2018 – A Retrospective
While 2018 brought its fair share of bumps and bruises for the economy and finance industry both domestically and globally, it has been a year of progress and consolidation for Financial Decisions.
Despite challenging conditions throughout the year, our approach of providing comprehensive, holistic financial services under the one roof has proven its utility and reduced the impact of volatile market trends upon our clients.
So, as the end of a calendar year best described as tumultuous draws to a close, we turn to our senior staff for their perspectives on 2018 and their forecasts for what is on the horizon in 2019.
Damien Cooper (Chief Executive Officer)
Despite 2018 being a particularly difficult year for the industry, I believe that through the adversity fresh opportunities have arisen both for our clients and us as a firm.
Adversity
In terms of challenges facing the industry as a whole, the obvious test for all has been the Royal Commission and the subsequent fallout for banks and bank aligned advice firms. The media scrutiny accompanying the Royal Commission has put all advisers and their practices under the microscope, leading to an increased burden of compliance for those operators outside of the large dealer groups.
In addition, the pull back in the property market has rattled the cages of many investors and on the whole consumer confidence is shaky at best.
This highlights that it has never been more important to have an adviser who has an overview across all of your economic interests, rather than looking after an individual element of your financial plan.
Opportunity
On the flip side, the attention given to the shady practices employed by the big banks and institutions has helped people identify and appreciate the key difference when it comes to independent advisers.
We chose to be self-licensed 9 years ago because we understand the value and importance of autonomy. We believe freedom of choice is imperative in designing and implementing informed wealth creation and management strategies, and being told what our clients can and can’t invest in goes against our fundamental values. We genuinely care about the financial wellbeing of our clients and work hard to protect their interests – not for the benefit of banks and other institutions.
In line with this, our full suite financial services offering has been extremely well received and is now a primary reason that clients are knocking on the door. People are attracted to the model because we can comprehensively take care of all their financial needs with complete transparency and integrity.
The Year Ahead
The forecast for 2019 isn’t all smooth sailing, primarily because it is an election year during which we will likely see a change to a Labor government. This will see a raft of changes in areas such as tax legislation, adding to the instability of what is already expected to be a challenging year.
For many people, a large portion of their financial strategies relate to leveraging wealth found in the value of their homes or properties. This approach will create significant issues over the course of the year, because as property prices fall so too does the amount of discretionary spending per household that helps drive and grow economic activity.
An additional source of volatility arises from the lingering concern that we have enjoyed a 10 year bull market without an official correction. The issue here is that, during a bull market, investors have a tendency to loosen the grip on their finances and invest more than they ordinarily would based on the strategy of making large gains quickly. While bull markets can be a great time to invest, many investors have potentially been overwhelmed by the hype, which can lead to hasty and irrational investment decisions that prop up a market that in reality is less stable than it appears.
All things being considered, I believe in adopting a precautionary stance for 2019, and for individuals, having a sound plan that spans all aspects of your financial wellbeing will be central to minimising exposure to any impending risks that the upcoming year may bring.
Matthew Collins (Principal / Adviser)
This year has been disrupted dramatically and dominated by the Royal Commission and new and potential government legislation. These have created hurdles, but there has also been a silver lining for those prepared to change the focus of their financial strategies.
The Elephant in the Room
The Royal Commission rollercoaster and the fallout from it will create a new regulatory environment designed specifically to control large dealer groups. The problem here is that the very institutions that were engaged in the activities that gave rise to the need for a Royal Commission – primarily the big banks – have now abandoned ship, shifting back towards traditional core banking activities and largely selling out of their superannuation, insurance, funds management and financial planning businesses. This leaves a much greater burden of compliance for Independent Financial Advice firms (IFA’s). This means that IFA’s need to be as efficient and agile as possible to ensure continued compliance in the face of volatile market conditions.
From the last round of attacks on our industry by a government who sees fit to try to rule every aspect of our lives and a regulator who seems to be asleep at the wheel, new legislation surrounding insurance was passed and over the last couple of years has been implemented. Some of the new legislation in effect reduced commission payments to advisers by approximately 30%, due to regulators believing this might curb the practice of bank advisers churning insurance contracts in order to be paid large upfront commissions. As this has been implemented, insurance companies have increased premiums on most contracts by between 20 and 30%! So we have consumers being slugged by the increase in premiums expressing their displeasure, while many advice firms foreseeing reduced income have had to consider their service models.
Reset your Thinking
During a two month stretch earlier this year, the all ordinaries dropped 12%. This correction made many investors – and some advisers – very nervous. However the upshot is that, for those who rolled with the punches, it brought about strong opportunities to buy quality assets in the form of companies at a reasonable price for the first time in years.
The other real area of opportunity for Australians came in the form of capital growth. Traditionally, Australian investors have looked for big dividends and “quick wins”, but there have been some significant results for those who were prepared to play the long game this year by shifting their focus to time in market and capital growth trends.
The Outlook for 2019
2019 is poised to be a very interesting year for a number of reasons. Firstly, for Australia, current indications are that we will get a Labor government that will hold a clear majority – and a mandate to stop the refund of franking credits. This will cause serious concern for shareholders and will have major implications for the tax strategy of many Aussies.
Traditionally, Australians have looked for big dividends, often with reasonable franking credits to fund part of their income needs, particularly in retirement. There may need to be a change in the dividend policy of many companies and a shift from an income to a growth focus when investing.
Globally there is a lot happening that could cause significant market fluctuations, including examples such as BREXIT and US/China trade deals. However I do not foresee a bear market or a crash either here or overseas. Volatility is an opportunity to buy quality assets at a more reasonable price. It is the price we pay for participating in the long-term growth of world markets
As a firm, I am looking forward to seeing the continued positive impact that we have by implementing comprehensive, strategically aligned financial plans for our clients in the face of what will be an uncertain market over the next 12 months.
Albert Lee (Chief Investment Officer)
The last year has highlighted the impact politics has on the global economy on a scale not seen for years, making 2018 a unique combination of challenges and favourable circumstances.
Polarising Politics
In the recent past, despite a great deal of noise and rhetoric, politics has not had a massive impact on financial markets. However this year a number of global factors – such as the populace movement, BREXIT and the policies and actions of the Trump administration – have emerged as a disruptive force in terms of market volatility and how people, businesses and institutions respond. A lot of people expressed dissatisfaction with traditional approaches and as such “voted with their feet” in a significant way.
As we entered 2018, the RBA left the cash rate at a record low of 1.5%, and it is still there. This extends its period of inaction to three years amid lethargy in inflation and a slowdown in the housing market. However, some in the industry are forecasting doom and gloom on the horizon, with potential for a dramatic housing price correction domestically and negative impacts on markets around the world as a result of the US continuing to raise interest rates. This is all evidence of the end of the so-called “easy monetary policy”.
The Importance of Being Earnest
While markets do not like uncertainty, the volatility of the last year has provided opportunity. For those who were committed to a comprehensive financial strategy that factored in all aspects of financial wellbeing, capitalism and common sense prevailed.
Domestically, economic growth has been strong and unemployment has fallen, helping to support family incomes despite household debt being at historic levels. For those operating businesses, there were positives in the face of difficult circumstances, with many Australian companies earning solid profits.
In addition, the Royal Commission weighed on sentiment towards the banking sector and major financial institutions. Over the longer term however, we see this as a positive move to ensure that our banking system takes more accountability and corrects the culture of inappropriate practices. Every country needs a strong banking system to flourish, so we are confident that the short-term pain will be a blessing in disguise for our banks and economy over the long-term.
Conditions in the housing market eased throughout the year with dips reported in major cities around the country. This caused sentiment towards the housing market to grow suspicious and brought about a decline in demand for housing finance, particularly from investors. The positive news arising from a falling property market is that affordability is starting to come back for first time homebuyers.
What’s on the Horizon
There are lots of headwinds that many Australian investors have had “too good a time” while things have been smooth and on the upswing, leading some analysts to assert that we have forgotten what a pullback is like.
International factors, such as what will happen in trade deals between America and China, combined with domestic factors such as the potential for quantitative easing by the government all make forecasts for the year ahead unstable at best.
But it is important to take things into perspective. Getting bogged down with the day-to-day noise from around the markets will lead to a haphazard approach to investments. A good policy is to shift your thinking so that you see yourself as investing in a business, rather than buying a piece of paper (stock). Once you make this transition in approach, there is greater emotional and strategic control when market conditions get tough.
Chetan Sharma (Principal / Accountant)
2018 is ending with considerable unrest in the markets, uncertainty and a lack of confidence surrounding political events and, as usual, an ever-changing taxation landscape. All of this combines to present a raft of considerations that has seen a shift in focus back to fundamentals.
Chaos Theory and the Economic Spectrum
Chaos theory states that changes in a system will, over time, produce a change in behaviour no matter how small those changes are. This theory holds true when it comes to financial markets with small changes making a big difference over time, and currently there are a range of factors driving the evolution of market sentiment.
While the effects of international factors have been well documented, here at home there have been some developments which have conspired to impact the market and influence changes to taxation and accounting practices.
Over the last 12 months this included tax changes brought into effect as a result of legislation that was designed with the intention of encouraging an upswing in the availability of affordable housing. The outcome of this, however, has had varying impacts across consumer cohorts, including:
For Investors
- Inability to claim travel costs to inspect rental properties
- Depreciation claims restricted to the point where depreciation for plant and equipment purchased by previous owner of the property are no longer deductible
- Increase in CGT discount from 50% to 60% for investments in affordable housing that meets criteria
For Foreign Investors / Temporary Residents
- Removal of CGT main residence exemption
- CGT withholding rate increased to 12.5% from 10% and the threshold lowered from $2,000,000 to $750,000
- Introduction of vacancy fee for foreign owners of residential dwelling
For Property Developers
- Introduction of new laws requiring remittance of GST on settlement of property rather than when the Business Activity Statement is lodged with the tax office
- Restrictions on number of foreign buyers in new developments
What will 2019 Hold?
In Australia, there is a distinct lack of clarity concerning potential changes to legislature as a result of the looming possibility of a change in government. Among other things, the Labor party has expressed that the domestic budget cannot support both CGT and negative gearing, meaning that there will be a range of changes potentially being enacted in 2019 including:
- Halving CGT to 25%
- Changes to small business CGT concessions
- Denial of franking credit refunds
- Stopping the practice of negative gearing altogether
- Minimum 30% tax on trust distributions
- Raise top personal tax rate by further 2 percentage points i.e. the top marginal tax rate to become 49%
- Lower non-concessional threshold to $75,000 and reduce the Division 293 threshold to $200,000
The Financial Decisions Family
This year was a fantastic one for our people, with the team growing in size, experience and cohesion. Here are some of the highlights over the last year:
- Leonita Kosasih finished her Masters in Financial Planning and has continued to develop into an outstanding asset to the firm
- Christeena Smyth put in a huge effort throughout the year, working tirelessly while also progressing with her Masters in Project Management
- We welcomed Matthew Story, who joined the team to assist Albert and strengthen the in-house capabilities we pride ourselves on
- Tim Brosnan’s steadfast service of the company was rewarded by being made a principal partner in the business
- Blake Conde joined the team as an Adviser, bolstering the bespoke advice side of the business with his energetic approach to client service.
Wrapping up the Year
As we evolve as a business we are growing from strength to strength thanks to our people and our vision of providing tailored strategies across every element of your wealth accumulation and management plans.
We thank you for being with us in 2018 and look forward to taking care of all your financial needs in 2019. Please note that we will be closed from Monday 24 December, reopening on Monday 7 January.
From the entire Financial Decisions family to yours, we wish you a prosperous and safe Christmas and New Year!
Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. December 2018
Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407