars will assist you to engage in meaningful conversations with your preferred clients more effectively and efficiently. They are key to turning strangers into prospects, prospects into clients, and clients into raving fans.

Huge thank you to our guest Jenny Pearse, and remember to email lyndal.higgins@lifespanfp.com.au for your short Avatar questionnaire.

Listen to the podcast here.

Lifespan Invest digital investing and education solution to address the ‘advice gap’

Lifespan is pleased to annnounce the launch of our digital investing solution, Lifespan Invest, as a means of reaching the mass market of Australians priced out of receiving personal advice.

Consumers who sign up will not receive personal advice but can elect to have their investment portfolio professionally managed for them, and will obtain access to a regular feed of financial literacy and educational content in the form of engaging articles and videos, helping them to lead more successful and fulfilling financial lives.

Lifespan Financial Planning CEO, Eugene Ardino, said the company was proud to be taking proactive steps via a digital solution to seek to address the needs of Australians who would like professional assistance.

“In an ideal world, every Australian would be able to afford a personal financial adviser, however, the reality is that delivering personal advice has become increasingly expensive over recent years, inevitably excluding more and more people. Yes, the Government can take steps to reduce much of this cost by streamlining regulatory requirements – and we are extremely supportive of the Quality of Advice Review currently underway – however, the industry needs to also utilise robust and compliant new technologies to help address the growing “advice gap”.

“Our advisers are now able to offer an alternative digital solution for those whose circumstances are such that they do not need to go through the more expensive personal advice process. When they do need that service, our advisers will be there for them”, Mr Ardino explained.

The Problem – and its Solution

Mr Ardino called on the rest of the financial advice industry to look to new technologies to enable them to reach and help mainstream Australia.

“The press is doing a great job in highlighting the size of the problem – thousands of advisers continue to exit the industry every year, and as a result, it is estimated another 100,000 Australians over the past year were “orphaned”, that is, had their advice relationship terminated. The problem is clear – but equally, there are now digital solutions to this problem, and it’s up to the industry to embrace these new technologies”.

The Lifespan Invest solution is provided via a partnership with Melbourne-based fintech platform, OpenInvest.

OpenInvest CEO and co-founder Andrew Varlamos said the company was excited to be partnering with an award-winning dealer group in Lifespan Financial Planning.

“The team at Lifespan understand that everyone is better off when they can access expert and professional help and are now – via OpenInvest technology – able to reach a much larger audience with their expertise. The current advice gap will only be solved by a combination of scalable technology and progressive financial advice firms such as Lifespan working in partnership”, Mr. Varlamos said.

Financial Wellbeing

Mr Ardino echoed the theme that being able to access trusted financial expertise helps people to lead more successful and happier lives.

“For a variety of reasons, increasing numbers of people are experiencing financial stress and uncertainty. And because the banks have all exited financial advice – unless you’re extremely wealthy – it leaves an even larger vacuum that unfortunately has been filled with a spate of gimmicky trading apps that encourage people, especially young people, to gamble via share trading or crypto. Not only does this pose excessive risk of financial loss, but it also comes with inevitable mental anxiety and stress.

“There’s sensible investing and there’s speculating, and we see it as our role to help Australians invest the right way – via managed, multi-asset class diversified portfolios. By doing so, they are more likely to reach their financial goals, and also achieve a greater sense of financial self-confidence and wellbeing,” Mr Ardino explained.

Find out more about Lifespan Invest here.

Can you be your own business coach?

Article also appears in ifa magazine online.

As a financial planner running your own advice practice, you not only need to be a competent financial planner, but also a confident business owner, able to set and achieve business objectives.

In over 20 years of coaching, supporting, and guiding advice practices to succeed, I have witnessed a range of roadblocks that can prevent advisers and their practices from reaching their full potential. To help overcome these roadblocks, a quality coach will get you to think outside the box, to challenge your thinking, and think beyond the obvious solution; but can we coach ourselves?

As an equation, your performance equals your potential minus interference. Therefore it’s interferences that prevent us from achieving peak performance. A coach aims to remove any interference or barriers to achieving your goals. As a financial planner you understand this, as you coach your clients by helping identify and remedy interferences that limit their potential to achieve financial goals.

Some advisers may not be ready to harness the insights of a business coach. If you wish to embark on developing your own business goals and objectives, but don’t feel ready to work with a business coach, you can start by coaching yourself. To do this you will need to commit to a process, and ideally, reach out to others for support along the way.

Coaching focuses on helping you unlock your potential. A good coach will instill a belief that you have the answers to your own problems within you. In most cases that belief is correct. One popular coaching process is the Sir John Whitmore’s GROW method which looks at the four steps of coaching as Goal, Reality, Options, and Where to?

Without using a coach to challenge your thinking, you must be able to step away from yourself when asking questions about yourself and your business. A useful self-reflective process is to think of someone you respect and ask the question, “What would they say or what advice would they offer if I asked them the same questions?”. Does it align with your thinking? If not, why?

Let’s break down the GROW methodology and apply some basic starting questions. In each case you should completely answer the question, before moving to the next:

What are your goals? Be specific.

  • What are your most important goals or what keeps you awake at night?
  • What would you like to happen that is not happening now?
  • What will happen if you don’t achieve this?
  • How will achieving this goal affect your life? What will it mean to you personally?
  • How important from one to ten is it that you address this? If your answer is not at least 9, it is doubtful you will commit to any actions. Perhaps you can ask yourself why it’s not a 9 or above. For a change to occur, you need a reason, the desire, a commitment, a way to change, and finally the support to change if needed. No action will take place until you are committed to change.

What’s your reality? Be specific.

  • Looking at your current reality. What is the situation right now? Describe it in relation to your goal or issue.
  • In this current situation, what do you think others are saying, and what is their perception?
  • How are you feeling about the situation?
  • And what effect does this situation have on you?
  • Is anything or anyone else relevant to this situation for you to act?
  • Based on the answers to these questions, are there any refinements that you would like to make to your goal?

What are the options?

  • What are four options I could use to address the issue or to achieve my goal?
  • List what is currently being done and not presently being done.
  • If you were with one of your peers, what sort of options would they give you?
  • What criteria would you use to judge these options?
  • Which one seems best against those criteria?
  • What are the benefits of that option?
  • What are the pitfalls of that option?
  • So, what do you think of that option now?
  • List the top two or three options.

Where to now? “A goal properly set is halfway reached”, Zig Ziglar.

What are your specific actions to achieve your desired outcome? Use SMART goals for the chosen options. These actions can also be incorporated directly into specific operational, tactical, strategic, or overall business planning documents if you have one.

  1. Specifically what options have you chosen, by who, what needs to be done, and by when.
  2. How will I measure whether the action has been done?
  3. Make sure the action or actions are achievable, realistic, and time-bound.
  4. What is the process for reviewing these actions?

Are you feeling comfortable OR uncomfortable about your answers and the actions?

If the process was all too easy and the outcomes were very similar to your current actions, you are likely not challenging yourself sufficiently to change.

Goal setting is something that you can work on yourself. However, reaching your potential involves being pushed outside your comfort zone, and being accountable for the outcomes you would like to achieve. This can prove difficult on your own. In these circumstances, you may well benefit from using external coaching. This might be a respected work colleague with strong business acumen, a Practice Development Manager experienced in coaching, or a professional business coach.

Holding yourself accountable

Without accountability, it is easy to become distracted, make excuses, blame other factors or just lose focus. It is crucial to document your goals and check in with them regularly to ensure you maintain your focus on measurable outcomes. If you are not continuing to progress, adjust your actions and restart. Using someone you respect to share your goals with will help you hold yourself accountable.

I have always thought of coaching as a little like friction. Even the smallest amount of friction over an extended period will cause change to any surface. Therefore, “If your actions don’t challenge you, they probably won’t change you or your business over time”.

Kevin Mayne, National Practice Development Manager (QLD), Lifespan Financial Planning

An open letter to Anthony Albanese and Scott Morrison on behalf of the financial advice community

Dear Anthony and Scott

With the Federal Election rapidly approaching, I felt compelled to put pen to paper to highlight the issues that continue to plague the financial advice community.

This upcoming election is looking like a tight race, and whoever assumes power on May 21 will significantly influence the financial services sector, and every Australian’s opportunity to access to quality financial advice for years to come.

The financial advice community has been decimated over the past few years, with only 15,000 financial advisers expected to be practicing by the close of 2022, from a peak of almost 30,000[1]. Australians are abandoning advice and advisers are being forced to cut ties with clients who cannot afford to pay significant fees, with over 100,000 less receiving financial advice than 12 months ago[2]. According to Adviser Ratings, most of those people no longer receiving advice, are aged 35-54 years, and it is going to be a major challenge to reintroduce the value of advice down the track to this segment.

We are at a critical crossroad, with an aging population, and the “Great Australian Wealth Transfer” on our doorstep, or potentially already here. Access to quality financial advice has never been so important, however, if we do not seek significant change, many will not be able to access affordable advice from a professional financial adviser.

Government has not recognised the advice community as the profession that it has now become, and therefore not provided the trust that our profession deserves, after years of jumping through hoops and navigating constantly shifting regulatory goalposts.

Here are four key issues that I believe need to be addressed by the incoming government.

  1. Legislative certainty and stability

We need a measured, long term view when it comes to financial advice regulation. Ongoing change and upheaval has left licensees, and advisers battered and bruised. We need the space to breathe and embed existing compliance requirements. We need the opportunity to consolidate and support advisers to build sustainable advice businesses so that they can continue to deliver quality financial advice for many years to come. In practice, this means a commitment to not increase compliance requirements for some time and where appropriate, to reduce some of these compliance requirements. This is not only important to existing advisers but is critical in attracting new entrants. There are currently low numbers of entrants into the advice profession, and we need to work on making a career in financial planning more desirable, as adviser numbers will continue to decline over the coming years. To achieve this, we desperately need to demonstrate stability.

  1. Address the fundamental issues affecting advice affordability

Currently, there exists a clear disconnect between the cost of providing one-off advice or advice to new clients, and the price consumers pay for that advice. The sheer amount of disclosure and record keeping documentation required is overwhelming and a major administrative burden for many advice practices. Most advisers absorb much of the costs of onboarding and advising new clients, which is not sustainable in the long term. Absorbing some of these costs will be viable if the compliance and administrative burden of ongoing advice arrangements are simplified, however, to reduce these costs, we need to simplify the advice process. Some practical suggestions to achieve this would include:  

  • File keeping requirements need to be simplified and Safe Harbour abolished

There are few other professions where there exists such a high burden of proof for an adviser to demonstrate the appropriateness of their advice. In most other cases, inappropriateness generally needs to be demonstrated for them to be sanctioned or found liable.

Shouldering this burden of proof has resulted in convoluted and complicated file keeping and disclosure requirements, which in turn increases the cost of providing advice. Perhaps a more moderate framework needs to be considered and abolishing the Safe Harbour provision would go a long way to achieving this.

  • Advice documents need to be simplified

Statements of Advice (SOA) should serve the purpose of educating and informing clients about how the advice provided meets their goals and objectives. At present, SOAs are too lengthy and often difficult for the client to understand. They are effectively compliance documents, but they have the potential to be so much more! Therefore, the SOA framework needs to be significantly simplified and this will make for more informed clients as they are more likely to read and understand the advice provided.

  • Financial Disclosure Statement (FDS) should be abolished

Client fee consent every one or preferably two years should be sufficient. If a client is unhappy with their service and advice, they simply will not renew their consent arrangement. Why have an extra piece of confusing disclosure, which adds no real value to the adviser, or the client?

  1. We need to stop perpetuating mistrust in financial advisers

The reputational denigration of financial advisers needs to come to an end. We have held up our end of the bargain (meeting education standards and fee consent requirements, just for starters), and we need support from the government to rebuild consumer perception regarding the value of quality financial advice.

  1. Continue to provide certainty in the superannuation system

Superannuation is the largest investment for many, outside of the family home. The superannuation system must continue to serve its purpose in ensuring that Australians have security and financial independence in retirement. Superannuation legislation needs to be viewed with a long term lens, and not as an election sweetener.

It has been positive to see that the communication coming from both parties demonstrates a desire to reform the financial advice framework to be less onerous and more affordable in the lead up to this election. I learned a long time ago to judge people and governments by what they do rather than what they say. This new term of government should serve as an opportunity to rebuild trust with the advice community and recalibrate financial advice regulation, learn from the mistakes made, and seek to ensure that the financial advice profession is in the best position to continue to provide quality advice to those Australians that need it.

[1] Adviser Ratings AR Landscape Report, April 2022

[2] Adviser Ratings AR Landscape Report, April 2022

Using compliance vetting to drive quality advice

In Season 3, Episode 1 of Lifespan Live, Eugene Serravalle, Lifespan FP General & Compliance Manager, and Pierre Moussa, Lifespan FP Senior Compliance Specialist, discuss the various ways that plan vetting can benefit both advisers and their clients.

Eugene and Pierre discuss the role of a good compliance team and the importance of approaching compliance with an adviser’s mindset, to ensure quality advice outcomes.

At Lifespan we are proud of the compliance-focused support that we provide to our adviser community. As a licensee we believe in making every aspect of running an advice business simpler – by sharing the burden of regulatory changes with our advisers and providing a robust and reasonable approach to compliance.

We see the role of a good compliance team is to primarily recognise the value that our advisers seek to add to their client’s and their family’s lives. By having this mindset, we are more likely to assess and review the advice from the adviser’s point of view. From a practical sense, our role is to help advisers navigate through complexity and empower them to confidently explore strategies that are tailored to their client’s current and future needs. 

Whilst always ensuring our advisers adhere to legislative and Lifespan policy requirements, we want to give advisers support and freedom to thrive. This is our motto at Lifespan and it provides an insight into our approach to compliance.

Whilst some of the larger licensees seem to have rigid standards in place for various reasons, they could be seen as overcompensating to mitigate as much potential risk as possible. On the other hand, we are flexible in entrusting our advisers and will always support innovative strategies, as long as they adhere to the legislative and licensee requirements – and ASIC’s interpretation – given that we are mainly steered by resources such as RG175, RG244 and other ASIC guidance.

Also, the emphasis should be on the team, whereby our advisers and their staff receive the benefit of the sum of our experience in providing and reviewing advice, across licensees that span various sizes and business models. We work together by sharing ideas and discussing strategies, both informally and in regular compliance meetings.

What is also different about the Lifespan compliance team, is that we are involved in vetting, assurance, technical, complaints, incidents, adviser onboarding, advice coaching and adviser presentations. This means you are working with more well-rounded compliance team.

Another role of a good compliance team is to recognise that our advisers are our best resource as they are interacting with, and building relationships with clients, which is why we are all here, so it is important to listen to them. We are continually raising matters in our compliance meetings that have been initiated by adviser feedback.

A good compliance team also needs to expect change in the industry and take an agile approach, always being ready to adapt to how legislation, technology and community expectations can alter the world of advice.

Much of this podcast focuses on the vetting function of our compliance team. This is where advisers send us their advice documents for approval, prior to presenting to their clients. We also have a post-vetting function, which is offered to advisers once they demonstrate a consistently strong level of advice quality.

Whilst some may think we are too controlling because we check every advice document, we believe the reality is the opposite. This is what allows us to be flexible, by not vetting to a set checklist or scorecard like many other licensees, we take an open-minded view to what advisers are proposing.

We look to say ‘Here are the client’s goals, these are the adviser’s strategies, and these are how the goals are being met and then adviser has demonstrated that the client is in a better position.’ Then we ask ‘Is there anything here that does not meet requirements?’, rather than relying on pre-prescribed check boxes. Quite often we will also discuss the strategies with the advisers.

This allows us to look at advice from a more practical and flexible view, to guide, help advisers navigate complexity, and to ensure that compliance does not present roadblocks that impact the adviser’s ability to provide quality, efficient advice.

You can listen to the whole podcast here.

5 top tips if you are considering merging your financial planning practice

This article also appeared in ifa.

Pressure to scale up and grow continues to increase with many financial planning practices fighting tooth and nail to operate sustainably for the future.

Many practices have struggled to meet their expectations of growth and client profitability over the past few years. This is due to the ongoing legislative upheaval, the increased cost of providing advice, and the distraction and disruption wrought by the global pandemic. 

Many practice owners that have gone it alone over the past few years feel exhausted and isolated, and are looking for ways to either generate growth, such as buying small client books, or potentially seeking to merge with like-minded practices, often with the encouragement of their licensee. 

It is important to carefully consider the implications of merging your practice, and ensure that at the end of the day, the merge is not only in the best interests of your clients, but also aligns with your core beliefs and the culture of your practice. 

Here are five tips to consider if you are thinking about merging your financial planning practice:

  1. Take the time to clearly understand what your medium to long-term objectives are for your practice. A merge with another practice might satisfy your short-term needs, however, in the medium and long term, you might find that it constrains how your practice will evolve and change.
  2. Understand the cultural fit. Don’t just pay lip service and agree on broad principles. It takes time to get to know each other and understand the differences and commonalities of each business. Your values should be aligned, and this is best understood by spending time together and witnessing them in practice.
  3. How much upheaval will the merger cause to both your clients, but also your team? If the practice you are seeking to merge with, is with another licensee, what hoops will you need to jump through if the merged business decides to maintain the alternative licensee? Of course, often, change is a positive; if the new licensee offers more efficient solutions, however, it pays to understand if the merge will benefit your business or potentially hinder it.
  4. Alignment in terms of your ideal client is critical. Synergy and efficiency can be gained by consolidating a service and approach which is tailored for a specific type of client. Alternatively, your ideal client profile might complement the merging practice which could potentially create new business opportunities. For example, if one practice focuses on late-stage accumulators, and the merging practice has an aged care focus, there could be potential for these accumulators to be supported in the aged care advice support for their elderly parents.
  5. Always have an agreed exit strategy and enter any merger with your eyes wide open. Commit to making it work but ensure that your clients and team are always at the front of your mind. 

Like most big business decisions, merging your practice requires careful consideration and in-depth due diligence to ensure that the decision you make is the best one for you, your clients, and your team. Reach out to those that have been in your shoes before and understand the lessons they learnt through the process. Understand if it is the right next step for you, and back yourself!

Michael Gershkov, national practice manager (VIC), Lifespan Financial Planning

Considerations for superannuation recontribution strategies

This article also appeared in Money Management.

The recent changes introduced to superannuation contribution rules provide increased opportunities for cash out recontribution strategies. While the strategy aims to increase the tax-free portion of superannuation interest, there are important issues for financial advisers to consider. This article provides a summary of:

  • the cash out re-contribution strategy;
  • potential benefits;
  • important points to consider before recommending the strategy.

What are the recent changes to superannuation contribution rules?

In February 2022, The Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021 (Bill) passed both houses of Parliament and received Royal Assent. The key superannuation measures in this Bill for individuals aged between 67 and 75 include:

  • Changing the work test requirement and extending the non-concessional contribution bring-forward rules effective 1 July 2022.

This means from 1 July 2022, individuals aged between 67 and 75[1] will be able to make non-concessional contributions to superannuation without having to meet the work test. These individuals will also be able to take advantage of the bring-forward arrangements and contribute up to $330,000 to superannuation in a single financial year (subject to their Total Superannuation Balance being below $1.48m on prior 30 June).

This change may open planning opportunities for older Australians including being able to cash out and re-contribute to super and ability to make non-concessional contributions post-age 67 without having to meet the work test.

Cash out re-contribution strategy

The cash out re-contribution strategy involves withdrawing some or all of the superannuation interest and re-contributing the amount as a non-concessional contribution. The amount withdrawn from superannuation is paid to the individual in accordance with proportioning rules, which is in proportion to existing taxable and tax-free components. When re-contributed to superannuation, the amount is allocated to the tax-free component of superannuation interest.

As such, the strategy may potentially convert some or all of the taxable component into a tax-free component. Ultimately, this may result in reduced tax payable if superannuation death benefits are paid to non-tax dependent beneficiaries (eg adult non-dependent children). 

Potential benefits of cash out re-contribution strategy

Benefits of the strategy include:

  • Increase in the tax-free component of superannuation interest.
  • Reduction in tax paid by non-dependent beneficiaries in the event of death.
  • If aged between preservation age and age 60, increase in tax-free component resulting in paying less tax on pension payments made prior to age 60.
  • Depending on income and other eligibility requirements, once the contribution is made the individual may qualify for Government co-contribution of up to $500.
  • Equalising superannuation balances for couples where the amount is withdrawn from one person’s superannuation and contributed into the other person’s superannuation account. By doing so, each person may be able to better manage their individual Transfer Balance Caps or Total Superannuation Balances. This may provide an opportunity to transfer more amount to pension or to make additional superannuation contributions.
  • Similarly, where one spouse is younger than the other, by withdrawing an amount from the older person’s superannuation and contributing to the younger person’s superannuation account, the couple may be able to access additional social security benefits while the younger person is below age pension age.
Article by Anna Mirzoyan, Compliance & Technical Officer, Lifespan Financial Planning

[1] Amounts contributed must be received no later than 28 days after the end of month in which they turned 75.

Lifespan National Conference Hobart 2022

Here are two great highlight reels from the recent Lifespan National Conference, held  in Hobart 2022. 

This year’s event really was a breath of fresh air after the past couple of years; a chance to reflect on the past, focus on the now, and plan for the future. 

One of the many great benefits of being part of the Lifespan adviser community!