Planning a couple’s investment strategy often means taking two very different risk tolerances and profiles into account, as Mark Story reports.
When it comes to financial matters, Sydneysiders James and Jenny Pittar are the quintessential odd couple. While Jenny has a moderate appetite for risk, James – who works for the tax office – would prefer to shove their savings under the mattress. When they met, Jenny, who’d dabbled in equities and property investments, owned her own apartment.
Meanwhile, James was sitting on a mountain of dormant UK-based direct equities that had done little since he inherited them 10 years earlier. While Jenny knew a thing or two about investing, she lacked the discipline to do anything about it. That’s one of many reasons why she approached friend, and financial adviser, Lisa Faddy to find an investment middle ground comprising capital protection and growth upside.
Life -changing decisions
Armed with a balance sheet and no specific idea of what the couple wanted to achieve, Jenny gave Faddy an open-ended brief to improve their financial situation. What also drove Jenny to seek financial advice was her growing dissatisfaction with their financial set-up. It seemed incongruous to Jenny that selling her apartment to fund an $800,000 house should leave them $600,000 in debt when they had this languishing war chest in the UK.
“We always knew that we could bail ourselves out using the UK shares, but we had little idea of when or how it should be done,” Jenny says.
The decision to start a family, relatively late in life (at 41), also meant they would have to reassess their income while Jenny took 12 months’ maternity leave from her job in IT consulting and James became the sole bread-winner.
Jenny was also keen to ensure that if anything happened to her, James – who’d been blind since his teens – would have sufficient income to look after himself and their daughter, Annica, who’s now a year old. She also wanted to ensure James would be able to continue his charity work as a marathon swimmer.
| Portfolio Snapshot James and Jenny Pittar |
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Refinance and diversify
Having assessed their financial situation, Faddy’s first mission was to bring the UK-based shares into Australia. Not only would that address their high debt level, it would also remove the risk of negative foreign exchange volatility.
“Given market and exchange rate movements, they would have lost a lot of money over the last year had they not made the change,” Faddy says.
But instead of bringing the shares down in one lump sum, Faddy recommended that the Pittars spread the CGT hit over two years. This meant selling shares with the least capital gains tax (CGT) late June and those with the most CGT early in the new tax year. Funds from the shares were put aside to pay tax bills, and reduce the non-tax-deductible debt on the mortgage to $50,000.
Some of the proceeds from the shares were also paid to the Pittars to top up cash flow while Jenny was on maternity leave. Faddy managed to achieve an annual tax saving of around $16,000 for the Pittars and, overall, $25,000 and $65,000 were redeemed for income needs in late 2007 and 2008 respectively.
More debt
To maximise the Pittars’ earning power, Faddy recommended taking out an investment loan to establish a diversified investment portfolio. Interest on the loan would be tax-deductible, as the loan was being used to produce taxable income via dividends and managed fund distributions. While the Pittars had the capacity to borrow up to $550,000, they only felt comfortable drawing down around $350,000.
“Lisa recommended drawing down more, but we didn’t want to be too close to the edge on repayments,” Jenny says.
 THE PLANNER Lisa Faddy Majella Wealth Advisers Neutral Bay, NSW Faddy holds a Bachelor of Commerce and Law from the University of NSW, a Graduate Diploma of Applied Finance from the Securities Institute, an MBA (Executive) from the Australian Graduate School of Management, and is a Certified Financial Planner. A former authorised representative of Godfrey Pembroke, she co-founded Majella Wealth Advisers in 2002 withbusiness partner Joanna McCreery. History Strategy |
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“With interest rates up around 7.5 per cent, we were keen to use extra cash flow to reduce the size of our overall loan.”
Having substantially reduced the debt on the home loan, Faddy proceeded over a few months to establish a $335,000 diversified investment portfolio of wholesale managed funds using BT Wrap as the administrators. Faddy recommended managed funds over direct shares for the diversification they provide. While index funds are a core part of the portfolio, active funds also provide greater growth upside.
Meanwhile, the $100,000 that Jenny held across six super funds was consolidated into her company fund with Colonial First State’s FirstChoice.
“Had Jenny and James been 20 years older, tipping proceeds from shares into super may have been an option. But I wanted to provide a vehicle that would maximise their gearing potential, and still provide the flexibility to use those funds prior to retirement,” Faddy says.
Given the Pittars’ limited appetite for risk and their ongoing cash-flow requirements, Faddy also recommended two $200,000, 100 per cent capital protected investments: Macquarie Fusion, and HFA Octane Asia. Faddy also steered the Pittars into two, fiveyear direct property syndicates that would pay tax-deferred income while providing longer-term capital growth.
Protection
The next step was to review the Pittars’ insurance requirements and ongoing super fund contributions. As Jenny had always been the family’s primary bread-winner, it was decided to increase her life insurance cover to $600,000 within her company super fund, and to take out trauma insurance (with MLC) that would pay $4800 per month if anything happened to her.
They also took out an income protection policy for James (also with MLC) that would pay $3000 per month, if needed. His life insurance cover was also increased through his PSS staff super fund. Both James and Jenny also increased their super fund contributions to maximise co-contribution benefits.
Performance
Since joining forces with Faddy, the Pittars’ portfolio is up around 8 per cent (less dividends) – and considering the 25 per cent equity market fall over the first quarter of 2008, they aren’t complaining. Having successfully restructured their finances and provided the needed cash-flow to see them through Jenny’s maternity leave, Faddy is now taking a watching brief on their investment strategy going forward.
While the fall-out from the subprime meltdown has dragged down overall portfolio performance, Faddy says there’s no need for a major strategic re-think. As long-term investors, she says it’s more important that their investment strategy is sufficiently flexible to cater for any planned or unexpected lifestyle changes. While the Pittars are contemplating having another child, self-employment for Jenny is also on the horizon.
Over the next two months she’s planning to transition from her current role into her own book-keeping business.
“I’m currently doing a Masters in Accounting and eventually plan to have book-keepers working under me,” Jenny says.
“I will no doubt be calling on Lisa’s expertise to work out how much I should be paying myself, and increase super contributions to reduce tax.”
Hindsight
To Jenny, the decision to pay a fee for financial advice – rather than commissions – was fashioned somewhat by her parents. They’d successfully convinced her that people who paid a fee were better off. She was also attracted to the range of products that Faddy was able to offer.
“I was also encouraged by Majella’s client-base, as many of them weren’t too dissimilar to James and me,” says Jenny.
In hindsight Jenny wishes she and James had sought professional advice years earlier – especially when it came to the festering UK-based stocks.
What she regrets most is not having more specific investment goals when they first engaged Faddy.
“I realise now how useful it is to have a well defined idea of what you want your money to do for you, before you engage professional advice,” Jenny says.
“The more you know, the more an adviser can gear their advice to you.”
