Cover story. Volume 09 Issue THE AUSTRALIAN JOURNAL OF Financial PLANNING. FS Advice

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2 Cover story 15 The foundation of trust David Raits, private client adviser, Shadforth Financial Group SFG Australia (SFGA) has been the talk of the town since IOOF publicly stated its intention to acquire all of its shares in May this year. To make the right decision, shareholders have carefully scrutinised performance figures, growth perspectives and potential synergies. But numbers aside, the real value of SFGA and of all advice groups- lies with its financial planners. So much so that high quality advisers was singled out as one of IOOF s main motivation for the buyout offer in the first place. SFG Australia is home to Shadforth Financial Group (Shadforth); and private client adviser David Raits is well aware of the importance of building the client s trust over time. With more than 20 years experience providing financial advice, he has gone from being a CPAaccredited accountant who gave financial advice part time, to a full time financial planner holding a Certified Financial Planner (CFP) accreditation. Raits career runs parallel to the trajectory of Shadforth. During the 90s, the then suburban accountancy firm that offered financial planning on a limited basis won a contract to provide advice to Ed Credit, a large credit union in Victoria focused on teachers. This coincided with Jeff Kennett becoming premier and making significant cuts to the education system that resulted in thousands of teachers facing redundancies. This innocuous contract that we had won ended up being something huge, and overnight we had literally thousands of people approaching us for advice, Raits says. Today, he services a number of medium to high net worth clients that have learnt to trust him over the years. Skeptical of the traditional arrangements with stockbrokers, Raits was an early adopter of managed discretionary accounts (MDAs). He was key in establishing the Dynamic Portfolio Update (DPU), Shadforths first managed account system that is still in use today. But that is not the only way in which this trailblazer has rocked the industry. Raits is the treasurer of the Financial Industry Community Aid Project (FICAP), which raises money to support a variety of charities and organises the much-loved industry event Who wants to be a RockStar. Preferring to remain behind the scenes, Raits says he has never taken the RockStar stage yet. He tells Laura Millan that if he was to do so, it would have to be to one of the Rolling Stones most energetic hits: Jumping Jack Flash.

3 16 Cover story 1.3 Objectives Financial Objectives Objective Detail When Pursue charitable purposes Target donations at 11% p.a. Now & Ongoing for at via regular donations of the foundation assets as a minimum; least 20 years or higher as long as the 20 years timeframe can be maintained. Capital Preservation Achieve capital growth that Now & Ongoing ensures the foundation is able to support its charitable activities for at least 20 years. Liquidity Retain at least $20,000 as cash Ongoing reserves to meet unanticipated expenses and contingencies. Maintain access to advice Retain an active involvement Ongoing in the management of the foundations finances even though you are seeking our advice. James 1 first approached Raits about 14 years ago, when he was planning for retirement. An engineer by trade, James was a big supporter of the Australian manufacturing industry and enjoyed following the companies that he invests in. When he sought Raits advice, most of his retirement savings were in his employee s superannuation plan, but he wanted to have more control over his investments and specifically direct shares. There was also the need to find strategies to deal with his reasonable benefit limits (RBL) problems, which at the time were an issue because they imposed significant tax liabilities on individuals with large superannuation balances. Raits recommended a common solution at the time, which was to set up a self-managed super fund (SMSF). Over the years he has assisted James in managing his fund. We ve done all sorts of things together: initially, dealing with the fact that he was a non-resident for tax purposes because he had been working overseas, sorting out the problem with the RBL rules, getting through the global financial crisis,... Raits remembers. Table 1. Current Position 1.1 Entities Private Ancillary Fund Key Details Trustee Company Key Details Directors Shareholders Purpose of Company 1.2 Assets and Liabilities James Foundation James Foundation Pty Ltd James Foundation Pty Ltd James, Solicitor & Friend James, Solicitor & Friend Trustee for James Foundation Assets Asset Owner Value Private Ancillary Fund Cash account* James Foundation $80,000 Pending Gift from James James Foundation $1,000,000 A tailored estate plan In recent years the client s focus has been on his estate plan. Having no dependants or family members that he was particularly close to meant that there was always the possibility of a big dispute if he didn t get his will right, Raits explains. In this context, getting James estate plan done correctly was a major focus. He had decided that he didn t want to leave significant amounts of money to his distant relatives. Instead, he wanted to use his savings to support the charities that he had supported for a long time. He has a number of those, one of which is a university scholarship named after him and which he s supported for a number of years, Raits explains. James wanted to make sure that support for these charities didn t end when he passed away. But he was reluctant to give them a large amount of money all at once. All he really said was: I don t know what to do. I know I want to support the charities, but I don t know how to do it, Raits says. To the adviser, it was quite obvious what the solution was. Raits recommended setting up a charitable foundation that would invest, administer and donate James money to the charities of his choice over a period of 20 years. Conceptually, I could answer his question, but I had to go and research, talk to the lawyers this was the first time I had dealt with a live case like this, he says. As his clients grow older, estate planning has become an increasingly important part of Raits work. Twenty years ago, they were all younger and just approaching retirement and estate planning was not such an issue for them. As they ve got older and children have turned into adults, their lives have become more complicated. Raits started this case by scheduling a meeting with James lawyer, who drafted the will and set up the charitable foundation. I often attend the first meeting with their lawyer so I can relay directly which strategies we have in mind, rather than leaving the client to be the middle man; that s when things can be lost in translation. Clear communication with the lawyer also helps the client save money: when there s information going back and forth, that s when time and money get lost, he says. The charitable foundation was set up for James so it would be the recipient of most of his monies when he passes away. The deed orders that the foundation will run for 20 years after he dies. The money will be invested and donated gradually to the selected charities.

4 The quote Having no dependants or family members that he was particularly close to meant that there was always the possibility of a big dispute if he didn t get his will right.

5 18 Cover story He looks at the periodic reports or online whenever he wants. It s taken stress away from him. The arrangement is also convenient for the foundation as the independent board of directors doesn t want to deal with the minutia of every single investment decision required. 2. Investment Profile and Asset Allocation 2.1 Asset Allocation vs Benchmark Current asset allocation recommended for the foundation. Asset Class Tolerance Range % Benchmark Allocation % Cash 0 to 10 5 Fixed Interest 20 to Property 5 to Australian Shares 30 to International Shares 20 to Total Defensive 25 to Total Growth 65 to As part of the process, a company was also set up to act as the trustee of the foundation, with James, his lawyer and a good friend as directors. Raits is an adviser to the foundation and is in charge of investing the money and calculating how much money charities need to receive each year. The value of MDAs The foundation s investment strategy is the same that James always had in his SMSF, Raits explains. A reasonable savvy investor, James always wants to know exactly where his money is invested and has a preference for direct shares. His client s loyalty for the Australian manufacturing industry has meant Raits has at times had to use his persuasive skills to convince him that it s better to invest in companies based in their return prospects rather than in the fact that they happen to manufacture in Australia. His heart says that he wants to support these sorts of companies but my job is to tell him that supporting these companies is not going to be enough to make them survive in their own right, he says, and adds that as much as possible, his portfolio has these kinds of investments. The way the portfolio is managed has changed significantly over time: In the early days of his retirement we didn t have a very good system to run share portfolios; this was in the days when you had to engage with a stockbroker to give you advice over the composition of the share portfolio. However, as the model has evolved and clients have increasingly became disenchanted with the stockbroking model, managed discretionary accounts (MDA) have become a better option. Today, the portfolio still follows the same medium to long-term strategy and asset allocation, but the shares sit in an MDA. As James has got older he has become more suited to the MDA structure. He s now happy to go along with the automated process and to develop an interest in the companies we have placed into his portfolio, rather than develop an interest first and invest later. Operating through an MDA also means that Raits does not need to consult with James every time there is a change in his portfolio. Catering the unexpected James and Raits original plan was to set up the charitable foundation immediately so it was in place prior to his death and then to grow its size progressively. But since then, his health has seriously deteriorated and James has agreed that he has more money than he is able to spend. So we decided to start the gifting process now, the adviser says. James SMSF was holding $3 million, including a $1 million pension with a partial taxable component. If he were to die, this money would have been paid to his estate as a death benefit and paid about $80,000 in tax. So Raits advice has been to recommend the redemption of the taxable $1 million and the gifting of this to his foundation now. Because he s over 60 and alive, he s able to access that pension balance tax free and donate the money directly to the foundation. The remaining $2 million has a 100% non-taxable component and will remain in the SMSF, providing income while he is still alive. After that, the money can pass tax free to his estate and then to the foundation. Over time, so will the sale of his house and the rest of his assets. Thanks to this million dollar injection, we could save $80,000 in tax, Raits says. The foundation of trust Having gone through all sorts of situations, Raits is aware that James is putting him in the ultimate position of trust. He is asking me to look after his life savings for a 20 year period after he is dead, he notes. That s the trust you can only build over a long period of time. Long term relationships with a financial adviser help clients through the difficult times because they don t have to second-guess everything; they re not asking themselves: is he trustworthy?. To James, trusting his adviser meant he could concentrate on his health and on enjoying the last years without worrying if Raits was doing the right thing. But the benefits of the advice relationship are twofold. I think that we all want to create a legacy, Raits says. As an adviser, he has had the opportunity to help James build his. fs 1. The name of the client has been changed to protect his identity.