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Why the rich are comfortable with investments they can't cash out fast · The Money Puzzle

• 0:09
  Speaker 1: Hello and welcome to The Australian's Money Puzzle Podcast. I'm
• 0:12
  Speaker 1: James Kirby, the Wealth Editor at The Australian. Welcome aboard, everybody.
• 0:17
  Speaker 1: A little later this year, The Australian is going to
• 0:19
  Speaker 1: publish its annual list of top financial advisors, which is
• 0:22
  Speaker 1: expanding this time to 150 advisors. It used to be
• 0:27
  Speaker 1: 100 advisors. And once upon a time when it started,
• 0:31
  Speaker 1: back in 2017 or so, it was only 50 advisors.
• 0:34
  Speaker 1: And one of the advisors that has managed to stay
• 0:36
  Speaker 1: on that list every single year is and I might
• 0:39
  Speaker 1: add in the upper reaches of that list every single year,
• 0:43
  Speaker 1: is Charlie Viola from Picture Partners. He's been on the
• 0:47
  Speaker 1: show before. Love to have him on. He's my guest today.
• 0:49
  Speaker 1: How are you, Charlie? Good, James. How are you, mate?
• 0:53
  Speaker 1: We're going to talk about a couple of things, but news-wise,
• 0:56
  Speaker 1: and I can't help it, I'm sorry, but I'm a
• 0:58
  Speaker 1: news-driven journalist to this day, never ends. And we have
• 1:03
  Speaker 1: been covering super, of course, regularly. And everybody, I suppose,
• 1:09
  Speaker 1: in many ways, aspires to have lots in super. We'd
• 1:13
  Speaker 1: all like to have three million in super. Not many do,
• 1:17
  Speaker 1: but many may have in the future. And some big
• 1:19
  Speaker 1: news this week in that the independents, the Teals, all
• 1:24
  Speaker 1: of them, plus a couple of their friends, Helen Haynes,
• 1:27
  Speaker 1: Kylie Tink, have issued a quite unusual, unprecedented statement that
• 1:32
  Speaker 1: they are calling for amendments as a group. on it,
• 1:36
  Speaker 1: two important, they're calling for all sorts of things, but
• 1:39
  Speaker 1: in terms, when I called them and asked what are
• 1:41
  Speaker 1: the actual amendments you're going to put through in Parliament,
• 1:44
  Speaker 1: there's two important ones. One's from Kylie, I think, which
• 1:47
  Speaker 1: is that this notion of that the new tax, which
• 1:51
  Speaker 1: is 15% on earnings on amounts above 3 million and super,
• 1:57
  Speaker 1: would be based on unrealised paper gains, which is really controversial.
• 2:02
  Speaker 1: And the second one, which would be put forward by
• 2:06
  Speaker 1: Allegra Spender is that if you were hit with this bill,
• 2:10
  Speaker 1: it would be deferred, that you would have the ability
• 2:12
  Speaker 1: to defer it for the simple reason that people could
• 2:15
  Speaker 1: get really caught. If you had one investment and it
• 2:18
  Speaker 1: was a property that was worth 3 million and you
• 2:21
  Speaker 1: had to sell it for some reason, that might be
• 2:24
  Speaker 1: a bit unfair on some people. I think the real
• 2:26
  Speaker 1: problem with the tax is not so much that there's
• 2:30
  Speaker 1: going to be another tax on super. although that obviously
• 2:34
  Speaker 1: isn't breaking an election promise. But the nature of this
• 2:38
  Speaker 1: tax is seen to be unfair in relation to tax
• 2:42
  Speaker 1: as it exists for everything else. What's your view on it, Charlie,
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  Speaker 1: on the $ 3 million? And what are you saying to
• 2:48
  Speaker 1: your wealthy clients, of which I'm sure you have many?
• 2:52
  Speaker 2: Yeah, well, I think, firstly, it just doesn't affect that
• 2:55
  Speaker 2: many people. So the political capital that's being used on
• 2:58
  Speaker 2: this seems to me to be a massive overreach. But
• 3:01
  Speaker 2: We're not a political show here.
• 3:02
  Speaker 3: So we'll move on from that.
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  Speaker 2: Look, it does tend to impact a fair number of
• 3:10
  Speaker 2: our clients. Our advice up until now, until we've understood
• 3:14
  Speaker 2: really what the impact of this is going to be,
• 3:16
  Speaker 2: has to be to sit tight and just to see
• 3:18
  Speaker 2: how it's applied in reality. It is likely, though, that
• 3:22
  Speaker 2: we will start reverting some of those excess amounts over
• 3:26
  Speaker 2: and above the three mil back into their sort of
• 3:29
  Speaker 2: trust and company structures and so that we are only
• 3:32
  Speaker 2: ever paying tax on the income and realised gains and
• 3:35
  Speaker 2: not that arbitrary uplifting value. I understand what the government
• 3:40
  Speaker 2: is doing here, right? They're saying, well, you only ever
• 3:42
  Speaker 2: need so much to be able to fund a really healthy,
• 3:46
  Speaker 2: happy retirement. The whole purpose of super was to make
• 3:49
  Speaker 2: it concessionally taxed so you weren't leaning on the welfare system,
• 3:52
  Speaker 2: so the age pension. So those tax concessions fundamentally should
• 3:56
  Speaker 2: go away or at least some of them should go
• 3:58
  Speaker 2: away if you've got more than what you need, because
• 4:01
  Speaker 2: you've now got more than what you need, so you
• 4:02
  Speaker 2: should be adding back to the public purse. We sort
• 4:04
  Speaker 2: of understand what they're doing. The application of it, though,
• 4:08
  Speaker 2: has just been terrible. And again, we understand why they're
• 4:12
  Speaker 2: trying to make sure that self-managed super funds are treated
• 4:14
  Speaker 2: the same way as industry funds and public offer funds,
• 4:17
  Speaker 2: and they're taxing the increase in a member's balance. But really,
• 4:20
  Speaker 2: they should have just kept it simple and provided a
• 4:23
  Speaker 2: surcharge tax on the realized gains and income over that
• 4:27
  Speaker 2: $ 3 million and an additional kind of 15%.
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  Speaker 3: And it would have simplified it for everybody. And we
• 4:32
  Speaker 3: would have all gone, right, okay.
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  Speaker 2: Well, we know we're paying 30% surcharge on that portion.
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  Speaker 2: The way they've done it, they've made a real hash
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  Speaker 2: of it. And it's going to be really hard to administer.
• 4:42
  Speaker 2: The issue of deferral that came out today, deferred, is
• 4:46
  Speaker 2: there interest payable on the deferral? Can we defer it forever?
• 4:50
  Speaker 2: So uncertainty is not loved by anyone and you'll just
• 4:54
  Speaker 2: have people ripping that extra portion out, sticking it back,
• 4:57
  Speaker 2: especially if people have got lots and lots of money,
• 4:59
  Speaker 2: pulling it out, putting it back in their trust and
• 5:01
  Speaker 2: company structures and ending up with a 30% tax rate anyway.
• 5:05
  Speaker 1: It sounds to me when we jump over all the
• 5:08
  Speaker 1: technicals and details that really what's going on here is
• 5:13
  Speaker 1: people like you and your investors, your clients are saying, look,
• 5:18
  Speaker 1: they call this a threshold issue. this $ 3 million in super.
• 5:21
  Speaker 1: But in effect, it's a cap. In effect, it's the end.
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  Speaker 1: After $ 3 million, you would be silly to have more
• 5:28
  Speaker 1: than that in super.
• 5:30
  Speaker 3: Well, not really. It just makes it more complex.
• 5:32
  Speaker 2: It just means calculating your after-tax returns slightly more complex.
• 5:36
  Speaker 2: And if there is an alternative, if the assets within
• 5:39
  Speaker 2: your fund are liquid enough and there is an alternative,
• 5:42
  Speaker 2: and there's an alternative to only paying tax on the
• 5:44
  Speaker 2: realized gains and income as it's received, like you otherwise
• 5:49
  Speaker 2: normally would, If we have an option, then we're probably
• 5:52
  Speaker 2: going to take that option, right? There are going to
• 5:54
  Speaker 2: be some people, as you say, who are caught with
• 5:57
  Speaker 2: no option because they have one significant property in there
• 6:01
  Speaker 2: or a set of illiquid assets that are in there.
• 6:03
  Speaker 2: So it's not so much as a cap, but it's
• 6:09
  Speaker 2: just made the whole thing far more complex and more
• 6:11
  Speaker 2: complex than it needs to be.
• 6:12
  Speaker 1: If I had a startup and I put my shares
• 6:16
  Speaker 1: in the startup in super... And the years went by
• 6:21
  Speaker 1: and the startup really started, it really worked. I'd be caught, right?
• 6:26
  Speaker 1: I couldn't get it out because it's in super. And
• 6:29
  Speaker 1: I'd have to pay tax on the assumed increase in value,
• 6:34
  Speaker 1: even though I hadn't got any money out of it.
• 6:36
  Speaker 2: Is that it?
• 6:36
  Speaker 1: Is that it at its worst? Is that an issue
• 6:39
  Speaker 1: for people? Or do many people put startups in super?
• 6:43
  Speaker 2: You probably rarely see people put startups in just because
• 6:48
  Speaker 2: of the high risk nature. We like to enshrine client
• 6:51
  Speaker 2: super money because you're obviously limited as to what you
• 6:53
  Speaker 2: can put in into super and it becomes the most
• 6:56
  Speaker 2: tax effective money in our tax system. So really high
• 7:00
  Speaker 2: risk assets like that, unless someone is super sure that
• 7:03
  Speaker 2: they're going to get a really significant outcome out of
• 7:06
  Speaker 2: something like that, then we don't tend to put it
• 7:09
  Speaker 2: in super. The arbitrage doesn't tend to be that great
• 7:12
  Speaker 2: in terms of doing it in a family trust and
• 7:14
  Speaker 2: getting the CGT discount somewhere down the line. But yeah, look,
• 7:17
  Speaker 2: at its worst, you end up with this kind of
• 7:19
  Speaker 2: really illiquid asset, which has been revalued by virtue of
• 7:23
  Speaker 2: other capital raises or they're sitting in escrow. They've done
• 7:27
  Speaker 2: really well. They've gone to a startup. They've gone to listing.
• 7:30
  Speaker 2: Now they're in escrow for 12 or 18 months. You're
• 7:33
  Speaker 2: now paying this latent tax bill on a really illiquid asset.
• 7:37
  Speaker 2: And that's… I'm not sure that's been thought through particularly.
• 7:41
  Speaker 2: I think it was done in an effort to ensure
• 7:43
  Speaker 2: that self-managed super funds, which have got obviously all of
• 7:47
  Speaker 2: the individual assets to be aligned with public offer funds
• 7:51
  Speaker 2: and industry funds, where it is simply the change in
• 7:54
  Speaker 2: the member balance that's being taxed.
• 7:56
  Speaker 1: All right. More generally, again, with wealthier investors, I read
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  Speaker 1: everywhere that they are more and more engrossed and occupied
• 8:06
  Speaker 1: with alternatives, which is such a wide, fuzzy term. But
• 8:11
  Speaker 1: I also read that they're more and more putting their
• 8:13
  Speaker 1: money offshore. Broadly, is that the case among Australian investors
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  Speaker 1: today that they are more likely to put money offshore?
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  Speaker 2: I think it's certainly more prevalent now than it was
• 8:26
  Speaker 2: 10 or 15 years ago. So 10 or 15 years
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  Speaker 2: ago or 20 years ago when I probably started my
• 8:30
  Speaker 2: career and we started building portfolios, We were probably having
• 8:34
  Speaker 2: almost kind of two thirds domestic, one third international exposure
• 8:38
  Speaker 2: to equities. We were all in love with the kind
• 8:40
  Speaker 2: of dividend paying shares that Australia has. And we were
• 8:43
  Speaker 2: all in love with kind of the imputation credits and
• 8:46
  Speaker 2: the level of revenue that was being generated by Australian equities.
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  Speaker 3: I think as time has gone on.
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  Speaker 2: And we've realised that the world is a big place
• 8:53
  Speaker 2: and that Australia is quite a small place and that
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  Speaker 2: there is lots of growth and activity and especially in
• 8:58
  Speaker 2: the tech and AI space globally. that what you're finding
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  Speaker 2: now is that certainly portfolios are much more closely aligned
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  Speaker 2: in terms of their kind of domestic exposure versus international exposure.
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  Speaker 2: I know certainly we here have probably, if we're putting
• 9:14
  Speaker 2: portfolios together, we're 40%. In terms of our equity exposure,
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  Speaker 2: we're probably 40% domestic because we still like them. We
• 9:20
  Speaker 2: still think that they're good companies that are well-run and
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  Speaker 2: good balance sheets and we like the income, but.
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  Speaker 3: We probably have a slightly bigger weighting, so 60%.
• 9:30
  Speaker 2: To global equities because we tend to believe that those
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  Speaker 2: businesses that continue to do things and continue to buy
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  Speaker 2: up market share and gobble up their competitors will generate
• 9:39
  Speaker 2: the best kind of medium to long-term returns.
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  Speaker 1: That's a big point, isn't it, really?
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  Speaker 2: The other piece, James, is that accessibility now is far
• 9:47
  Speaker 2: greater than it ever was. Fifteen years ago, you had
• 9:49
  Speaker 2: Platinum and Magellan and not much else in terms of
• 9:51
  Speaker 2: accessing global equities. Now, we can all trade Apple and.
• 9:56
  Speaker 1: I can buy Nvidia after this show. I can buy
• 9:58
  Speaker 1: Google after this show in five minutes, two minutes. Okay,
• 10:02
  Speaker 1: about that, that asset allocation and the majority. So you're
• 10:06
  Speaker 1: telling me the majority of their shares in your clients,
• 10:09
  Speaker 1: the majority of their shares are overseas. That means the
• 10:12
  Speaker 1: majority are in the US, right? Because the US is 72%
• 10:15
  Speaker 1: of the Organ Stanley Capital International Index now.
• 10:19
  Speaker 2: Probably say that we've still probably got some domestic bias
• 10:22
  Speaker 2: because we're probably living with 15 or 20 years of
• 10:25
  Speaker 2: gains on the Australian market. So it's more about where
• 10:28
  Speaker 2: we're allocating new money as.
• 10:29
  Speaker 3: Opposed to what portfolios look like.
• 10:32
  Speaker 2: But to your point, there is still a fairly significant
• 10:35
  Speaker 2: US bias to any global allocation that we make. We
• 10:39
  Speaker 2: still very much like those big sort of mega cap
• 10:45
  Speaker 2: AI companies and tech companies and because, as I said before,
• 10:49
  Speaker 2: they're gobbling up competitors, they protect their margins, and they're
• 10:52
  Speaker 2: probably able to trade for very long periods of time
• 10:56
  Speaker 2: at very big multiples, which means that we tend to
• 10:59
  Speaker 2: get that kind of valuation and thematic run that we've had,
• 11:03
  Speaker 2: and it'll likely continue for a period of time.
• 11:06
  Speaker 1: Okay. On the flip side, does it mean that frank
• 11:09
  Speaker 1: dividends are less important than they used to be?
• 11:12
  Speaker 2: So I guess the way that we construct portfolios, we
• 11:15
  Speaker 2: want to generate client returns in all different ways. The
• 11:19
  Speaker 2: revenue production from portfolios, which should absolutely come from shares,
• 11:23
  Speaker 2: but also comes from private debt, private credit, syndicated property,
• 11:28
  Speaker 2: will get income in all different ways.
• 11:30
  Speaker 3: We still like Australian shares.
• 11:31
  Speaker 2: We are still an investor in Australian shares, and we
• 11:34
  Speaker 2: still like the nature of those companies, especially the large cap, defensive,
• 11:38
  Speaker 2: blue chip, revenue producing companies. So it's not less important.
• 11:43
  Speaker 2: We just don't want to leave the return on the
• 11:45
  Speaker 2: table available to us in terms of global equities. We
• 11:49
  Speaker 2: also want to be genuinely diversified, right? So we want
• 11:53
  Speaker 2: to make sure that we're giving the clients a spread
• 11:55
  Speaker 2: of their risk. If we do nothing but go on
• 11:58
  Speaker 2: by CBA and BHP shares, then we are always only
• 12:02
  Speaker 2: exposed to what's happening domestically.
• 12:04
  Speaker 1: Okay, very good. Hey, we'll take a short break and
• 12:05
  Speaker 1: we'll be back in a moment. Hello and welcome back
• 12:17
  Speaker 1: to the Australian's Money Puzzle. I'm James Kirby talking to
• 12:20
  Speaker 1: Charlie Viola of Pitcher Partners. Hey, Charlie, you just mentioned
• 12:24
  Speaker 1: just in passing reference there about diversification. And it doesn't
• 12:28
  Speaker 1: really matter. The next question I'm going to throw is
• 12:30
  Speaker 1: it doesn't really matter whether the person has 100,000 in
• 12:34
  Speaker 1: super or 10 million in super. But regardless of what
• 12:38
  Speaker 1: you're offering them or is being offered through you, It
• 12:43
  Speaker 1: could be a private credit, private equity, pick anything you like,
• 12:46
  Speaker 1: oil futures, whatever. Nothing is guaranteed, right? Nothing. Except Australian
• 12:52
  Speaker 1: cash in the bank. It's guaranteed by the government. It's
• 12:56
  Speaker 1: guaranteed to the tune of 250 grand per person, per account.
• 13:01
  Speaker 1: And I'm sure your clients can have 10 different bank
• 13:05
  Speaker 1: accounts with 250 grand in each one if they want.
• 13:08
  Speaker 1: Point I'm making is, Do we in our excitement about
• 13:13
  Speaker 1: what has been a good share market since COVID, do
• 13:19
  Speaker 1: we underestimate cash now that it's paying good money on
• 13:23
  Speaker 1: any measure, even against inflation?
• 13:26
  Speaker 2: So I think the best way to answer this is
• 13:30
  Speaker 2: number one, we never underestimate cash. It's where we park
• 13:33
  Speaker 2: money before we invest it somewhere else. I'm probably on
• 13:35
  Speaker 2: record a lot. as saying that we're big ones for
• 13:38
  Speaker 2: having powder dry because we want to be able to
• 13:40
  Speaker 2: invest into weakness and opportunity as things come along and
• 13:43
  Speaker 2: as cycles change. But your point is a well-made one
• 13:47
  Speaker 2: where the risk-free rate at 5% is quite high. So
• 13:51
  Speaker 2: it is easier for us to leave powder dry and
• 13:54
  Speaker 2: not have clients feel like they're having their returns dragged.
• 13:57
  Speaker 2: But also with the risk-free rate being 5%, we now
• 14:01
  Speaker 2: need to work out whether or not we're actually being
• 14:03
  Speaker 2: rewarded for the additional risk that we're taking and by
• 14:06
  Speaker 2: investing anywhere else.
• 14:08
  Speaker 3: So previously, when we were buying.
• 14:11
  Speaker 2: Possibly, I don't know, just one of the flavours of
• 14:13
  Speaker 2: the month or what's been the flavour of the last
• 14:15
  Speaker 2: couple of years has clearly been private debt. Private debt
• 14:18
  Speaker 2: where it has always felt like the risk versus return
• 14:21
  Speaker 2: was a bit asymmetric. You're getting good returns for the
• 14:24
  Speaker 2: risk that you were taking with LVRs, sort of 60%,
• 14:27
  Speaker 2: good sponsors, loans are turned over all of the time,
• 14:31
  Speaker 2: where you're getting 6% or 7% or 8% above the
• 14:32
  Speaker 2: cash rate. now where you're getting 3% or 4% above
• 14:36
  Speaker 2: the cash rate for the additional risk that you're taking,
• 14:39
  Speaker 2: given the environment where rates are up, construction is struggling,
• 14:42
  Speaker 2: people are struggling to borrow money, et cetera, it feels
• 14:46
  Speaker 2: like the 5%, given the risk, which is no risk,
• 14:49
  Speaker 2: versus getting 7% or 8% for a good deal of
• 14:53
  Speaker 2: risk is actually a good outcome. So I think cash
• 14:56
  Speaker 2: is really two things. One, it's waiting there to be
• 14:59
  Speaker 2: invested in other things. And right now, it's not particularly
• 15:02
  Speaker 2: dragging on portfolios. So It's not the worst thing in
• 15:04
  Speaker 2: the world to have some cash sitting in portfolios.
• 15:07
  Speaker 1: Do you think that will be the case? In a way,
• 15:11
  Speaker 1: I'm asking you the outlook for rates or at least
• 15:13
  Speaker 1: the outlook for rates, which you must... If I'm sitting
• 15:17
  Speaker 1: across from your desk and I'm a client of yours,
• 15:19
  Speaker 1: I'm going to say, where do you think rates are going?
• 15:21
  Speaker 1: I don't know what you're going to say. Maybe you say, well,
• 15:24
  Speaker 1: we follow whatever, Morgan Stanley, or we follow Goldman Sachs
• 15:28
  Speaker 1: in terms of their team or whatever. What do you
• 15:30
  Speaker 1: say when someone says, hey, I like the 5%. Should
• 15:33
  Speaker 1: I lock it in for a few years because maybe
• 15:35
  Speaker 1: this is as high as it gets?
• 15:37
  Speaker 2: We're still big ones for normal, fundamental kind of portfolio construction.
• 15:41
  Speaker 2: We are still, generally speaking, investors. So we want the
• 15:45
  Speaker 2: money out and invested. We just want to make sure
• 15:47
  Speaker 2: that we're picking our timing and we're picking our mark
• 15:49
  Speaker 2: in terms of when to deploy that capital into markets, again,
• 15:53
  Speaker 2: into sort of weakness and when opportunity kind of presents
• 15:57
  Speaker 2: itself in terms of what we think from a rate
• 15:59
  Speaker 2: outlook point of view, we're probably the same as everybody else.
• 16:02
  Speaker 2: We think domestically, we're not going to get a rate
• 16:03
  Speaker 2: cut for a period of time and it'll probably be.
• 16:05
  Speaker 3: Into next year.
• 16:07
  Speaker 2: So where we know that we're probably deploying money over
• 16:10
  Speaker 2: a period of time, we're happy to lock rates in
• 16:12
  Speaker 2: for three and six and kind of nine months to
• 16:15
  Speaker 2: try and achieve a reasonable return on that money that
• 16:18
  Speaker 2: we're still yet to deploy. But I make the point
• 16:21
  Speaker 2: that every client that we see whether they are 30
• 16:25
  Speaker 2: or whether they are 50 or whether they are 60,
• 16:28
  Speaker 2: have got 30-plus year timeframes. Over a 30-year-plus timeframe, because remember,
• 16:33
  Speaker 2: even a 60-year-old is alive for a period of time.
• 16:35
  Speaker 2: We still want to invest this money for the rest
• 16:37
  Speaker 2: of their life. We want to get the money out
• 16:39
  Speaker 2: and we want it to be in active style investments
• 16:42
  Speaker 2: because that's how we're going to generate the best possible returns.
• 16:45
  Speaker 2: So cash, we'll manage the cash to produce the best
• 16:48
  Speaker 2: outcome at the time, but ultimately, We want it as
• 16:50
  Speaker 2: liquid as we can so we can get in and
• 16:52
  Speaker 2: get it invested at the right time.
• 16:54
  Speaker 1: Okay. Talking about liquidity, you said there about you stick
• 16:57
  Speaker 1: with the fundamentals. Some things haven't changed. But then in
• 17:00
  Speaker 1: another way, you said to me that people are in
• 17:03
  Speaker 1: new areas, relatively new areas, private debt, private credit, et cetera.
• 17:07
  Speaker 1: Has that tolerance for illiquidity changed with you, your circle,
• 17:12
  Speaker 1: your clients?
• 17:13
  Speaker 3: Yeah, we're really relaxed about liquidity or illiquidity, to be honest.
• 17:17
  Speaker 2: So especially when you're dealing with clients with slightly bigger portfolios.
• 17:21
  Speaker 3: The reality is if we need that.
• 17:24
  Speaker 2: $ 250, 000 out of $ 10 or $ 15 or $ 20 million back
• 17:28
  Speaker 2: within a short period of time, then we've done something wrong.
• 17:31
  Speaker 2: We've buggered something up in terms of the allocation or
• 17:33
  Speaker 2: the knowledge of the client situation, etc. So we are
• 17:37
  Speaker 2: big ones for getting money out, getting it invested and
• 17:40
  Speaker 2: trying to generate the best return. If we get a
• 17:43
  Speaker 2: premium for that illiquidity, then we're all for that.
• 17:47
  Speaker 1: So Can you apply that for everybody, Charlie? Do you
• 17:49
  Speaker 1: think that's applicable to everybody at every level, whether they
• 17:52
  Speaker 1: have 100 grand or a million?
• 17:54
  Speaker 2: Look, I think everybody's individual situation is different and what
• 17:57
  Speaker 2: the advisor needs to do is work hard to understand
• 17:59
  Speaker 2: what the client's needs are.
• 18:01
  Speaker 1: I'm not asking you to give advice. I'm just saying
• 18:03
  Speaker 1: in a universal way, do you think that's applicable to
• 18:07
  Speaker 1: all investors?
• 18:08
  Speaker 2: Where there is no requirement for the money in absolute
• 18:12
  Speaker 2: terms to get it pulled out and get it spent,
• 18:14
  Speaker 2: where it is there to generate good long-term results returns,
• 18:18
  Speaker 2: then having a portion of your money illiquid is absolutely
• 18:21
  Speaker 2: okay and will help generate better returns over a long
• 18:24
  Speaker 2: period of time. I would say on average, we would
• 18:28
  Speaker 2: say that probably 25 to 35% of our portfolios are
• 18:33
  Speaker 2: going to be somewhat illiquid. And that's the manner in
• 18:36
  Speaker 2: which we generate good long-term returns for people. We still
• 18:40
  Speaker 2: need to be able to produce enough revenue for them, right?
• 18:43
  Speaker 2: We need to make sure that they can buy bread
• 18:44
  Speaker 2: and milk and rice and race cars or whatever it
• 18:47
  Speaker 2: is that they spend their money on over a period
• 18:49
  Speaker 2: of time, if we can generate them a better return
• 18:52
  Speaker 2: by having a portion of the money illiquid or locked
• 18:55
  Speaker 2: away or off invested in a property or a group
• 18:59
  Speaker 2: of assets or what have you, then we'll do that.
• 19:02
  Speaker 2: And we will just manage their liquidity needs around the
• 19:04
  Speaker 2: rest of the stuff that they've got.
• 19:06
  Speaker 1: I suppose most listeners would be familiar with illiquidity through property.
• 19:14
  Speaker 1: And maybe it's something of a mental leap to face
• 19:17
  Speaker 1: that liquidity in another asset. It's a new challenge for
• 19:21
  Speaker 1: many people.
• 19:22
  Speaker 3: Yeah, possibly.
• 19:24
  Speaker 2: But like I say, if somebody says to you, hey,
• 19:28
  Speaker 2: give me your money for three years and I'll deliver
• 19:32
  Speaker 2: you back an 8% yield over that three-year period, but
• 19:36
  Speaker 2: you can't have the money, you can't have the 100
• 19:37
  Speaker 2: grand or you can't have the 250 grand, but I'll
• 19:40
  Speaker 2: give you effectively a coupon or a a return on
• 19:43
  Speaker 2: your investment of 8% a year. And when I return
• 19:45
  Speaker 2: it back to you, we'll hope that the asset's gone
• 19:47
  Speaker 2: up in value and we might return back to you
• 19:49
  Speaker 2: instead of $ 1. we might return back to you $ 1. 06
• 19:51
  Speaker 2: or $ 1. 07 or $ 1. 08 or something like that, which means
• 19:54
  Speaker 2: that the client has achieved an 11% return or whatever
• 19:57
  Speaker 2: that works out to be over the three-year period. But
• 20:00
  Speaker 2: what's happening over that three-year period is every month, 8%
• 20:04
  Speaker 2: or the equivalent of 8% is being stuck into their
• 20:07
  Speaker 2: bank account. What we care about is the quality of
• 20:10
  Speaker 2: the asset that's backing this thing, the quality of the
• 20:12
  Speaker 2: manager managing the asset and their ability to make sure
• 20:16
  Speaker 2: that the cash keeps flowing into the bank account. Because
• 20:18
  Speaker 2: we want the client to live off the cash that's
• 20:21
  Speaker 2: flowing into the bank account. If they need that $ 200, 000
• 20:25
  Speaker 2: back or that $ 250, 000 back, then we've clearly not understood
• 20:29
  Speaker 2: the client's needs and we wouldn't have.
• 20:31
  Speaker 3: Put it in.
• 20:32
  Speaker 2: So it's really important that we understand client needs, but
• 20:35
  Speaker 2: people shouldn't be scared of illiquidity. What do you, is
• 20:38
  Speaker 2: this money really invested for 30 years? Well, if it is,
• 20:41
  Speaker 2: then you don't need it in a month or two
• 20:42
  Speaker 2: months or three months. You need it to produce revenue
• 20:45
  Speaker 2: for you and the best possible return. So let's invest
• 20:47
  Speaker 2: it that way.
• 20:48
  Speaker 1: Okay. That's very good. I haven't had an answer like
• 20:50
  Speaker 1: that before. All right. Very good. We'll take a break
• 20:54
  Speaker 1: and we'll be back with some of the questions. Hello,
• 21:15
  Speaker 1: welcome back to the Australian's Money Puzzle podcast. James Kirby
• 21:18
  Speaker 1: here with Charlie Viola, regular on the show, regular on
• 21:21
  Speaker 1: the show many times and always good to have him.
• 21:24
  Speaker 1: Charlie from Pitcher Partners. OK, question from Luke. Whose concessional
• 21:31
  Speaker 1: contribution limit does it add to on contributing money? To
• 21:36
  Speaker 1: a spouse's super. I hope everyone understands that. That's when
• 21:41
  Speaker 1: a couple, you've put in the max for your concession contribution,
• 21:45
  Speaker 1: and maybe your partner hasn't, but there's money there that
• 21:49
  Speaker 1: you guys could put in that person's name. Whose concessional
• 21:53
  Speaker 1: contribution limit does it add to when contributing to a
• 21:55
  Speaker 1: spouse's super? Is there a clear answer on that one?
• 21:59
  Speaker 3: Yeah, there is.
• 22:00
  Speaker 2: Assuming that what Luke means here is the spouse contribution
• 22:03
  Speaker 2: where you get the rebate for making the contribution, then
• 22:06
  Speaker 2: it's not considered against either's concessional limit because it's a
• 22:10
  Speaker 2: non-concessional contribution that's going in. So it's measured against the
• 22:14
  Speaker 2: non-concessional limit for the spouse.
• 22:17
  Speaker 1: So.
• 22:18
  Speaker 2: If what Luke means though is super splitting, so there
• 22:21
  Speaker 2: is a concept of super splitting where it is effectively,
• 22:25
  Speaker 2: I get paid by employer, my employer makes contributions for me,
• 22:28
  Speaker 2: but I've got lots of money in super, my partner
• 22:30
  Speaker 2: or my spouse doesn't have lots of money in superannuation.
• 22:35
  Speaker 2: You can split those contributions where 85% of the money
• 22:38
  Speaker 2: goes into my spouse's superannuation fund and it's 85% because
• 22:43
  Speaker 2: the 15% tax comes out first when you make a
• 22:46
  Speaker 2: concessional contribution and That amount is assessed against the spouse's
• 22:50
  Speaker 2: concessional limit. And you tend to do that where you
• 22:53
  Speaker 2: want to top them up because they're not making the
• 22:56
  Speaker 2: maximum concessional contributions or they've got a lot of super
• 22:58
  Speaker 2: member balance than what you do.
• 23:00
  Speaker 1: It's the limit of the person who gets the money.
• 23:02
  Speaker 1: Is that really simplifying it? It's the limit of the
• 23:04
  Speaker 1: person who gets the money.
• 23:05
  Speaker 3: Correct.
• 23:06
  Speaker 1: Okay, terrific. Thank you for that. Bruce, there is a
• 23:09
  Speaker 1: discussion in medical circles as to whether it's better to
• 23:12
  Speaker 1: use a family trust or a self-managed super fund for
• 23:15
  Speaker 1: holding investments, with opinion probably favoring family trusts. As a
• 23:19
  Speaker 1: member of the Great Unwashed, I don't know anything about
• 23:21
  Speaker 1: family trusts. I was wondering if you could discuss the issue.
• 23:24
  Speaker 1: Thank you, Bruce. This is never advice information only. I
• 23:28
  Speaker 1: know I have a damn good idea what you're going
• 23:30
  Speaker 1: to say here. But in any event, which is better,
• 23:33
  Speaker 1: a family trust or an SMSF? I'm guessing an SMSF
• 23:36
  Speaker 1: is better for super. But you tell me.
• 23:39
  Speaker 2: Yeah. So this of course depends on people's situation, right?
• 23:43
  Speaker 2: And both vehicles have their place. As me and everybody
• 23:46
  Speaker 2: like me always notes, super is the most tax effective
• 23:49
  Speaker 2: structure we have.
• 23:50
  Speaker 3: It's also the most inflexible, right?
• 23:52
  Speaker 2: What comes with all the tax advantages of contribution limits
• 23:55
  Speaker 2: and issues around accessing the capital and that you're needing
• 23:57
  Speaker 2: to wait basically until retirement until you get the money.
• 24:01
  Speaker 2: But super is always going to be a better than
• 24:03
  Speaker 2: a trust for apples for apples kind of tax wise, right?
• 24:08
  Speaker 2: So Remembering that a self-managed super fund or super in
• 24:11
  Speaker 2: general is just a tax structure. So on the basis
• 24:14
  Speaker 2: that if you're investing the exact same way in a
• 24:16
  Speaker 2: trust as you are in super, you're always going to
• 24:19
  Speaker 2: get a better tax outcome in super. It's the lowest
• 24:21
  Speaker 2: tax rate in town, 15% on earnings and 10% on
• 24:25
  Speaker 2: capital gains when you're in accumulation and it being tax-free
• 24:29
  Speaker 2: when you're in pension phase up to your transfer balance cap,
• 24:32
  Speaker 2: then clearly that's going to be a better tax rate
• 24:34
  Speaker 2: than putting it somewhere else. A family trust is going
• 24:38
  Speaker 2: to be more flexible in terms of accessing your capital,
• 24:41
  Speaker 2: but it's clearly not going to be as tax effective.
• 24:43
  Speaker 2: For those who don't understand, a family trust is simply
• 24:47
  Speaker 2: a flow-through vehicle where investments get made in the family trust.
• 24:51
  Speaker 2: The income that gets generated by the investments in there
• 24:54
  Speaker 2: have to be distributed to somebody. And a family trust
• 24:58
  Speaker 2: is often known as a discretionary trust. The trustee has
• 25:01
  Speaker 2: the discretion as to who they pay that income to.
• 25:04
  Speaker 2: And that income is often paid to a lower... tax
• 25:07
  Speaker 2: rate paying member of your family, or if everybody's on
• 25:10
  Speaker 2: the top marginal tax rate or above 30%, you can
• 25:13
  Speaker 2: pay it to a company, which is called a beneficiary
• 25:16
  Speaker 2: company or a Benco or a bucket company, depending on
• 25:20
  Speaker 2: what parlance people use. So in effect, you end up
• 25:23
  Speaker 2: with kind of, if you've got lots and lots of money,
• 25:25
  Speaker 2: you end up with this sort of scenario where the
• 25:27
  Speaker 2: best tax rate that you'll pay is 30%. Whereas in super,
• 25:31
  Speaker 2: it's always going to be lower than that. So, and again, Remember,
• 25:35
  Speaker 2: put money in super, it's stuck there until you retire, effectively.
• 25:39
  Speaker 2: Money in the trust you can get to, but you're
• 25:42
  Speaker 2: going to pay more tax. So it'll depend on your situation.
• 25:46
  Speaker 1: And would it be fair to say you'd also pay
• 25:49
  Speaker 1: more year by year in terms of fees, in terms
• 25:51
  Speaker 1: of keeping that rolling?
• 25:52
  Speaker 3: In terms of the family trust?
• 25:54
  Speaker 1: Yes. Is the family trust dearer to run each year
• 25:57
  Speaker 1: than an SMSF, say?
• 25:59
  Speaker 3: No, they're about the same.
• 26:00
  Speaker 1: Are they? Okay.
• 26:01
  Speaker 2: The accounting costs of running a family trust... and running
• 26:04
  Speaker 2: a self-managed super fund are going to be very similar.
• 26:07
  Speaker 2: But remember, they're two different tax structures and they're used
• 26:10
  Speaker 2: for two different purposes. If you have lots of capacity
• 26:14
  Speaker 2: to do lots of savings, get as much money into
• 26:17
  Speaker 2: super as you can because it's going to be the
• 26:19
  Speaker 2: best tax structure available to us. Just be mindful that
• 26:23
  Speaker 2: you can't get to that money until you retire.
• 26:25
  Speaker 1: Yeah. So there you are. I imagine that is very
• 26:29
  Speaker 1: useful to you, Bruce, and thank you for the question. Okay.
• 26:32
  Speaker 1: Catherine says... I'm returning to the EU to retire. I
• 26:36
  Speaker 1: have a sale agreed on my house and have just
• 26:39
  Speaker 1: exchanged contracts. That is, Catherine is selling the Australian house
• 26:44
  Speaker 1: and moving to the EU. My super has been dissolved,
• 26:50
  Speaker 1: sitting in a bank account. Basically, she wants us to
• 26:55
  Speaker 1: recommend a currency site for switching the money and for
• 27:00
  Speaker 1: forecast rates. Big issue, Catherine, I know. And I know
• 27:06
  Speaker 1: in our family, when on those rare occasions that there
• 27:10
  Speaker 1: were substantial amounts of money crossing the world in an
• 27:15
  Speaker 1: act of deep conservatism, we went back to the banks
• 27:18
  Speaker 1: knowing that they were going to charge an awful lot
• 27:21
  Speaker 1: more than other services. Any observations on that one, Charlie?
• 27:25
  Speaker 2: Look, I understand why Catherine would want to be assured
• 27:28
  Speaker 2: of her exchange rate and it's probably a big lump
• 27:31
  Speaker 2: of money and it's maybe the last big lump of
• 27:33
  Speaker 2: money that she'll ever earn. Very hard for us to
• 27:36
  Speaker 2: recommend a provider. We're agnostic and we like to tell
• 27:39
  Speaker 2: the market that we are completely agnostic in terms of
• 27:42
  Speaker 2: product and what have you. There are a number of
• 27:45
  Speaker 2: good providers out there. Just find the one that's going
• 27:47
  Speaker 2: to not charge a big spread and not charge a
• 27:50
  Speaker 2: big fee.
• 27:51
  Speaker 1: Would you be prepared to name, say, two popular ones
• 27:53
  Speaker 1: without recommending them?
• 27:55
  Speaker 2: Look, I often think going and talking to your bank
• 27:59
  Speaker 2: is not the worst idea in the world.
• 28:01
  Speaker 1: It's secure.
• 28:01
  Speaker 2: It gets done quite quickly. It goes through your accounts.
• 28:04
  Speaker 2: There's no need to set up others. They're very good
• 28:06
  Speaker 2: in terms of the regulatory stuff. I don't think the
• 28:10
  Speaker 2: spread is as big as what you would think it
• 28:13
  Speaker 2: would be. And then the other sort of really popular one,
• 28:16
  Speaker 2: and certainly the one that we use for clients, is OFX.
• 28:20
  Speaker 2: They do a good job. They make it really quite simple.
• 28:23
  Speaker 2: But just go and review the rates and see which one.
• 28:27
  Speaker 1: She was asking about forecast rates. I presume one forecast
• 28:31
  Speaker 1: rate is as good as another, regardless of who's putting
• 28:34
  Speaker 1: it together. Yeah.
• 28:36
  Speaker 2: Like I said, it's the spread that you really want
• 28:38
  Speaker 2: to be mindful of and the cost associated with doing
• 28:42
  Speaker 2: it in terms of which way the currency is going
• 28:44
  Speaker 2: to go.
• 28:45
  Speaker 3: There's no crystal ball here. It's very hard.
• 28:48
  Speaker 1: No one knows. No one knows, Catherine. Nobody knows, regardless
• 28:51
  Speaker 1: of how much they're paid to forecast.
• 28:53
  Speaker 3: All right.
• 28:54
  Speaker 1: There was a question from Jenny about this sort of thing.
• 28:56
  Speaker 1: This was more complicated. It was about an estate in
• 29:00
  Speaker 1: England and farms and a very interesting question. I'm afraid, Jenny,
• 29:04
  Speaker 1: it's just that you've got to– I'm afraid on this
• 29:06
  Speaker 1: occasion we would refer you off to a financial advisor
• 29:09
  Speaker 1: and we would not go into that one. It's just
• 29:12
  Speaker 1: too particular. OK, for the show and its purposes. OK,
• 29:16
  Speaker 1: final question from Ben. This is a juicy one. The
• 29:18
  Speaker 1: background here, Charlie, was that we were working on the assumption, perhaps,
• 29:23
  Speaker 1: on the show that if Trump gets in, and a
• 29:26
  Speaker 1: few weeks ago it seemed more likely that he would
• 29:27
  Speaker 1: get in, but if he does get in, he's got
• 29:32
  Speaker 1: this clear bias towards fossil fuels and oil and coal, etc.,
• 29:38
  Speaker 1: and is not remotely responsible. seem not to be remotely
• 29:41
  Speaker 1: enthusiastic about alternative energy, certainly subsidizing it or the whole
• 29:45
  Speaker 1: ESG movement. And that's pretty clear from his records so far.
• 29:49
  Speaker 1: So we were making the assumption that it would be
• 29:51
  Speaker 1: good that oil would get a good run. And so
• 29:53
  Speaker 1: would fossil fuels if he gets in. This correspondent, Ben,
• 29:56
  Speaker 1: says he got it the wrong way around. and that
• 30:00
  Speaker 1: if he gets in, there'll be basically more oil drilled,
• 30:04
  Speaker 1: because they say, what's the phrase? One of the many
• 30:06
  Speaker 1: chants at Trump rallies is, dig, baby, dig. He says, well,
• 30:10
  Speaker 1: if they dig more, the price will go down. What
• 30:13
  Speaker 1: do you think about the whole political risk that is
• 30:17
  Speaker 1: clearly on the table here on the US and investing?
• 30:21
  Speaker 2: Yeah, again, I I think I made the point before,
• 30:23
  Speaker 2: I didn't realize we're on a political show here, James.
• 30:26
  Speaker 1: We're not, Charlie, but we live in the real world. Yeah.
• 30:30
  Speaker 2: Look, I must confess that I don't wonderfully know. What
• 30:33
  Speaker 2: I do know is Trump is all about free market, right?
• 30:37
  Speaker 2: He is a capitalist at heart.
• 30:39
  Speaker 3: He's about free market. He's about open trading.
• 30:42
  Speaker 2: And he is about creation of kind of really good
• 30:45
  Speaker 2: quality supply chain. So say what you like about all
• 30:48
  Speaker 2: of the other antics and whatever else, and I'm certainly
• 30:50
  Speaker 2: not sitting here suggesting I'm in any way a Trump supporter,
• 30:53
  Speaker 2: but we saw in his first presidency that he was
• 30:56
  Speaker 2: a big one for saying to everyone and everything, let's
• 30:59
  Speaker 2: open the doors, let's pour fuel on the fire and
• 31:01
  Speaker 2: let's get everybody out there and let's get it growing.
• 31:04
  Speaker 2: His view around fossil fuels is exactly the same. It's
• 31:07
  Speaker 2: somewhat obviously fuelled by the fact that's where lots of
• 31:10
  Speaker 2: his supporters come from and lots of his donations come from, etc.,
• 31:14
  Speaker 2: I think the comment around, oh, look, if he goes
• 31:16
  Speaker 2: and solves the Russia-Ukraine conflict and Russian oil kind of
• 31:19
  Speaker 2: ends back on the market and we end up with
• 31:22
  Speaker 2: this kind of additional kind of supply, I think is
• 31:25
  Speaker 2: rhetoric more than anything. I think the discussion around let's
• 31:30
  Speaker 2: drill more holes and make more oil is very much
• 31:34
  Speaker 2: a discussion around around his supporter base in terms of
• 31:37
  Speaker 2: that kind of belt around the kind of wealthy sort
• 31:40
  Speaker 2: of Texan oil kind of barons and what have you
• 31:43
  Speaker 2: around creating additional sort of activity. I don't think that
• 31:48
  Speaker 2: US fracking oil, which is the lowest quality stuff, will
• 31:52
  Speaker 2: have the OCD change oil prices particularly.
• 31:56
  Speaker 3: I don't think that stuff scratches the surface.
• 31:58
  Speaker 1: They're not worried on the board of Aramco?
• 32:01
  Speaker 3: No, I don't think so.
• 32:01
  Speaker 2: Look, I think in reality it's going to come from
• 32:05
  Speaker 2: the interrelation between the middle east and some of the
• 32:09
  Speaker 2: russian stuff and i think that's what's going to drive
• 32:10
  Speaker 2: oil prices trump can say what he likes to get
• 32:13
  Speaker 2: as many votes as he can i don't think it's
• 32:15
  Speaker 2: changing the way oil prices are going to be determined.
• 32:20
  Speaker 1: Okay very interesting well thank you for even tackling that
• 32:23
  Speaker 1: charlie appreciate you i appreciate your gumption and even going
• 32:26
  Speaker 1: in there okay hey terrific great to have you on
• 32:29
  Speaker 1: the show as always lovely to talk to you again
• 32:31
  Speaker 1: Thank you.
• 32:32
  Speaker 3: Appreciate it.
• 32:32
  Speaker 1: That's Charlie Viola, top advisor on the upper ranks of
• 32:36
  Speaker 1: our top, soon to be 150 advisors list from Pitcher Partners.
• 32:41
  Speaker 1: Lovely to talk to him. As always, keep those emails rolling.
• 32:45
  Speaker 1: And we would love if you would mention the show
• 32:48
  Speaker 1: to one other person. A little campaign we're running at
• 32:51
  Speaker 1: the moment and seems to be working. So thank you
• 32:53
  Speaker 1: very much. The emails, themoneypuzzle at theaustralian.com.au. Today's show was
• 32:59
  Speaker 1: produced by DSM Englund. Talk to you soon.