If you’re a DIY investor who researches thoroughly and has translated that into a well-managed and high performing portfolio, you may think you don’t need a financial advisor.
If so it may pay you to think again… and read on. You might find that you don’t know as much as you thought you did.
Dominic Mulcahy, financial advisor at Shadforths, says one of the problems facing DIY investors is that often the DIY market “doesn’t know what it doesn’t know” and lacks a reliable sounding board.
“I’m not being disparaging to DIY-ers but unfortunately a lot think they are able to manage their financial affairs and think they are doing a very good job when in fact they’re not addressing the whole picture. It’s imperative that investors attend to both the financial and strategic elements,” says Mulcahy. Recent legislative changes in superannuation, tax and pensions underscore the need for professional advice, he says.
Missing the 30 June cut-off to make contributions to superannuation, for instance, or failing to understand the different ways to contribute can undermine otherwise profitable DIY strategies, Mulcahy points out.
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One example was the window of opportunity that closed on July 1 this year that allowed individuals to put up to $1million into their superannuation tax-free. While many took advantage of the opportunity to transfer money from their personal share holdings, joint portfolio, family trust or investment companies into their super – often at the advice of their financial planner – many others didn’t, often because they didn’t know or didn’t understand how it worked. That kind of oversight, due to inaction or confusion, could end up costing investors tens of thousands of dollars during retirement, explains Mulcahy.
The opportunity to get your money into super is still there but on a smaller scale. You can now transfer up to $150,000 a year tax-free, or a lump sum of up to $450,000 during the next three years into your super.
“In a number of cases I’ve looked at we’re talking a loss of $10,000-$30,000 at least of tax savings within the near term because of people’s inability to get a handle on the legislation and manage their affairs,” says Mulcahy.
Superannuation is in effect a tax vehicle through which to own assets, says Strategy First Financial Services’ Patrick Anwandter who has lately been snowed under with requests for advice on transferring shares into a super fund.
“What a lot of investors don’t realise is that asset allocation – deciding how much of your portfolio you invest in Australian shares, international shares, cash, property, bonds etc. – is more important than whether you have BHP, ANZ or Rio in your portfolio,” says Anwandter. Sourcing the relevant information to make those decisions can be time consuming for self-directed investors who are time poor, he adds.
Leanne Van Der Merwe of Cantor Wealth Management acknowledges that self-directed people often prefer to self-manage but suggests it might be wise to at least consider a financial diagnostic.
“You may have an absolutely fantastic share portfolio that you manage yourself and which is going great guns,” she says, “but have you thought about which structure to put it in – whose name it should be invested in or what the tax implications are?
“Would it be better held in your spouse’s name or a trust structure? Is it diversified? Are all the shares in resource stocks because that’s what you feel comfortable with? While you’re happily creating wealth, are you also protecting it with insurance? What happens if you lose your job tomorrow?”
“A good financial planner will sit you down and ask ‘where are you in life?'” she says.
“What are you seeking to achieve in the next five years to ten years? When are you anticipating retirement? Are you seeking an investment strategy focused on growth? Do you need income? Are you a conservative investor but want fantastic returns? If so those inconsistencies need to be reconciled and the structural aspect, the building blocks, need to be put in place.”
Regarding superannuation, Van Der Merwe’s suggestion is to start contributing sooner rather than later even if you have a mortgage and young children; in which case consider salary sacrificing part of your earnings into super as an additional sum.
That way you’ve got the effect of compounding interest and you are building up a structure that is tax effective and cannot be touched and therefore becomes forced savings.
Van Der Merwe admits she sees some portfolios where DIY investors clearly understand the whole picture. But frequently she finds that self-directed, investment oriented investors often omit to consider the other side of the equation.
“They will not have thought about the insurance aspect or the estate planning aspect or they may have superannuation from a previous job in which the beneficiary is still their ex-wife, which can cause stgastation in the family if something happens,” she says.
“If you can’t work for six months and you don’t have the appropriate insurances in place how does the family survive?”
Van Der Merwe believes that a lot of self-directed investors, like her executive clients, possibly have the capability to manage everything themselves but lack the time, energy and focus to do it.
“That’s where financial advisors come in. We run the day-to-day stuff, pick up the nuts and bolts and force them to focus on it periodically.”