FINaNCe
THe MOneY MAn
-- Graeme McDonald
Greetings again and its seems like only the other day I was
contemplating Christmas 2008 and here we are at Christmas time 2009
and I still haven't been near the shops to do any shopping yet, sorry
kids, I will get there, those places scare me this time of year, what with
the crowds and the hassles over parking......mmm anyway.
This article is all about changing from Prescribed Private Funds to
Private Ancillary Funds. So what is a Private Ancillary Fund and how
does it differ to Prescribed Private Funds that have existed in the past?
Private Ancillary Funds are a form of ancillary trust fund designed to
encourage private philanthropy by providing private groups, such as
businesses, families and individuals, with greater flexibility to start their
own trust funds for philanthropic purposes.
Prescribed Private Funds were put in place for private philanthropy, so
that families and individuals can donate to a trust of their own, which
then disburses funds to a range of other gift-deductible recipients.
Other than some subtle changes in wording there doesn't appear to be
much overall change both are still instruments to disburse funds.
In both cases the funds are essentially a pool of money or property that
is managed to make distributions to others that are not engaged in the
provision of services. In other words it is so people or companies can
make bequests to NFPs.
What's your responsibility in all this? If you are a registered DGR,
which most readers would be, you are required now to keep detailed
records that explain all transactions that pertain to your status as a
DGR, and maintain these for a period of no less than 5 years.
Now you may remember last time I wrote about ensuring the bequests
you get were real and not part of a tax avoidance scheme that you may
be inadvertently getting involved in.
This change appears to be a follow on from those introduced before.
It comes as no surprise to see the government engaging in a practice
that will require organisations to reapply to establish a PAF. This
Government has made it clear that they are out to target tax avoidance
from any direction and it would appear that they have highlighted this
as an area to be investigated. The ATO is looking to make sure that
the playing field is a level one, and while this may appear as nothing
more than a name change it will have the effect of everyone opening
themselves up to review and in turn this may have an effect on your
operations and income streams.
Anyway enough from me. Have a great Christmas and New Year, for
now so long.
Parts of the information and dialogue of this article were sourced from
the ATO website.
If you want to know more on this, or you have a money or financing related
question feel free to email me on graeme@moneyresources.com.au. The
above information / scenarios are for information purposes and should not
be treated as specific advice, Please refer to your accountant or financial
advisor for information related to your own particular circumstances.
A
ny not-for-profit organisation that derives income through
investment returns will have felt the effects of the GFC
(global financial crisis) and know how cruel the impact of
lower returns can be. More than ever, people are in need of
help and there is often little money or help to be given. The impacts of
this can be catastrophic.
Although in good times it can be easy to forget, financial market
fluctuations are a part of the economic cycle. We can expect to see
them happening again and again. Now is the time for NFPs to conduct
a financial health check to ensure they are best placed to recover from
recent events and to weather the next market downturn.
How can this be achieved? Before going into detail, it may be useful
to consider an example from the recent past.
In 2007, a mid-sized NFP approached BDO Private Wealth Advisers
to evaluate some advice they had received. The NFP supported a
medical research group, which was generating income from a pool of
investments.
One of the board members had experienced great financial success
with margin lending, and suggested that the NFP might also benefit
from this strategy.
They had approached an adviser and received advice. The
recommendation included a well-diversified range of the adviser's
own products, and a margin lending strategy that their adviser felt was
appropriate for the group. The NFP was inclined to go ahead with the
recommendations as the adviser was not charging an upfront fee.
BDO Private Wealth Advisers identified a number of concerns with
this approach, which were flagged to the NFP.
Firstly, although the suggested investment mix was well diversified
amongst the different asset classes, they were all within products
offered by just one fund manager. Diversification means across asset
sectors, within asset sectors and across fund managers. Or more
simply put `don't put all your eggs in one basket'.
Secondly, whenever an NFP engages a financial adviser they must
ask whether the investment recommendations are truly in their best
interests, or whether the adviser has an obligation to recommend a
particular product. It is important to recognise that 85 per cent of the
financial planning industry is owned by product providers.
Thirdly, a financial adviser will always need to be paid for their work,
and the lack of an upfront fee is not necessarily an indicator of a better
deal. In this situation, the fees to be taken as a commission from the
NFP's investment were almost double what would have been charged
on a fee for time basis, although this was not clear to the NFP.
Finally, the plan had not adequately taken into account the NFP's risk
profile. The NFP had a requirement for a steady income flow and
modest capital growth to offset inflation.
Now while they may have achieved large capital gains through margin
lending, a significant market downturn could leave them with no
income and the likelihood of a serious erosion of their capital. This
would in turn lead to a reduced ability to distribute investment income
in years to come.
Here is a simple example of how gearing can go wrong.
Imagine you have $20,000 to invest in shares and you borrow another
$20,000 to buy $40,000 worth of shares. If the value of the shares
drops by 10 per cent, they would be worth $36,000, but you would
still have a loan of $20,000.
This leaves only $16,000 of your money
remaining, or a loss of 20 per cent on the
original funds. So, with gearing, everything
gains and losses is magnified.
When an individual has received advice
from an adviser and they have been happy
with the results, it is only natural to talk
about it with friends and associates. But it
is not a good thing to take a friend's advice
and apply it to your own situation. Nor is it
wise to take advice that has been prepared
for an individual, multiply it by a factor of
10, 100 or 1,000 and apply it to a NFP.
A good financial adviser will have
explored an NFP's goals and aspirations
and developed advice that will help
them to achieve that. It is impossible
for an organisation's needs to be the
same as the individual's goals and
aspirations.
there are a number of key areas
that NFP boards should be
addressing now to ensure that their
houses are in order:
}
Identify your attitude to risk.
}
Establish your income requirements and their time horizon.
}
Engage an adviser.
}
Formulate a written investment strategy.
A written investment strategy is essential to ensure a clear vision
and maintain direction through market fluctuations and changes to
any NFP board. An investment strategy is a documented plan for
the distribution of assets among various investments, taking into
consideration such factors as the organisation's goals, risk tolerance
and horizon.
Responsible investment management is an ongoing process. The
investments must be constantly monitored and reviewed. And if you
have engaged an adviser to assist you with this, then the board must
ensure that the advice you are receiving continues to be appropriate.
In this time of increasingly structured philanthropic giving, often
from people with a commercial background, NFPs face a greater
expectation of accountability and defined strategy. Those that have an
investment structure in place will be better placed when approached
by benefactors, and will benefit in terms of their image and reputation.
While financial catastrophes like the GFC are difficult to avoid,
seeking professional and unbiased advice to formulate a financial
strategy that mitigates such risks is the best method of crisis planning
for the future. n
Trevor Bridger is Managing Director of BDO Private Wealth Advisers
Pty Ltd (AFS Licence Number 238280) and can be contacted at trevor.
bridger@bdo.com.au or 07 3221 0205. This information is of a general
nature and has been prepared without taking account of the objectives,
financial situation or needs of any particular investor. You should
therefore consider the appropriateness of this advice in respect to your
own objectives, financial situation and needs.
Financial advice: it pays to be guarded
FINaNCe
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