Make your money work smarter<Adviser’s Name>

<Adviser name> is an Authorised Representative of RI Advice Group Pty Ltd

Make your money work smarter<Adviser’s Name>

<Adviser name> is an Authorised Representative of RI Advice Group Pty Ltd

Make your money work smarter<Adviser’s Name>

<Adviser name> is an Authorised Representative of RI Advice Group Pty Ltd

Make your money work smarter<Adviser’s Name>

<Adviser name> is an Authorised Representative of RI Advice Group Pty Ltd

My Name Financial

Make your money work smarter<Adviser’s Name>

<Adviser name> is an Authorised Representative of RI Advice Group Pty Ltd

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Disclaimer

Important Notice

RI Advice Group Pty Ltd, ABN 23 001 774 125, holds Australian Financial Services Licence Number 238429 and is licensed to provide financial product advice and deal in financial products such as: deposit and payment products, derivatives, life products, managed investment schemes including investor directed portfolio services, securities, superannuation, Retirement Savings Accounts.

The information presented in this seminar is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. RI Advice Group strongly suggests that no person should act specifically on the basis of the information contained herein but should obtain appropriate professional advice based on their own circumstances.

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RetireInvest credentials

• More than 80,000 clients and $10 billion under advice

• Professional personal financial planning advice

• Backed by quality research and technical teams

• Over 110 offices nationwide

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Greater potential

“With most things in life,

the more you put into them,

the more you’re likely to get in return”

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What is gearing?

• Borrowing to invest

• A long-term investment strategy

• Means of ‘creating wealth’ by increasing your investment balance to give the potential for higher returns

– BUT, if the investments decline in value the losses you make will be magnified

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Types of gearing

Gearing

Positive gearing Income greater than Expenses

Neutral gearing Income equals Expenses

Negative gearing Income less than Expenses

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• Your expenses (mainly interest) are more than the income you will receive back

• This can increase returns, but also increases risk.

• Manage risks:

– Make sure you have other income (eg salary) to cover the shortfall

– Have a long-term view

– Consider your personal insurance needs

– Invest in growth investments that have the potential to increase value

Negative gearing

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Three main gearing options

Home equity loan

• Borrow against your home

• Interest rates may be lower

• Any purpose

Internally geared funds

• Money borrowed by fund manager

• You don’t borrow• No repayments – just

amount you want to invest

• Low minimum to start• Can help to boost

your super• Less paperwork and

no credit checks• Limited to that fund

Margin lending

• Borrow against purchased investments (up to approved limit called loan value ratio – LVR)

• Limited to approved shares and managed funds

• Margin calls may arise

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Margin calls

• Applies to margin lending

• If loan exceeds LVR threshold you will be asked to (quickly) pay a margin call

Example:

• Investment value is $100,000. Loan amount is $60,000

• LVR is 60% and is the maximum permitted

• Investment drops to $92,300. LVR now 65%

• Margin call required to restore LVR to 60%

– Option 1 – use other money to repay $4,620 of the loan

– Option 2 – sell $11,400 of investment to reduce debt

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Margin calls

• Dealing with margin calls– usually need to respond with 24 hours– have other cash or additional security on hand– if you sell off underlying assets, be aware of real cost

• Strategies to reduce the potential for a margin call– borrow less than the maximum ratio– pay interest regularly and reinvest any income– diversify across and within sectors

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Gearing sources – comparison

Home equityInternally geared

share funds Margin loan

Underlying investments

shares /managed funds / property

managed fundsshares /

managed funds

Margin call n/a n/a yes

Potential capital losses

yes yes yes

Invest through super?

no yes no

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Case study – Cassie Value of gearing (margin loan)

• Cassie has $40,000 in savings and earns a $60,000 salary

• Wants to build wealth over the next seven years

• Wants her money to work hard for her

Strategy

• Her adviser recommends she take out a margin loan for $40,000

• Combine it with her $40,000 savings to invest $80,000 in high growth managed funds

Assumptions

• Investment return 8.3%, income is reinvested

• Average margin loan interest rate 9.5% pa paid from salary income

• Expenses are $30,000 per annum.

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Case study – Cassie Potential result of gearing (margin loan)

Calculations show the returns of each strategy after the loan, own investment and tax have been deducted. It assumes investments in a growth strategy with an average annual return of 8.3%. This return is composed of 3.65% income and 4.65% growth and includes 75% franking. Returns assume income is reinvested, a marginal tax rate of 34.5% (including Medicare levy), and average annual margin loan interest rate of 9.50% excludes brokerage and any other fees. This example is for illustrative purposes only. It does not represent the past or expected performance of any fund, portfolio or investment. Any changes to taxation, loan interest rates, investment returns, the regular savings amount and other assumptions will affect the outcome. The assumptions do not include the earnings on any excess cash flow that may be invested.

If geared$80,000 investment valued at $139,794Net return $25,622

If not geared$40,000 investment valued at $69,897Net return $21,522

After 7 years

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The underlying investment

Shares Property

Advantages

Liquid Tangible - you can “see it”

Portion can be sold Regular income (?)

Can diversify with large amounts The great Australian dream

Can start with small amount or contribute regularly

Disadvantages

Intangible Not liquid/diversified

Dividend amounts may vary Potential problems with tenants

Brokerage costs

Large sums needed to invest

High level of expertise/time

No regular savings

Possibility of margin call (margin loans)

No partial redemption

Possibility of capital lossesOngoing costs

Possibility of capital losses

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Managed funds: another option

Advantages

• Professionally managed

• Diversification can be achieved with smaller investments

• Liquid investments and can sell small portions

• Regular savings plans

• Can start with smaller amounts

Disadvantages

• Intangible

• Income payments can be irregular amounts

• Professional management is at a cost

• No direct control over underlying assets

• Possibility of capital losses

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Case study – Jason and Lorraine Regular gearing (managed funds)

Jason and Lorraine are in a strong financial position, earning good salaries

• Small amount left to pay on their mortgage

• Investment horizon of seven years and growth-orientated risk profile

Strategy

• Adviser recommends establishing a regular gearing plan for $1000/month

• And put another $1000/month into the investment from regular saving

• Investment in joint names.

Assumptions

• Investment return of 8.3% pa, income reinvested

• Regular total investment of $2,000/month

• Average margin loan interest rate of 9.5% pa paid from salary income

• Expenses are $50,000 per annum.

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Case Study – Jason and Lorraine Potential result of regular gearing

Calculations show the returns of each strategy after the loan, own investment and tax have been deducted. It assumes investments in a growth strategy with an average annual return of 8.3%. This return is composed of 3.65% income and 4.65% growth and includes 75% franking. Returns income is reinvested. Mark earns $79,000 and Sharon earns $75,000. Average annual margin loan interest rate of 9.5% excludes brokerage and any other fees. This example is for illustrative purposes only and does not capture any tax implications while the investment is held. It does not represent the past or expected performance of any fund, portfolio or investment. Any changes to taxation, loan interest rates, investment returns, the regular savings amount and other assumptions will affect the outcome. The assumptions do not include the earnings on any excess cash flow that may be invested.

After 7 years

If geared$168,000 investment valued at $225,772Net return $23,051

If not geared$84,000 investment valued at $112,861Net return $20,776

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Gearing – potential advantages

• Could increase returns (but at risk of greater losses)

• May reduce your tax liability– claim deduction for borrowing costs*– more invested in Australian shares could mean greater franking credits

• Diversification– access investments you wouldn’t otherwise have access to

– spread your portfolio across a greater range of assets

* Eligibility for tax deductions in based on individual circumstances and specific tax advice should be obtained.

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Gearing – potential risks

• Gearing can magnify both potential investment gains and losses

• If you are subject to a margin call, you will be required to contribute additional funds or sell down investments

• Interest rates may rise and you could have to pay more interest than you anticipated

Value change Asset value Loan Net Investment

$100,000 $50,000 $50,000

by 10% $110,000 $50,000 $60,000

by 10% $90,000 $50,000 $40,000

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Taking cover

• With responsibility for a debt (which is what gearing is), what would happen if you became sick, injured or died?

• Insurance cover against death and disability

- pay off loan should something happen to you

- can provide peace of mind

• Income protection

- allows you to continue servicing debt in event of injury

Insurance should form a part of your gearing strategy

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Is gearing right for you?

• Gearing is best suited to people who:

Question Yes No

1. Are looking to achieve strong capital growth over the long-term

2. Can cope with potentially large fluctuations (both up and down) in the value of their investments

3. Expect returns from their portfolio to exceed their borrowing costs

4. Can afford any shortfall between borrowing costs and investment earnings

5. Have adequate insurance in place

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Principles to consider

• Never make a decision based on tax advantages alone

– the investment must be appropriate even if tax advantages were not available

• Underlying investment must suit your needs and objectives

– basic principles of investing still apply

– diversification, protection against inflation

• Look for potential to provide capital growth

– shares

– property

• Seek professional financial advice

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Where to from here?

• Used wisely, over a long-term, gearing can accelerate wealth

• Geared investments generally involve much higher risk than similar non-geared investments

• If you feel gearing is an appropriate strategy for you, seek professional financial advice before commencing a gearing strategy

• If you don’t think gearing is for you, there are other wealth creation opportunities – just ask your financial adviser

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<Adviser name> is an Authorised Representative of RI Advice Group Pty Ltd