In this section we explain how providing a comprehensive financial planning practice means establishing yourself as the primary adviser to clients, to the exclusion of competing advisers, and providing services in nine essential competencies. The financial planner does not need to have an advanced knowledge of all nine competencies, but must be able to identify where expert advice is needed and to control a system for accessing that advice for his or her clients.
These nine essential competencies are:
- estate planning and business succession planning;
- general business advice;
- basic taxation planning, including choice of structure;
- finance, and negotiations with financiers, including the management of non- deductible debt;
- super planning and particularly self-managed funds;
- record keeping, bookkeeping, accounting and basic tax compliance;
- risk insurances;
- property, including property acquisitions and tax planning strategies; and
- shares and other securities including managed funds.
In the following section we look at how Dover helps its advisers provide services in the nine competencies. We examine each of the nine competencies and explain how virtually any financial planner can provide these services to his or her clients no matter what their professional background or how small their practice is.
If you are not a Dover representative you should make an appointment today to discuss how you can become a Dover representative. Dover presents the best client value proposition possible: we cost you less than your current AFSL and we do more for you than you current AFSL.
The Dover financial planner as a business adviser
Businesses are the best investments. If a financial planner presents a comprehensive financial plan to a client it should at least consider the possibility of the client starting or acquiring a business. Obviously this is not current industry practice. Businesses do not generate commissions. But commissions from financial products, with the exception of risk insurances, are now banned. So why wouldn’t you recommend that a client start or acquire a business?
The financial planner who expands his skills to include advising on new and existing businesses will be very busy and will have a very profitable and valuable practice.
The best advice to a twenty-seven year old plumber, with a one year old child, dependant wife, and another child on the way, is to stop being an employee plumber and to start his own plumbing business, ideally engaging apprentices and other plumbers and creating a good strong diverse base of income.
Where suited, this advice completely transcends all other advice. It’s step number one on the road to financial success. If it‘s done properly, the client’s income will increase and that income will be more secure. The client has more of everything: he can own more home faster; he can contribute more to super; he will need more insurance; he can invest in other assets; and he can enjoy better tax planning including sharing profits with his wife and other family members. One day he will sell his business CGT-free.
Until that day you, the adviser who got him started, will have a very active – and grateful – client for life. There will be much more work for you than otherwise would have been the case. And your client will regard you as his primary adviser, the first port of call on all major decisions and a constant source of encouragement and good ideas.
And he will be prepared to pay you for this advice.
The same goes for virtually every young client (and some older clients) who come to your door. It does not matter what field they are in. The idea is universal, and you should at least be raising it for discussion. It does not have to be a business start up: we have had good results suggesting younger clients buy a share of their employer‘s business or even all of that business. For the right client this can work very well.
We are not saying that you should recommend a business for every client. We are saying that a business should be considered for every client – and be recommended for those to whom business-ownership is suited.
Businesses are safer than employment
Most employees get their cheque from one source, their employer. Most businesses get their cheques from multiple sources, their clients or customers. Think diversification. The safest and fastest way to create wealth is to build a quality business that does not rely on one client or even one source of income, and which has a market value that others are prepared to pay for.
At best, employment is a precarious situation. Done properly, setting up and running a business is actually a relatively-low risk and conservative option that protects the client from the vagaries of the employment market and opens the door to a much larger income and a much faster wealth accumulation.
How can Dover help you?
Dover has established literally hundreds of businesses ranging from large primary production businesses, to training organisations, to aged care homes, to marketing companies, to large sea food providers, to IT businesses, to manufacturers and – something of a forte – medical and dental practices. This includes the legal processes, the accounting processes and the business planning and financing processes.
Dover’s legal support service
Dover advisers can also call on MLA Lawyers for low cost, practice and effective advice on commercial law matters related to small and medium sized businesses. This means they can present to their clients as a source (not a provider) of legal advice, by arranging advice direct from the Dover legal team and staying in control of the client advice process at all times.
MLA Lawyers is available to all Dover representatives and allows them to offer legal services to their clients while staying in control of the advice process at all times. MLA Lawyers charges Dover representatives significantly lower prices, leaving space for their own fees and making sure all tasks are completed promptly, properly and at the lowest possible cost to the client.
MLA Lawyers has decades of experience with all aspects of professional practices including:
- taxation planning strategies for financial planning practices, including advice on choice of structure for financial planners;
- trade practices law for professional practices;
- super planning strategies;
- setting up professional partnerships, associateships, companies and trusts including family trusts; unit trusts and hybrid trusts;
- employment law issues for professional practice staff;
- practice purchases including valuations and due diligence, and start ups;
- practice sales, including negotiation with purchasers;
- leasing practice premises;
- dispute resolution processes;
- practice finance;
- estate planning, with a particular knowledge of testamentary trusts;
- partnership agreements, joint venture agreements; associate agreements, unit- holder agreements and shareholder agreements;
- self-managed super funds;
- succession planning strategies;
- financial product and ASIC compliance advice; and
- service trust documentation processes.
The Dover financial planner as a property adviser
The family home
The family home is the most valuable asset owned by most clients. It‘s got a great track record, its capital gains tax-free and clients love talking about it. Yet most statements of advice do not mention the family home. They do not mention whether it should be extended, up-graded or downsized.
The family home is basically ignored in the majority of statements of advice. In fact many authorised representative agreements specifically avoid discussing the family home. It‘s a pity because creating strategies to improve the family home is always popular with clients and a great way to get the adviser client relationship off to a great start.
Show mum how she can get a better kitchen, more personal space, a better street address and bigger tax free capital gains for the same after tax cost as she is paying now and you will have a client, and a friend, for life.
Residential property investment is a booming sector and most clients are more interested in homes than they are interested in shares and similar securities. They see homes as safer and more stable, and they can drive by and see it, and even touch it if they want to. Yes, they cannot sell a fractional share of it (they can, actually, but not that easily) and sometimes houses can stay on the market for a while before a buyer comes along. But unlike shares and similar securities they are easier to borrow against and this creates an effective liquidity that, overall, makes property a very interesting investment.
The tax benefits are good too: negative gearing is one of the last remaining tax- planning strategies open to taxpayers, particularly employees facing high tax rates. Its no coincidence that property prices have jumped since the government halved the deductible super contribution amounts: negative gearing strategies can compensate here, and are a comparable tax benefited investment strategy.
The tax benefits and cash flow advantages of negative gearing are shown in the table on the next page: being able to create and explain concepts like this is a critical skill for financial planners.
Don‘t forget holiday homes. With careful tax planning your clients can get the best of both worlds: a tax effective residential property investment and a nice place to take a break when there is no tenant in residence. Yes, they can be volatile, but with a booking economy and a growing population the long-term prospects are excellent, for some locations at least.
No matter what your view of residential property as an investment, you will have to at least consider residential property with your clients if you want to be competitive and not lose clients to the firm down the road that offers a more complete service.
Incorporating property into your professional services
Consulting on property is actually natural territory for most financial planners. The investment analysis for property is substantially the same as the investment analysis for shares and similar securities and concepts like gearing, diversification and risk/return represent familiar home grounds.
There is a huge amount of technical material available on the Internet and your local bookstore. It‘s a good idea to specialise in your local area, assuming you believe it has good capital gains prospects and generally meets all appropriate benchmarks.
How can Dover help you?
Part 16 of this book, The financial planner as a property adviser, provides a comprehensive overview of the different types of property advice and recommendations financial planners are able to provide to their clients.
Dover can help you establish yourself as your client‘s primary property adviser, by assisting you formulate property investment strategies and provide guidance of what type of property investment will be suitable for your clients. Dover’s advisers can also call upon MLA Lawyers for various property transactions and related legal matters.
The Dover Financial Planner as a taxation adviser
If you refer your client to an unknown quantity, or more probably, an unfriendly party, ie an incumbent accountant, for a tax opinion you are basically kissing your client good bye. The last thing the incumbent accountant will do is agree with you and endorse your plan. The incumbent accountant is your competition, not your supporter. Do not be so naïve as to expect without fear or favour comments on the merits of your strategy. That‘s not the issue. The issue is – who is the primary advisor to this client? You will end up watching the incumbent accountant take you head on, irrespective of your case. He or she will argue that you are wrong and they are right.
You can‘t win. Never ask a client to check your advice with their accountant. You have to have a better strategy than that.
The best strategy is to develop sufficient knowledge and skill to develop sound tax planning strategies and then arrange formal advice confirming your strategies from a recognised expert tax agent or solicitor (ie Dover’s legal and accounting team), and to rely in this formal advice in your SOA, and not invite your client to involve their incumbent accountant.
On the positive side, identifying a significant tax saving early in the first or second client meeting as part of your SOA preparation process is a great way to start the client adviser relationship.
Cars, rental properties, trust structures, super, interest/debt management, and overseas travel: normally there is something that can be done for a client to legitimately improve their income tax profile, and save tax. A financial planner should spend time identifying what can be done and should incorporate the results into the final statement of advice.
How can Dover help you?
Dover has a team of tax agents and solicitors who are experienced in all aspects of your clients‘ tax affairs and who are able to provide expert advice on how to minimise your clients’ tax liabilities and how you can in effect achieve a better tax planning result for your clients than they are experiencing now.
The Dover financial planner as a finance adviser
We have never seen a self-made millionaire who did not use debt. And we have never seen a self-made bankrupt who did not use debt. Debt creates wealth and debt destroys wealth. On balance, debt is positive and creates more wealth than it destroys. A successful financial planner has to understand debt and when it can be used to create wealth, and when it should not be used.
Perhaps the worst we have seen was an attempt by a bank financial planner to recommend margin lending to an 80 year-old nursing home resident. We had to explain that it did not matter that it was a good margin-lending product, it just was not appropriate to the client. Happily the bank supervisor agreed and the idea was canned and the adviser canned, with appropriate apologies all around.
On the other hand virtually everyone who has borrowed to buy property in the last twenty years has experienced a significant increase in wealth. Most Australians are in debt to debt: it has served them well and made them money. Most older Australians wish they had taken on more debt when they were younger to buy and hold property.
Most clients, particularly younger clients, have debt. If you can help them pay that debt off faster than otherwise without significantly impacting lifestyle then you will be very popular. Strategies include:
- reducing principal repayments and making larger extra deductible super contributions, with a view to using the tax free benefits to pay off loans at age 60. It does not suit everyone, but it does suit a lot of people, particularly those closer to age 60;
- borrowing to pay costs where the interest is deductible and using the extra free cash flow to pay off separate expensive non-deductible debt;
- consolidating multiple loans into larger, cheaper loans at the lowest possible interest rate;
- paying credit cards off before interest bills are triggered;
- arranging inter-generational family finances to pay off non-deductible home loans as fast as possible; and
- paying off margin loans with cheaper and safer debt secured against property.
A competent financial planner nurtures relationships with selected banks, and creates mutual trust. If you go out of your way to refer work to a particular banker in a particular bank, it‘s reasonable to expect him or her to go out of her way to help you with a problem case or an urgent case as the need arises.
How can Dover help you?
Dover has a team of advisers who can assist you with formulating debt management strategies for clients and to make sure all debt is as tax deductible as possible.
The Dover financial planner as a SMSF adviser
Dover has authorised representatives with up to 500 self-managed super funds. These self-managed funds represent a significant part of their overall practice, and means they are in constant contact with their clients about insurances, investment strategies as well as SMSF and super issues.
There is no reason why Dover cannot help you create a similar SMSF practice as part of your financial planning practice. Dover can handle the set up, documentation, compliance, audit and tax returns while you focus on value adding strategic advice, insurances and investment advice.
Most super funds are SMSFs and have had a big jump in popularity.
How Dover can help you?
Dover set up an SMSF office in Saigon in 2008. It was started by two team members we recruited from Melbourne University in 2003, and trained intensely in SMSFs for five years before sending them to Saigon to open a representative office in the CBD area of Saigon.
The Dover Saigon team is very good at SMSF accounting and audit work. Many of the Saigon staff members have completed MBAs from Swinburne University and have also qualified as CPAs.
The Dover Saigon team just keep getting better, and have the capacity to complete work for our representatives SMSFs. We see this as a real value add proposition that is good for everyone involved, including our Saigon team. The Dover Saigon SMSF office is available to help you develop a SMSF practice that creates extra profits and extra tax free CGT value for your practice.
The Dover financial planner as an estate planner
Estate planning is an area that should be discussed with almost every client. Particularly as clients get older, start families and accumulate more wealth, there are more opportunities to provide advice and strategies on estate planning. You do not need a law degree to dicuss these issues with clients.
The more discussions you have with your client’s regarding the estate planning wishes the more experienced you will become in dermining your client’s expectations and needs. For example, if you advise your clients on wills and estate planning you will be aware that the patter ie the verbal explanations provided to clients, is remarkably the same in each meeting. It‘s actually not hard, at least in most cases. What is hard is being alert to the circumstances where the standard patter and explanations is not appropriate, and when as specialist needs to be called in.
How Dover can help?
Dover has an experienced and expert team of legal advisers on hand to help its representatives advise clients on all aspects of estate planning including the preparation of wills and related documents.
Part 19 of this book, The financial planner as an estate planner, has two purposes:
- it educates and trains Dover advisers in the main principles attached to estate planning; and
- Dover advisers provide it to their clients to help them explain how estate planning works and what they should be doing now to ensure their estate is dealt with in accordance with their intentions.
Dover’s estate planning team can also help you provide super planning services to your clients and make sure their SMSF arrangements work with their estate planning so their desires are achieved.
The Dover financial planner as an insurance adviser
Many Dover advisers run substantial traditional risk insurance practices and have significant experience and expertise in these fields. They enjoy the almost unique circumstance of having 100% of all commissions refunded and not having to pay any extra to a dealer group for providing a simple commission handling process.
But not all do. For those that don‘t have a traditional risk insurance practice Dover provides a unique service that lets accountants and financial planners who traditionally have referred life insurance work to other firms to instead offer a life insurance service to their clients – and profit by doing so.
How does Dover help?
The model is very simple. Dover handles all of the administrative and licensing disclosure requirements for the insurance policies for a low fixed fee – normally about
$500 plus GST per policy, and then rebates all commissions to you, including trailer commissions, for the life of the policy. Dover oversees all of the compliance, client liaison and application functions, as well as handling all client monies on your behalf. Monies received on your client’s account are disbursed to you promptly in the month following receipt under our unique commission rebate scheme.
This service allows you to benefit from your client’s life insurance needs without the stress and distraction of running your own insurance practice. The extra commissions belong to you for the life of the policy, dramatically increasing your cash flow and the (CGT free) value of your practice.
A recurring income stream is an important part of any business, and developing a robust insurance practice significantly decreases the risk and increases the CGT free value of your practice. The Dover experience means every financial planner can provide risk insurance services to their clients.
The Dover financial planner as a share and securities adviser
This essential competency focuses on shares and similar investments including index funds and other types of managed funds. It is very much the traditional financial planning function.
Since 1 July 2013 most commissions have been banned. Now that the commission bias has been removed, and advice neutrality achieved, financial planners are now less likely to recommend managed funds to clients and more likely to recommend property, direct shares, index funds and similar investments that do not pay commissions.
This means financial planners will have to be competent in advising on direct shares, index funds and similar investments if they are to be the primary adviser to their clients.
Dover recommends advisers take a conservative approach to which property, shares, index funds and managed funds they recommend to clients and in particular that they do not recommend aggressive investments and that they avoid high levels of gearing.
There is no point taking your clients to the edge. Stay conservative at all times and reduce risk for your client, yourself and your AFSL.
Think about it. Once there is advice neutrality, ie no commission bias towards recommending specific investments, and a rule against % based fees on geared investments, why would you recommend anything aggressive or highly geared to your client? There is no revenue incentive to do so. But there are plenty of complications if things go wrong.
In summary, Dover sees a move to more conservative, less aggressive and less geared investment strategies, where excesses will be avoided. Effective financial planning will include much more than mere asset selection, and will be a wholistic and comprehensive process that covers all aspects of a client‘s financial profile and aims to increase the client‘s wealth without excessive risk or costs.
How does Dover help?
Dover has an experienced team of financial advisers who can assist you in preparing sample investment portfolios and simple and effective investment strategies to suit your cient’s circumstances. The Dover approach on share and securities investments is set out in part 11, Managed funds or direct investments.
How to make your time based fees for SOAs as tax deductible as possible
One significant advantage of time based fees, and comprehensive statements of advice that cover the nine essential competencies, is that all or part of your fee may be a tax deductible loss or outgoing in the hands of your client. We have to say, may be rather that will be because ultimately deductibility depends on the circumstances of the client, and the actual content of the statement of advice. But generally at least part of your fee will be deductible, and in many cases all of it will be deductible.
Obviously you should be aware of the issues and within the parameters of professional propriety do what you can to ensure your fees are as deductible as possible in your clients’ hands.
Creating templates, procedures, and a client attitude conductive to deductible fee notes gives your practice a significant cost advantage over competitors. It means your fee notes will be up to 47% less than your competitors, on after tax basis. Pointing this out to clients in the first meeting helps reduce fee resistance and helps make sure your clients get the on-going service and attention they deserve.
Are commissions deductible?
Generally commissions are not deductible. But time based fees can be deductible provided certain conditions are met, particularly when you are providing a comprehensive and on-going service.
If your fees are tax deductible they cost your clients less. This cost saving is one of the big advantages time based fees have over commissions, although this is barely mentions in the financial planning press.
How do you maximise the deductibility of your fee notes?
Deductibility is maximised by:
- allocating time appropriately over different tasks and, in particular, making sure the time allocated to deductible tasks is accurately recorded and able to be verified if your client is questioned by the Australian Taxation Office;
- charging smaller multiple recurring fees over a period rather than larger once off up-front fees, and connecting the smaller multiple recurring fees to on- going advice and services over time rather than a large up-front job;
- careful wording of tax invoices to emphasise/affirm the connection with existing income sources and business and investment activity, and to emphasise the review of existing investments aspect of your advice, and to de-emphasise any non-deductible work completed for your client;
- addressing tax invoices to business entities where the work predominately relates to a business entity if possible;
- ensuring your SOA content emphasises deductible matters such as tax advice, business advice, employee remuneration issues, employer super, existing sources of assessable income, business issues, investments generating recurring assessable income, business succession planning; and
- ensuring SOA content de-emphasises non-deductible matters such as wills.
Remember that the tax law includes apportionment rules for dual purpose expenditure so your tax invoice may be partly deductible and partly non-deductible (ie be private or capital in nature) with the apportionment completed on the amount of time the advisor spends on each purpose, or some other sensible basis.
Your fees will be generally deductible in your client‘s hands to the extent they relate to your client‘s assessable income and they are not private or domestic in nature. The table on the next page summarise the position, but should not be accepted as stating hard rules because each case is different and subtleties and technicalities abound.
Specific legal advice should be sought before concluding a cost is tax deductible.
|Business advice||Generally yes. May be a question regarding the deductibility of advice for prospective businesses compared to existing actual businesses|
|Business structure advice||Generally yes. May be a question regarding the deductibility of advice for prospective businesses compared to existing actual businesses|
|Superannuation||Generally yes, if it relates to employer contributions.Advice to a SMSF will generally be deductible (but at the low or nil effective tax rate faced by the SMSF)
|Risk insurances||Generally yes, for income continuation insurance Generally no, for life insurance not in a SMSFGenerally yes, for life insurance in a SMSF (tax invoice to the SMSF)|
|Debt management||Generally yes, if the interest is deductible. No, if the interest is not deductible.|
|Investments||No, if it relates to new investments, unless paid in instalments over life of investment, and connected to on-going advice/serviceYes, if it relates to existing investments|
|Tax planning||Generally yes, depending on who has done the work|
|Estate planning||No (unless it relates to a business‘s succession planning issues)|
|Retirement planning||No (unless it relates to a business‘s succession planning or a SMSF‘s payment of benefits)|
The Australian Taxation Office’s view on the tax deductibility of investment fees
The Australian Taxation Office released Taxation Determination 95/60 on 6 December 1995 dealing generally with the deductibility of investment fees. This is a relatively short determination and is reproduced below. You can access it at the ATO website at ATO TD 95/60
Income tax: are fees paid for obtaining investment advice an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936 (‘the Act’) for taxpayers who are not carrying on an investment business?
- When a taxpayer seeks advice in relation to the most appropriate investment or investments to make, the taxpayer may participate with an investment adviser in developing an investment plan. In many cases there will be a continuing relationship with the investment adviser. A fee is payable for drawing up a plan. A ‘management fee’ or ‘annual retainer’ is payable if advice is provided over the period of the investment(s), usually upon an annual or semi-annual review of the performance of the investment(s).
- In discussing what makes expenditure deductible under subsection 51(1), Lockhart J said in F C of T v. Cooper 91 ATC 4396; 21 ATR 1616 (at ATC 4399, ATR 1620):
The phrase “incurred in gaining or producing assessable income” in the first limb of s. 51(1) has been construed to mean incurred in the course of gaining or producing assessable income…
For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end; …
This test of deductibility has been explained in subsequent judgments of the High Court, so that to be deductible the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income … The essential character test is also applied to determine if the expenditure is of a capital, private or domestic nature…
- In view of the above, we do not think that the fee for drawing up the plan is deductible for income tax purposes. This is because it is not expenditure incurred in the course of gaining or producing the assessable income from the investment(s). It is too early in time to be an expense that is part of the income producing process. It is an expense that is associated with putting the income earning investment(s) in place, in the same way as certain kinds of investments attract entry fees, and has, therefore, an insufficient connection with earning income from the investment(s). See F C of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 and the discussion of that case by Hill J in Cooper, (supra) at ATC 4412, ATR 163.
- Expenditure on drawing up the plan is incidental and relevant to outlaying the price of acquiring the investment(s), and is so associated with the making of the investment(s) as to warrant the conclusion that it is capital or capital in nature: see Sun Newspapers v. Federal Commissioner of Taxation 5 ATD 87 per Dixon J especially at ATD 95. The expenditure may qualify as an incidental cost to the taxpayer of the acquisition of the assets(s) [i.e., the investment(s)] for capital gains tax purposes. See subsections 160ZH(1) and 160ZH(5) of the Act.
- On-going management fees or retainers are deductible under subsection 51(1). In Taxation Ruling IT 39 we discussed expenditure incurred in ‘servicing’ an investment portfolio. The Ruling discussed the decision in F C of T v. Green (1950) 81 CLR 313 which allowed a taxpayer a deduction in relation to the management of the income producing enterprises of the taxpayer. The Ruling concluded that expenditure in ‘servicing’ the portfolio should be regarded as incurred in relation to the management of income producing investments and thus as having an intrinsically revenue character. However, to be wholly deductible, all of a management fee must relate to gaining or producing assessable income. If the advice covers other matters or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible.
- Over the period of an investment plan advice may be received suggesting changes be made to the mix of investments held. This would normally be part and parcel of managing the investments in accordance with the plan. This advice may be from the original investment adviser or from a new adviser. Provided the advice is not in relation to drawing up an investment plan it will be an allowable deduction as set out in paragraph 5 above.
- We have been asked what is the position where a taxpayer has existing investments and goes to an investment adviser to draw up an investment plan. For example, a taxpayer nearing retirement may have a number of small investments, is expecting a super payment (eligible termination payment (ETP)) and decides to put in place a long term financial strategy incorporating the investments arising from the ETP. In our view, a fee paid to an investment adviser to draw up an investment plan in these circumstances would be a capital outlay even if some or all of the pre-existing investments were maintained as part of the plan. This is because the fee is for advice that relates to drawing up an investment plan. The character of the outgoing is not altered because the existing investments fit in with the plan. It is still an outgoing of capital for the same reasons as set out in paragraphs 3 and 4 above.
Commissioner of Taxation 06/12/95