Portfolio diversification was a key result of changing financial advisers, as Mark Story discovers.

As all country-folk learn from their farming parents, property is the only real invest­ment worth having. This furphy about land eventu­ally drove Michael Le Roy to a major investment and financial advising crossroad.

Growing up on his parent’s farm just north of Perth, three things were always in abundance: dust, flies and land. Admittedly, Le Roy’s still got a soft-spot for the soil and owns two properties at Preston Beach, WA, plus a five-acre family block in the town of Waroona. But it was a couple of misadventures with two plantation investments –recommendations from his former financial plan­ner, a former life insurance salesman with earnings largely derived from commission-based fees – that led Le Roy to finally diversify his portfolio beyond terra firma.

Le Roy is a corporate manager (health, safety, environment and community) for AngloGold Ashanti Corporation. His main residence is in Wa­roona, 120 kilometres outside of Busselton, WA; during the week he lives in Perth.

After bouts with bad soil, drought and then fire, the investment Le Roy made in Paulownia Wood has since gone into liquidation. And the three lots invested with Timbercorp are now fore­cast to return less than half what Le Roy expected. While Le Roy doesn’t have too much to say about it, it’s understood his former planner would have received trailing commissions by recommending this investment.

Le Roy had mistakenly anticipated that these two plantation investments would give him a significant retirement plan, plus additional funds for possible family matters, like a future wedding.

“Like me, many investors conveniently overlook the probability of fire and drought, things nobody can control,” Le Roy says.

“Investors should be wary of robust projections and what earnings erosion can do to your future plans.”

Having watched his investments turn pear-shaped, Le Roy wasn’t totally distraught when his financial planner sold out to Busselton-based, Adam Moir of Garvan Financial Planning four years ago.

Change of Heart

Already cautious regarding financial matters, it took Le Roy time to develop a level of trust working with Moir after getting his fingers burnt with trees.

“When I started talking with my new financial planner [Moir] I felt a sea change in my ingrained thinking. My vision was to go on buying land as it always goes up in value,” recalls Le Roy.

“It took another six months before I felt sufficiently comfortable to consider other investment options.”

Moir never forced the issue on specific invest­ments and Le Roy eventually felt comfortable paying him, on a fee-for-advise basis, to review the other main aspect of his investment portfolio, his managed funds. At the instigation of his former planner, Le Roy had one managed fund, an MLC Income Builder, which was split between super and a regular investment account.

Given Le Roy’s age, 56, his appetite for risk and the available tax breaks, Moir promptly reallocated Le Roy’s managed funds to 80 percent Australian exposure and 20 percent into global markets. While Le Roy was happy with the MLC Income Builder, Moir saw a major risk having such a large portfolio exposed to just one fund. While MLC Income Builder is great for gearing and low franking credits, Moir says the fund switch was based on the need for greater diversification.

“Because of Mike’s large exposure to Australian shares in his invest­ment account, we have diversified his superannua­tion across three international share funds while maintaining some exposure to Australian shares,” advises Moir.

Strategising

The current strategy with Le Roy’s fund is to maximise super, due to the $450,000 cap on con­tributions over a three year period. By maximising salary sacrifice contributions, Le Roy is only paying a 15 percent contribution tax, significantly less than his 46.5 percent marginal tax rate.

“We’ve chosen to salary sacrifice Mike’s income up to his maximum of $100,000, combined with his employer’s nine percent contribution,” says Moir.

Moir has looked at diversifying Le Roy’s invest­ment funds further but he says that the capital gains implications make this unviable, pre-retire­ment. The plan is to gradually sell-down Le Roy’s capital account by age 65 and get it into super for tax and pension-related benefits.

Once he’d committed to a managed fund strategy, Le Roy was comfortable giving Moir one basic brief: to find the greatest value with the lowest risk.

“I was happy to be guided by Adam where I didn’t have a broad understanding. The annual rate of return I’ve received has given me the confidence to invest progressively more into these funds. It’s also alleviated initial concerns over the value of fee-based advice.”

Since rethinking his approach to managed funds, Le Roy now has well over $1 million in these funds, which is now focused on super and deliver­ing average returns of between 13–15 percent, which he feels are significantly higher than returns from either bank or property.

“I don’t like to get too involved in the fund selection, yet I do like to steer clear of higher-risk regions offshore,” says Le Roy.

Equity Appetite

When it comes to shares, Le Roy feels con­fident with direct equity exposure. With a son working as a mining engineer in Kalgoorlie and having a close ear to the mining scene, Le Roy feels confident making mining-related equity invest­ments. He selects stocks through his own research and also by using the advice of a broker, referred to him by Moir. A modest amount he invested in his wife’s name three years ago has grown into a sizable holding of mining stocks.

Le Roy has gone after undervalued mining juniors that typically fly under the radar of brokers’ analysts. Based on current values, he estimates a share price appreciation of around 55 percent. Despite the lingering tail in the mining boom, he is ready to take Moir’s advice and start locking in gains next year rather than buy more stocks.

“The idea is to use these gains to crank-up con­tributions to super, leave the investment account as is and use the income to supplement his cash flow due to such a salary sacrifice strategy,” Moir says.

Valuing Advice

With his investments tracking nicely, Le Roy supplements his annual face-to-face review with a monthly catch-up over the phone.

“Even though Adam knows a lot more than I do about financial matters, he doesn’t thrust his views on me,” says Le Roy.

“At the end of the day I know that I have to make the final investment decisions myself.”

It would have been easy for Le Roy to attribute improved fund performance to the market’s recent bull-run rather than Moir’s involvement but Le Roy had never really stopped to consider the value of Moir’s advice until his employer provided Le Roy with the opportunity to have an independent adviser review his financial strategies. Apart from suggesting slightly greater exposure to bonds and other debt instruments, Le Roy says that the ad­viser failed to find fault with his overall investment strategy.

Other than being somewhat disappointed with the returns of the international stocks that Moir recommended, which Le Roy says delivered around eight percent over the last couple of years, “Adam and I don’t disagree on too much,” Le Roy says.

Due to the size of his managed fund portfolio, Moir has suggested Le Roy set-up his own self managed super fund. While he can see the upside associated with actively managing his own portfolio Le Roy questions whether he has the time for this while still working.

Looking Ahead

As Le Roy commutes between the family home at Waroona and Perth, week-in, week-out, he has contemplated investing in a city apartment. But with property prices coming off the boil, plus the likelihood of additional interest rates rises, Moir sees no reason why Le Roy should jump the gun.

Although Le Roy is reluctant to invest in tree plantations again, Moir has encouraged him to retain his current investments and offset tax losses against income.

While Le Roy respects Moir’s opinion on financial matters, he says it’s equally important to continually second-guess that advice by doing his own homework.

“The best way not to take Moir’s advice for gospel is to ensure I have a list of well researched questions to ask him when we talk.”

“I liked the idea of having a professional planner who would be accountable for a range of financial advice, from estate planning to tax issues while having the ability to play devil’s advocate when necessary,” says Le Roy.

Portfolio snapshot

Property

Preston Beach, WA: Purchased in 2002, doubled in value

Preston Beach, WA: Purchased in 1979, value up tenfold

Managed funds

Domestic: MLC Income Builder fund (for his gearing portfolio).

International: Platinum International, MLC Global Share fund and the MLC Capital In­ternational share fund.

Spouse- Lynda

Super: MLC Horizon Five fund; in line with her risk profile, offers diversification across high quality managers and asset classes.

Shares:

ASX mine-stocks: net worth doubled in four years.

Timber Investments

Timbercorp: Three lots of blue-gum; in­come projections over eight years un­known.

The Planner

Adam Moir

Cape Naturaliste Holdings P/L

Busselton, WA

After holding state management roles in Victoria, NSW and South Australia, Moir entered the financial planning arena in 2002. He holds an Advanced Diploma in Financial Planning from Deacon University and a Quality Advice Accreditation through GWM Adviser Services.

Advice structure

The business Moir bought in 2002 generated most of its income from up-front commission-based fees and trailing commissions. Moir immediately stopped charging commissions, electing for a fixed up-front fee and rebated all trail­ing commissions. “Due to a perception I was just another product pusher, I experi­enced difficulty getting my client base in for their initial annual review,” recalls Moir.

History

“When I inherited Mike in 2002 he was predominantly a margin lending client with a small super fund. We have since in­creased our scope of advice to include tax planning, salary sacrifice, cash-flow man­agement, and estate planning,” says Moir.

Strategy

“Mike is a well-educated client who likes to have a certain amount of con­trol of his financial situation. We tend to discuss alternative strategies, the positives and negatives of those strategies, espe­cially around maximising tax concessions,” advises Moir. “But ultimately Mike makes the final decision on what he feels comfort­able with.”

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