Australian Civil Liberties Union
Your Rights 2005
Chapter 16
RIGHTS OF INVESTORS
General
advice. Seek information. Sources of information. Investment advisors.
Acquiring
money to invest. Investment risks. Types of investment. Choice of
Superannuation
Funds from 1st July 2005.
See
also Chapters on Rights of Consumers and Rights of Taxpayers.
GENERAL
RULES FOR INVESTORS
A
person wishing to invest money should be aware of all relevant reliable
information,
decide what he wishes to achieve, look for hidden dangers, and be prepared
to
change investments if new information becomes available. The general advice in
the chapter
on the rights of consumers suggesting you should know your rights, keep your
cool,
shop around, be prepared to complain and exercise care may be useful for the
investor.
Although some protection is given to the consumer of goods and services, and
to
investors, you must learn to protect your own interests by making full
enquiries.
Gathering
information
You
should prepare a list of relevant information about your personal and financial
situation
for your own benefit, and to assist any financial advisors you consult. The
information
should include details on assets and liabilities, income, expenditure,
insurance,
health, family responsibilities, estimated date of retirement, job security,
need for
access to funds, preparedness to take risks, investment advisors you propose to
consult (if
any) and sources of written investment advice (newspapers, magazines,
etc.).
What
is your aim
You
should always be ready to ask yourself questions and to direct questions to
anyone
from whom you are seeking advice.You should ask yourself whether your aim is
to
maximize income by achieving a high rate of interest. This aim will often
involve some risk
and some limits on accessibility to the funds invested.
You
should ascertain the tax advantages of particular investments and whether your
investments
will affect your pension entitlement. Ask questions to establish whether you
can
rely on bank savings and a pension when you retire. For most people, investment
in adequate
superannuation should be given priority. Superannuation is an excellent
investment
for people in the highest tax brackets. Contributions are often tax deductible.
You
may decide to use “discretionary” money (not urgently needed) to pay off your
mortgage;
renovate and improve the value of your house; place it in “no hassle” 10 year
insurance
bonds; or “invest” in your own quality of life by travelling, obtaining new
skills, or
doing whatever you enjoy doing. You may feel that there is more to life than
being anxious
over high or even low-risk investments, and that acquiring status symbols and
more
assets and income can decrease your enjoyment of life. Investment decisions
including
a decision to spend rather than invest, are essentially personal and private
decisions.
Poor decisions whether based on the advice of experts or not are your decisions
for
which you are responsible.
As well as directing questions to himself, and to investment advisors and institutions in which he proposes to invest, the investor should seek information from newspapers, magazines, newsletters and radio talk back programs.When investments have been made he should seek to update his knowledge of his particular investments and to look for early warning signs of trouble and take appropriate action. He should decide whether he can cut his expenditure to make more funds available for investment, whether he ismore interested in capital growth than in income on investment, whether money can be obtained in an emergency from investment funds, and whether any of his investment can be frozen if there is a run on the investment fund. He should know the “rules of the game” for investors and whether the rules can be changed to his detriment if, for instance, his investment is frozen.
Obtaining
information—Investor beware
In the same way as a prospective or actual tenant, car purchaser, demonstrator, testator or consumer should be aware of his rights and options, so should the investor. Books such as Making Money Made Simple, 161 Tax and Investment Strategies, How Safe are Your Investments; The Money Book; Super Made Easy and Real Estate Family Package, and magazines such as Australian Business, Personal Investment Monthly, Australian Investment, Business Review Weekly, and Personal Success, provide useful background information. An important investment can be to invest in books and magazines.
The
business sections of newspapers, and the personal financial advice sections
of newspapers, magazines and radio shows, can keep you updated. All major
newspapers
and many magazines have personal financial advice sections. Useful advice,
knowledge
and skills may be obtained through attending business and financial courses
at
various institutions. Most talk back radio stations have advice programs taking
listener’s
calls. Some investment advisors in the media may have investments in the area
they
recommend you to invest in and they should disclose that
interest.
Investment
Advisors. Picking
an advisor from the telephone book or lists in magazines
can be risky. You should obtain advice from advisors licensed by regulatory
bodies
such as the Corporate Affairs Commission and who are members of the Australian
Society
of Investment and Financial Advisors. Licensed investment advisors are
employed
by four basic groups, namely bank owned investment advice services, large
independently
owned services, services with significant shareholding by outside groups
(usually
Insurance Companies), or small independently owned suburban advice services.
The
extent to which bank and insurance owned services give objective advice varies a
good
deal, and you should ascertain whether the advisors mainly or exclusively
promote investments
in the bank or insurance company owning the advice service. You should
seek
advice from several sources and be satisfied that each advisor is aware of your
aims, is
an expert in the field in which you are seeking advice, discloses whether he
will obtain a
commission if you follow his advice, and discloses whether he is recommending an
investment
in which his employer has an interest. You should also ask yourself whether
the
advisor has recommended a spread of investments to give protection against
failure in
one area of investment, whether he can provide ongoing investment advice,
whether he
researches all investments before recommending them whether he has a hidden bias
in
favour of particular investments, and whether he is financially secure himself
without any
pressing need to obtain commissions by inducing you to make particular
investments.
Money
to Invest
You can borrow money in order to invest elsewhere but this can be hazardous and the interest payable can be crippling. The best source of money for investment is from your own resources.You can automatically set aside part of your income say at least 10% for savings, so that you live on no more than 90% of your income. You will have more money available for investment if you heed advice for consumers (Chapter 3) such as buying only things you really need and advice for taxpayers (Chapter 15) such as claiming all relevant deductions. You can also save money by shopping around for the best deals when buying goods, arranging discount holidays, and insuring your house and car, etc., at reasonable rates. Priorities are important.
You
may think it is also important to “invest” in
your health, knowledge of other countries through travel, and causes to which
you are committed.
Few people who gamble win large sums of money, and if they do, often
dissipate
their fortune. Few millionaires became rich as the result of a lottery or
gambling on
the races. Poker machines and lotteries make money for the governments but
little for the
gambler.
Plan
Ahead
Only
about 40% of people reaching the age of 65 will be retired or be in a position
to
retire on what Noel Whittaker calls a liveable income. Whittaker sets out the
differences
between those who win and lose financially. The winners obtain and apply
financial
advice from experts; invest wisely to produce growth as a hedge against
inflation,
defer short-term pleasures and aim for long-term gains; exercise discipline in
spending;
and avoid investing in things that lose value.Winners plan carefully towards
useful
goals and don’t assume that good present income will lead to financial
independence—it
won’t unless you plan for it. Winners have an optimistic attitude — financially
successful people have a PMA (Positive Mental Attitude). These are good
commonsense
ideas to start from. Unless the basics are attended to, the structure built on
it
will fail.
TYPES
OF INVESTMENT
General advice for the investor is no substitute for advice tailored to the requirements of individual investors. Advice for each investor should take into account the investor’s future aspirations, job security, debts, age, state of health, family commitments, capacity to take risks, need for superannuation, need for capital growth and possible need to have ready access to money. Many investment advisors recommend a spread of investments including fixed interest investments giving a constant return over the period of the investment, including debentures (a statement acknowledging indebtedness when a loan has been made) offered, for example, by finance companies.
Some advisors favour direct investment in bonds, debentures and interest bearing accounts, rather than investment in managed funds, to give the investor greater control over the money. Others recommend cash management trusts (e.g. Macquarie) for security and good interest rates; 10 year insurance bonds to avoid hassles; well managed listed mortgage trusts, and shares in “blue chip” companies such as BHP, and National Bank.
Some
advisors believe most shares are significantly overvalued. Long term investors
who know
what they want to achieve, can often ride out market and share fluctuations and
can take
steps to be aware of problem areas which have recently been
exposed.
Government
Bonds. Bonds
are the safest short term investment, but inflation reduces the
real value of capital and interest. Although capital and interest are
guaranteed, losses through
inflation are also guaranteed. Interest payments are taxable, and you may
sustain a
loss if you sell before the bond matures. Some government bonds (e.g. Telecom)
have the
same advantages and disadvantages.Trading banks such as the Commonwealth, ANZ,
Westpac,
etc. are secure institutions in which to invest money. The Reserve Bank controls
the
Commonwealth Bank and the private banks and watches their exposure to large
borrowers
such as high flying entrepreneurs the cash available to meet
withdrawals (liquidity),
and the funds for shareholders available for hard times (capital backing). The
Reserve
Bank would provide funds to meet a run on a well managed bank, but it is not
legally
obliged to prop up a badly run bank. Its suspension should prevent any bank
being badly
run. Even with all this backing rumours can cause a run on a bank as occurred
recently
with the Bank of Melbourne. State Banks accept Reserve Bank requirements
and
are effectively guaranteed by State governments.
Building
Societies, Credit Unions and Friendly Societies. These
three types of institutions
are regulated by different controls in different states. Although a state
government
may ’guarantee” a line of credit if there is a “run”, and collective protection
funds
may be set up by the institutions to provide security for the investor, they do
not give
the same security to investors as given by banks. Building societies and credit
unions must
report their activities to the Reserve Bank which however has no obligation to
support
them. Although supervised by State governments, the Farrow Group collapse,
largely
due to rumours, indicates that the supervision has been inadequate. If building
societies
lent, as they should, mainly for residential housing, the most secure form of
investment,
they should remain viable. Shareholders in societies are at greater risk than
depositors,
if the society is liquidated. Friendly Societies are largely confined to
Victoria and
do not have to report to the Reserve Bank.
Finance Companies. Most large finance companies are owned by the major banks. Interest rates are usually higher than for government bonds. The companies are not guaranteed by their parent bank but are relatively safe.
Trusts.
Investment
trusts, operating under rules in the trust deed, accept money from investors
who wish to pool money for investment in various areas such as shares,
government
bonds, and real estate. A trust may be listed or unlisted. A listed trust is
traded
at the stock exchange in the same way as shares in a company, and investors can
sell
their investment through a stockbroker. Investors in unlisted trusts buy shares
direct from
the trust and can sell them back to the trust.The risk to investors in trusts
depends on
the ability of the manager of the trust, and the nature of the
investments.
Property
Trusts allow
investors to become part owners of some of the best real estate sites
in Australia. Problems arise if a lack of confidence develops, and many
investors want
their money back at the same time. A run on a trust can lead to the trust
selling property
in a depressed market, or freezing all investors’ funds for a period. Provided
trusts
invest in good properties with high occupancy by tenants, they can provide good
returns
and help to offset inflation.
Mortgage
Trusts lend
money to property owners using the property as security through
a mortgage. Problems such as those experienced by Estate Mortgages may arise
if
the trust also borrows money from banks, and if the property developer borrowing
the money
cannot find a buyer for the property.
Equity
Trusts involve
investment in share markets in Australia and overseas. If the trust
makes a good choice of shares and spreads the risk, there should be a good
returns for
the Investor who however, has no guarantee. Changes in exchange rates can affect
overseas
investments.
Cash
Management Trusts give
good security and returns. They invest in government and
bank backed securities.There would have to be a significant breach of the trust
deed before
a capital loss occurs. Liquidity is assured but all income is taxable. Many
investment
advisors believe cash management trusts are a good investment in the current
economic
climate.
Insurance
and Superannuation Bonds
Life
insurance companies are subject to the control of the Insurance and Superannuation
Commission which requires such companies to have sufficient reserves
to
guarantee the capital of the investor, by investing in government and bank
backed bonds
and securities. Other bonds, which are market backed, require the investor to
take the
risk. These bonds may give a higher return, but the risk will depend on the
nature of investments
made by the manager of the fund.As in most other areas of investment the
higher
the potential return, the greater the risk.
Ten
Year Bonds. A
form of investment that produces tax-free income after 10 years is
a good form of long-term investment, and in the meantime, it constitutes a kind
of financial
discipline In the form of compulsory savings. One option recommended for
those
of about 50 years of age, is to invest in a ten-year tax paid savings plan, then
put the
tax-free income into an annuity at 60 years of age. This is excellent advance
planning.
Superannuation. Those planning for retirement must aim for security rather than “get rich quick” offers and maintain their “solid assets” of home, car, etc., to fall back on.There are indications that the government will in future greatly restrict or even eliminate the pension. It is best to put money into superannuation if you haven’t already done so. Those in their twenties now starting work would do well to start preparing for retirement now, putting money into superannuation and insurance schemes. Every state has management investment firms offering guides to such matters as “rollover funds”, methods to minimize taxation, and the relative advantages of pensions, retirement payments, annuities and ADFs (Approved Deposit Funds) etc. Because the details of these funds will differ from time to time, it is best to get in touch with a financial advisor for up to date advice. New laws about Superannuation will come into force on 1 July, 2005, when employees will have 28 days to decide where their “super” is invested. Details are on the Association of Superannuation Funds of Australia website www.superannuation.asn.au/super/rpm.cfm.
Superannuation
and Roll Over Funds. Superannuation
is a safe long term tax effective
investment to provide for security upon your retirement. There may be a fixed
payment
on retirement or a return of contributions and investment earnings. You may
obtain
death and disablement cover. Many employees are covered by employer sponsored
Superannuation, but others, such as the self employed can obtain significant
tax
deductions on payments to a superannuation fund. To avoid the tax liability for
lump sum
Superannuation, payments, you should “roll over” such payments by investing in
Approved
Deposit Funds (ADF) or deferred annuities within 90 days of receiving the
lump
sum. This has the advantage of deferring, reducing or avoiding tax. ADFs are
managed
investment funds which can accept only eligible termination payments until you
reach
65. You can invest your lump sum in a deferred annuity which gives regular
payments
of income for the rest of your life (or for a stated period). Deferred annuities
may
be sole life annuities which cease on the death of the investor, or joint
annuities which
allow the surviving spouse to roll over the investment. ADFs and deferred
annuities
are either income linked (mainly fixed interest securities) or unit linked,
where fund
managers have a wide discretion to invest. “Immediate” annuities are available
only from
Life Insurance Companies and income to you starts soon after your investment. At
age
65 tax concessions for ADFs and deferred annuities (“rollover” bonds) ceases,
and you
should convert to an immediate annuity scheme to avoid lump sum
tax.
Real
Estate. You
can invest in real estate by buying a property yourself and using rental
from the property to pay off your mortgage. You can lend money direct to a
property
purchaser and secure your loan by a registered first mortgage. You can invest in
a
property or mortgage trust with the potential high returns and risk such an
investment may
entail. You should avoid highly mortgaged properties. As in other areas of
investment,
shop around for advice, decide what you want to achieve, evaluate the risks,
and
continue to monitor the investment through relevant investment advice in
newspapers,
magazines and newsletters specializing in particular investment
areas.
Shares
in Companies. You
can invest directly in shares by buying shares through a stock
broker who must be paid a commission when the shares are bought or sold. The
share
market can be risky for those without specialist knowledge themselves, or access
to reliable
professional advice. It is easy to get your fingers burnt, especially in a
volatile market.
If you buy good quality shares with franked dividends you may obtain significant
taxation
advantages. Stock exchanges can provide you with detailed information on the
share
market and often run useful investment seminars.You may prefer to invest in the
share
market through a well managed equity trust whose manager can spread the risk and
keep
a close watch on the market.
Keeping Records and Documents. It is advisable to keep all important records and documents in a safe place and advise a member of your family, a friend, your solicitor, your bank manager or your financial advisor as to their location. It is also advisable to keep photocopies of key documents in a different place, separate from the originals. This applies to documents such as certificates of title to your house, car registration papers, share certificates, debenture holdings, mortgages, 10 year bonds, tax returns, passports, travellers cheque numbers, wills, income received from investments, and capital gains.
You
should keep a record of actual income you receive from investments and the
date
you receive the income, for tax purposes. Income from bond, bank, and debenture
investments
will be received at predictable times but other income may be received on
your
request. If investments have a capital growth component you may need to keep a
record
of capital gains each year to ascertain any liability for capital gains tax. You
may be
liable for tax on capital gains when assets are sold, excluding the family home,
motor vehicles
and certain personal use assets, acquired after September, 1985. If assets are
held for
more than a year and do no more than keep pace with inflation, it is unlikely
you would
be liable for capital gains tax on disposal.
Australian Civil Liberties Union