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					                                                                                                                             WHK Horwath Newsletter December 2008

        straight talkstraight
         straight talk                                                                                                                          talk
Take a long term view
The past quarter has been a momentous, tumultuous          What is the conclusion for investors?                     move higher, perhaps substantially so, well before
and historic one when we witnessed panic on Wall                                                                     either sentiment or the economy turns up. So if
Street, the collapse of Lehman Brothers, a mad             It is clear that the world governments are doing          you wait for the robins, spring will be over.
scramble for capital from many Investment Banks            everything in their power to prevent a more severe
and corporate consolidation. This led to mass              financial crisis. Share markets around the world have     A little history here: During the Depression, the
withdrawals from US money market funds.                    dropped substantially, effectively pricing in much of     Dow hit its low, 41, on July 8, 1932. Economic
                                                           the future risk.                                          conditions, though, kept deteriorating until
What started as a philosophical debate about the                                                                     Franklin D. Roosevelt took office in March 1933.
role of government in financial markets when the           We believe that the key point for investors to keep in    By that time, the market had already advanced
US Treasury ‘rescued’ Fannie Mae and Freddie Mac,          mind is to ensure their portfolios are well diversified   30 percent. Or think back to the early days of
became all too real by the end of the September –- the     and to make decisions on a rational basis.                World War II, when things were going badly for
US Congress voted against the A$840 billion Targeted                                                                 the United States in Europe and the Pacific. The
Asset Relief Plan (TARP) before it finally voted through   In an article published by the Australian Financial       market hit bottom in April 1942, well before Allied
the Rescue package 'take-two' in early October.            Review in mid-October, Warren Buffett (regarded           fortunes turned. Again, in the early 1980s, the
                                                           as the world’s savviest investor with a net worth of      time to buy stocks was when inflation raged and
Here in Australia, the Rudd government announced           $62 billion) summarised why now is a good time to         the economy was in the tank. In short, bad news is
its $10.4 billion stimulus package in mid-October.         purchase equities. His words can give some comfort        an investor’s best friend. It lets you buy a slice of
The key points of the package are:                         in that if we are buying good companies now and           America’s future at a marked-down price.
                                                           holding them over the long term, we are likely on
•	 $4.8 billion for an immediate down payment on
                                                           the right track. It also describes moving to cash in      Over the long term, the stock market news will
   long-term pension reform;
                                                           this climate and how that can be dangerous for our        be good. In the 20th century, the United States
•	 $3.9 billion in support payments for low and            portfolio’s long term returns (this does not mean         endured two world wars and other traumatic and
   middle-income families;                                 however that you should move all your investments         expensive military conflicts; the Depression; a dozen
•	 $1.5 billion investment to help first-home buyers       from cash to stocks as we often need short term           or so recessions and financial panics; oil shocks; a
   buy a home;                                             cash to meet expenses and to maintain appropriate         flu epidemic; and the resignation of a disgraced
•	 $187 million to create 56,000 new training              liquidity).                                               president. Yet the Dow rose from 66 to 11,497.
   places in 2008-09;
                                                           Below is an excerpt of his letter published in            You might think it would have been impossible for
•	 The implementation of the government's three            mid-October:                                              an investor to lose money during a century marked
   nation building funds and bring forward the
                                                                                                                     by such an extraordinary gain. But some investors
   commencement of investment in nation building           “The financial world is a mess, both in the United        did. The hapless ones bought stocks only when
   projects to 2009.                                       States and abroad. Its problems, moreover, have           they felt comfort in doing so and then proceeded to
                                                           been leaking into the general economy, and the            sell when the headlines made them queasy.
Will the latest package work?                              leaks are now turning into a gusher. In the near
                                                           term, unemployment will rise, business activity will      Today people who hold cash equivalents feel
The global economy needs to have the credit
                                                           falter and headlines will continue to be scary.           comfortable. They shouldn’t. They have opted for
markets working again. We believe the rescue
                                                                                                                     a terrible long-term asset, one that pays virtually
package will go some way in achieving this. The            So ... I’ve been buying American stocks. This is          nothing and is certain to depreciate in value.
major issue is who can sell what and, most                 my personal account I’m talking about, in which           Indeed, the policies that government will follow in
importantly, at what price? The US Government is in        I previously owned nothing but United States              its efforts to alleviate the current crisis will probably
a position to hold assets for the long term.               government bonds. (This description leaves aside          prove inflationary and therefore accelerate declines
                                                           my Berkshire Hathaway holdings, which are all             in the real value of cash accounts.
In April’s Financial Stability Report on the subject of
                                                           committed to philanthropy.) If prices keep looking
problem loans, the Bank of England said that credit
                                                           attractive, my non-Berkshire net worth will soon be       Equities will almost certainly outperform cash over
losses from the turmoil are unlikely to ever rise to
                                                           100 percent in United States equities. Why?               the next decade, probably by a substantial degree.
levels implied by current market prices unless there
                                                                                                                     Those investors who cling now to cash are betting
is a significant deterioration in fundamentals, well       A simple rule dictates my buying: Be fearful              they can efficiently time their move away from it
beyond the slowdown anticipated. That is because           when others are greedy, and be greedy when                later. In waiting for the comfort of good news, they
prices are likely to reflect substantial discounts         others are fearful. And most certainly, fear is now       are ignoring Wayne Gretzky’s advice: “I skate to where
for illiquidity and uncertainty that have emerged as       widespread, gripping even seasoned investors.             the puck is going to be, not to where it has been.”
markets have adjusted but which should ease over           To be sure, investors are right to be wary of
time. This view neatly explains why the US Treasury        highly leveraged entities or businesses in weak           I don’t like to opine on the stock market, and again
and the Federal Reserve believe they can buy these         competitive positions. But fears regarding the            I emphasize that I have no idea what the market
loans, with the end result being taxpayers not greatly     long-term prosperity of the nation’s many sound           will do in the short term. Nevertheless, I’ll follow
out of pocket or even in profit over the long term.        companies make no sense. These businesses will            the lead of a restaurant that opened in an empty
                                                           indeed suffer earnings hiccups, as they always            bank building and then advertised: “Put your
What does history tell us?
                                                           have. But most major companies will be setting            mouth where your money was.” Today my money
A similar rescue package was put together in 1933.         new profit records 5, 10 and 20 years from now.           and my mouth both say equities.
Known as the Home Owners Loan Corporation, it was a
                                                           Let me be clear on one point: I can’t predict the         Warren E. Buffett is the chief executive of Berkshire
bid to refinance home loans, granting longer term loans
                                                           short-term movements of the stock market. I               Hathaway, a diversified holding company.
to over one million people during the depression years.
                                                           haven’t the faintest idea as to whether stocks will
The Owners Loan Corporation stopped lending in 1935                                                                  Should you wish to discuss further, please speak
                                                           be higher or lower a month - or a year - from now.
and wound up in 1955, having made a small profit.                                                                    with your WHK adviser.
                                                           What is likely, however, is that the market will

                                                                                           TOTAL FINANCIAL SOLUTIONS... WHK HORWATH: DECEMBER 2008
                            Time to get focused...
                                                                                                                                      measure the number of x-rays performed in a
                                                                                                                                      day for the first one, the number of incidents for
                                                                                                                                      the second, then the level of client satisfaction
                                                                                                                                      by issuing feedback forms for the third.
                            Sometimes there seems to be so much to do… where do
                                                                                                                                      Where possible ensure the KPI is set against
                            you start? This is the time to prioritise – what are the most                                             industry benchmarks so you can be sure you
                            important things for your success?                                                                        are achieving best practice.

                                                                                                                                      3. Initiative-specific KPIs
                            Start with indentifying the key performance         Other KPIs tied to this particular critical success
                                                                                                                                      The third kind of KPIs are those that measure
                            indicators (KPI) for your business – those things   factor may then be the average transaction
                                                                                                                                      progress against specific initiatives. For
                            that are critical for your success. There are       value, number of transactions per doctor, and
                                                                                                                                      example, if you have a particular issue with staff
                            three different kinds of KPIs to be aware of.       so on.
                                                                                                                                      turnover, then you may consider implementing a
                                                                                2. Industry-specific KPIs                             specific training/retention program to address
                            1. Generic KPIs
                                                                                                                                      this. Setting metrics around this initiative will
                            You can identify these by asking yourself three     The second kind of KPIs are those that are
                                                                                                                                      help it stay on track.
                            simple questions:                                   specific to your industry. So using our earlier
                                                                                example, you would need to identify all of            Conclusion
                            •	 How do we get business?
                                                                                the critical success factors for your radiology
                            •	 How many inquiries do we convert into                                                                  Don’t forget the principle “What you can
                                                                                practice. For this example, let’s say the success
                               sales? and                                                                                             measure, you can manage”. Essentially, by
                                                                                of the business depends on:
                                                                                                                                      establishing KPIs, you will be in a better position
                            •	 What is the average value of a sale?             1. getting the X-rays done quickly (you can gain a    to control the results you want to achieve from
                                                                                   competitive advantage doing more in a day);        your business.
                            For example, let’s assume you are a radiologist
                            who gets sales from doctors’ referrals.             2. reputation for safety; and
                                                                                                                                      If you would like assistance in identifying appropriate
                            Therefore, an important success factor might        3. client care.
                                                                                                                                      KPIs for your business and industry benchmarks,
                            be to develop effective relationships with
                                                                                Those success factors would then need                 please speak with your adviser at WHK.
                            doctors. To successfully measure this, you
                            then establish the number of referrals you get      metrics—or KPIs—against which to monitor
                                                                                                                                      Article adapted from Alliance news Principa by
                            from doctors as a KPI.                              progress. So as a radiologist, you may want to        Dominic Ruso, Brampton Ontario, Canada

                                                                                Responsible and
                                                                                Sustainable Investment.
                                                                                Much has been written about the Government’s proposed
                                                                                Carbon Pollution Reduction Scheme (Green Paper) and
                                                                                how this may impact on our economy and the future
                                                                                success and viability of individual companies.
                            Already a whole new dictionary of terminology       Corporate Social Responsibility (CSR) is a            performance, and found that only 3 studies
                            and acronyms has been developed and                 common term used to define the broader                showed a negative correlation. In other words,
                            expectations have built up around the value that    issues which can be split into 3 main areas:          investing “ethically” does not mean you have to
                            could be extracted from the proposed Carbon                                                               forego some of your return.
                                                                                •	 Environmental concerns; and how companies
                            Pollution Reduction Scheme.
                                                                                   deal with the inevitable impact their products     In 2006 the United Nations developed their
                            But who knows what the real cost or benefit            and processes have on the environment, use         Principles for Responsible Investment. These
                            may be?                                                of energy etc;                                     have already been adopted by over 200
                                                                                •	 Social issues; such as how the company             investment managers globally, including 40
                            The answer is no-one really knows. But what we                                                            managers in Australia who control over $360
                                                                                   deals with its employees, outsourced workers
                            do know is that the combination of a growing                                                              Billion of funds under management – over 27%
                                                                                   overseas, the local community etc;
                            global population and its associated energy                                                               of all managed assets in Australia.
                            demands, an increasing scarcity of water, food      •	 Governance; the Board and management
                            sources and oil and the ever present impact of         structure, legal compliance and trade              So, whenever (if ever) the Carbon Pollution
Total Financial Solutions

                            climate change will have an economic impact.           practices etc.                                     Reduction Scheme is established in Australia, the
                                                                                                                                      issues and how they will impact companies now
                            This presents risks to companies at many levels     Companies are now rated on the basis of these         and in the future are already being considered
                            and while some companies are taking these           issues. And as you might expect companies             around Board tables, the investment managers’
                            issues seriously there are many companies who       which rate well across these areas generally          committees and the public pension funds – at
                            still seem to believe that it is someone else’s     perform better than others. A global study of         least by those of them who wish to continue to
                            problem to solve.                                   over 4,000 companies showed that over 5               survive and prosper.
                                                                                years, companies which rated in the top 10% on
                            The development of Responsible or Sustainable       governance issues, generated on average almost        Mark Mackintosh, Adviser and Representative,
                            investment principles has taken place over          4% pa extra return for investors. Put simply,         Prescott Securities Adelaide.
                            the last few years, developing from ethical         companies which are proactive, perform better.
                            investment concerns which were driven more                                                                Mark is a member of the Responsible Investment
                            by personal feelings, into a broader interest in    And a broader study looked at 30 separate             Association of Australasia.
                            how companies are dealing with the issues of        pieces of research into the quantitative
                            sustainability and their future success.            relationship between CSR issues and investment
Testamentary Trusts                                                                                          Did You
One way of creating an effective and flexible estate plan is
to include the option for a Testamentary Trust in your will.                                                 Know?
A testamentary trust (TT) is a trust created from                                                            WHK Group is the fifth largest
a will. Instead of all of the assets of a deceased
                                                                        TT is created                        Accounting group in both Australia
estate being distributed to the beneficiaries,
some or all are retained in a trust for the benefit                                                          and New Zealand.
of beneficiaries. It provides the option of either                 Testamentary Trust
a discretionary or fixed trust with each providing                (Discretionary or Fixed)
different benefits.                                       Trustees selected, trustees run the trust
                                                                                                             Clients & Readers: This newsletter is provided by WHK Group,
The persons nominated as trustees of a TT                                                                    its member firms, Investor Financial Planning and Prescott
have the ability to determine which beneficiaries                       Beneficiaries                        Securities Ltd (hereafter “WHK Group”) as an information
receive distributions and the timing and amount                            Partner                           service only and does not constitute financial product advice.

of distributions. Alternatively, the Trust may                            Children                           WHK Group provides no warranty regarding the accuracy or
                                                                        Grandchildren                        completeness of the information. All opinions, conclusions,
provide for fixed entitlements for beneficiaries,                                                            forecasts or recommendations are reasonably held at the
although flexibility is recommended to retain the                                                            time of compilation (ie November 08) but are subject to
advantage of any tax planning opportunities. It       However, you must be careful as any income             change without notice by WHK Group. WHK Group assumes
is important to consider carefully who are to be      not distributed to beneficiaries each year is          no obligation to update this document after it has been issued.
the trustees of the TT. They should be persons                                                               Except for any liability which by law cannot be excluded,
                                                      taxed at 46.5% in the hands of the trustee.
                                                                                                             WHK Group, its directors, employees and agents disclaim
who you know have some financial management
                                                                                                             all liability (whether in negligence or otherwise) for any error,
skills and can be trusted to act in the best          Asset protection
                                                                                                             inaccuracy in, or omission from the information contained in
interests of the beneficiaries.                       A well drafted TT may also assist to protect           this document or any loss or damage suffered by the recipient
                                                      the assets of beneficiaries of the estate. As the      or any other person directly or indirectly through relying upon
Tax minimisation                                      TT is not owned directly by the beneficiaries it       the information.
A TT allows for tax effective income distribution.    can offer a level of protection from creditors.
                                                                                                             Section 945A of the Corporations Act requires financial
Through flexibility of distribution of income the     It can also provide protection of your estate
                                                                                                             planners to obtain information from clients before making
TT effectively lowers the rate of tax paid on         for subsequent generations as the assets will          recommendations. Equivalent requirements apply also to
Estate income. The diagrams below illustrate the      never be directly available in property settlement     accountants in relation to the provision of taxation advice.
potential tax benefits of using a TT.                 disputes, be available for spendthrift children, or    Accordingly, clients and readers should not act only on the
                                                      in the event of matrimonial breakdown. The family      basis of material obtained in this newsletter because the
                                                                                                             contents are of a general nature and therefore do not take
                                                      court may however have some regard to assets
                                                                                                             into account each person’s individual circumstances and
                                                      in a TT and could adjust the assets outside of
 With a Testamentary Trust                                                                                   may be liable to misinterpretation. Do not act upon any of
                                                      a TT in determining the asset split between a          the information contained within this newsletter without first
 Assume $100,000 in taxable income and                husband and wife.                                      obtaining specific advice from your local WHK Group Adviser.
 beneficiaries have no other income
                                                      If a beneficiary is not capable of handling their      WHK Pty Ltd ABN 84 006 466 351, Investor Financial
                                                      own financial affairs or have special needs,           Planning Pty Ltd, holder of Australian Financial Services
                            PARTNER $25,000           you could leave part of your estate for that           License No: 238244 ABN 51 060 092 631 and Prescott
                                                                                                             Securities Limited (PSL) holder of Australian Financial Services
                                                      person’s benefit by naming them as the primary
                             CHILD 1 $25,000                                                                 License No: 228894 ABN 12 096 919 603
                                                      beneficiary (but not a trustee) of a TT. It prevents
                                                      abuse of the trust assets by unscrupulous people
                             CHILD 2 $25,000
                                                      or irresponsible individuals.                          This newsletter is printed on environmentally-
                                                                                                                                         friendly, eco stock.
                             CHILD 3 $25,000
                                                      A TT within a will allows beneficiaries the
 Total tax payable for partner and 3 children         flexibility and choice that a normal or standard
 will be $12,900 or effective tax rate of 12.9%       will simply cannot match and is not just for the
                                                      wealthy. A well-planned TT can last for up to 80
                                                      years after the death of the will maker, and can
                                                      provide ongoing asset protection with significant
 With No Testamentary Trust                           tax savings for partner, children, grandchildren
 Assume $100,000 in taxable income and                and great-grandchildren.                                                          Member Horwath International
 beneficiaries have no other income
                                                      You should consult your accountant, solicitor
                                                      and financial adviser, to ensure that you are
                            PARTNER $91,999           aware of all the advantages, disadvantages,
                                                      costs and responsibilities before you make the
                               CHILD 1 $2,667         decision to include this in your will.

                               CHILD 2 $2,667         The above comments provide only a general
                                                      overview of the concept of a TT. Specific advice
                               CHILD 3 $2,667
                                                      should be sought in relation to your personal
 Total tax payable for partner (no tax payable        estate planning needs.
 by children as $2,667 is the current tax free
                                                      Peter Hickey, Adviser & Representative, Prescott
 threshold applying from 1 July 2008 for minors       Securities, Robina Qld.
 after allowing for the low income rebate) will be
 $24,179 or an effective tax rate of 24.17%           Prescott Securities Limited is a wholly owned
                                                      subsidiary of WHK Group Limited.

                                                                                        TOTAL FINANCIAL SOLUTIONS... WHK HORWATH: DECEMBER 2008
                                                                                                                     When deciding on an exit strategy, there are
                                                                                                                     circumstances and issues unique to the family farm
                                                                                                                     business. Where there is someone in the family
                                                                                                                     wanting to be the successor there may be an
                                                                                                                     expectation gap between this person, or persons,
                                                                                                                     and mum and dad. The gap will be the time frame
                                                                                                                     on when to hand over the running of the farm, and
                                                                                                                     on what terms this should take place. After all, mum
                                                                                                                     and dad, and possibly past generations, have toiled
                                                                                                                     on the land for the best part of their lives and are
                                                                                                                     reluctant to release control.

                                                                                                                     Mum and dad might have serious reservations and
                                                                                                                     fears about the potential successor. Do they have
                                                                                                                     the experience to run the farm? Are they committed?
                                                                                                                     Can they fund the purchase of land? Is the farm
                                                                                                                     asset at risk in case of a relationship breakdown
                                                                                                                     with their spouse?

                                                                                                                     There may be an additional complexity when not
                                                                                                                     all siblings work on the farm. In that case how can
                                                                                                                     the inheritance be made fair & equitable when the
                                                                                                                     majority of the estate is the farm?

It pays to have a                                                                                                    When mum & dad want to retire but the only asset
                                                                                                                     is the farm how do they fund their retirement cash
                                                                                                                     flow needs if a buyer can’t be found or there is no

business succession plan

                                                                                                                     Step 4. Consider the superannuation and retirement
                                                                                                                     issues to ensure that your retirement is well planned
                                                                                                                     for. Ask questions such as: What type of super fund
Small business within the Australian economy is heading                                                              best suits your needs? Are you making sufficient
                                                                                                                     super contributions to achieve your goals? Have
towards some major changes over the next 5 to 10 years.                                                              you sought tax advice on contributions and the
                                                                                                                     consequences of your succession plan?

Given that the definition of an Australian small business   Developing a succession plan with your accountant        Once your succession plan is complete it should
is one that employs less than 20 employees, there           now and working on its implementation over the next      be continually updated and monitored to make sure
are many industries that will be significantly affected     5 to 10 years will make it easier to achieve your        you’re on track to achieve your goals and that no
by these changes.                                           personal, business and financial goals                   risk has the capacity to cause your plan to fail.

A study by RMIT University estimates that 97% of all        How do I go about the process?                           Without planning your succession you are leaving it
businesses within Australia are small businesses and                                                                 to chance that you will enjoy a financially comfortable
                                                            The processes that might be involved in developing
that the average age of the small business owner is                                                                  retirement.
                                                            your plan may follow the following steps:
55 years. In the next 10 years 81% of these small
business owners will be approaching retirement.                                                                      Article by Ruth Annett, Principal, WHK Western
                                                            Step 1. You’ll need to assess where you’re at now -
Problem is 75% of these business owners do not                                                                       Victoria.
                                                            personal, financial and business wise.
have in place an exit strategy from their small
business.                                                   Step 2. Set your personal, financial and business
                                                            goals. By clearly defining your goals you can
With only 10 years to go until retirement it is now         determine an appropriate plan to get there. A
time to commence implementing a succession plan             timetable for obtaining your goals is important. This
for a planned and successful retirement.                    ensures your goals are achievable in the timeframe.

What is a succession plan?                                  Step 3. Plan your succession strategy by deciding
Succession planning is a process undertaken by              whether to change leadership or exit from
a business owner to ensure the continuity of the            ownership.
business into the future, regardless of the ownership
or leadership.                                              Under the Changing Leadership strategy, you exit
                                                            from the day to day running of your business without
Every business owner is going to exit his or her            selling your business or your right to choose the
business at some stage of their business life. The
challenge is to make sure that your exit is planned.
                                                            strategic direction of the business. Key questions to
                                                            consider with this strategy include: Who will be the        Season's greetings
                                                                                                                        from WHK
By planning your exit you will be aiming to maximize        new leader? Are there strong controls over systems
the value of your business and accordingly unlock           and processes in place? Is the business structured
this value on retirement.                                   appropriately?

Why is succession planning important?                       If you choose to Exit from Ownership as your                Horwath
                                                            strategy, you not only exit from the day to day
Many small businesses are the small business
                                                            running of your business, but you also dispose of
owner’s superannuation or retirement fund. You
have invested not only your working life into this
                                                            your ownership interests and the right to choose            All of us at WHK
                                                            the strategic direction of the business. Key things to      Horwath would like to
business but also your savings to fund the growth
                                                            consider with this strategy include: Method of exit,
of this business.                                                                                                       wish you a safe and
                                                            for example employee ownership or merger; Method
If you do not plan your exit strategy correctly you         of business valuation; How to find an investor; Tax         joyful holiday season.
may not have sufficient funds to achieve your               consequences of exiting.
personal goals in retirement.

                                                                                            TOTAL FINANCIAL SOLUTIONS... WHK HORWATH: DECEMBER 2008

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