You could well ask ‘just tell me straight off, what asset class and how do I use this asset to get to my end goal?’ But before making any investment decisions, it is always prudent to ask yourself: What am I investing in? What is the asset, and what returns can I reasonably expect? Therefore it is important to ensure you understand a bit more about what we are investing ‘in’.

First, let’s look how the asset class of cash performs.

Cash
Of all the asset classes this is the worst performing in terms of investment growth. There is virtually no growth with cash investments. Savings accounts offer minimal or no interest and any interest they do offer is outweighed by account fees. As we all know, cash is easily accessible, accepted everywhere and useful for purchasing goods, paying for services and to survive day-to-day.

However, as a saving vehicle, cash does not generate enough growth to provide future income for goals such as funding private school fees. In the Australian banking system, there is an excess of cash just sitting in the banks and cash management trust, most of them earning very little interest. If you leave your savings in cash, you better watch out for inflation.

For example, if you left $10,000 in cash in a bank account in 1995, inflation over the period 1995 to 2006 would itself wilhavel eroded your purchasing power to $7,831 within 10 years. (That’s a loss of 21.7%. So, unless you earn more than inflation, your wealth is essentially going backwards. You need to invest your cash that is not earmarked for short-term goals into other asset classes.

This does not mean that you, the client, needs to know all the strategies and legal and tax implication—that’s the planner’s job. However, the client needs to be aware of the disciplines of managing their own cash flow. Cash flow management is the main driver and the separator between success and failure in any financial objective.

A financial planner cannot guarantee returns (if one does then run the other way quickly). The role of a financial planner is to demonstrate the relativity of market returns between the asset classes you are looking to invest in.

An adviser should provide detailed advice around:
• General banking matters, debt management such personal, investment and home loans
• Wealth accumulation – various strategies and options
• Comprehensive advice on all investments including direct investments
• Cash flow management
• Debt reduction solutions.
• Retirement strategies
• Personal risk protection.
• Be able to identify a tax situation or consequence and then refer them to an accountant.
• Understand estate planning issues and discuss how to best deal with them.

Importantly, there must be mutual respect and liking between adviser and client. I have no interest in how much money someone has to invest if they don’t first adopt the attitude of listening to what my advice will be. If you think you can do it all yourself, then an adviser is not for you.

So, is it hard to find an adviser? What is a good test? The following are some key areas for you to consider when interviewing your financial adviser.

• Attend one of the many free seminars that are always offered by financial advisory firms.
• Ask for a referral from a friend
• Ask your accountant or another professional body.
• Visit the Financial Planning Association’s website (see the Resources section of this book).

Trusts are not uncommon and there are many types. There are two types of trusts, however, which are used more often than others. They are:
• discretionary trusts
• unit trusts.

However, for the context of this book, I will focus on one main type of trust and avoid going into too great a detail—discretionary trusts. There are many books that cover trusts and I suggest you get as much background information as possible before you take on this strategy.

So, who is involved in a trust and what are their roles?

There are a number of parties or people involved in a trust. They are:

Appointor The boss, the person with the most control. The appointor has the power to change the trustee and appoint a new one at any time
Trustee The person/s or company that controls the trust
Trust The structure that holds the investment assets
Beneficiaries Owners of the assets and entitled to the income of the trust
Financial Adviser Provides advice and manages the affairs
Solicitor Establishes the trust
Accountant To liaise with the adviser and prepare the regulatory requirements for the ATO

One point to always keep in the back of your mind with a trust; you (as the trustee) are the legal owner of the trust property although you are not the beneficial owner of the assets. The trustee has the responsibility to manage the trust assets and must act in the best interest of the beneficiaries.

Note: I may have already started to confuse you at this point. This area requires sound legal and accounting advice to ensure you have the right trust tailored for your situation. Don’t always assume the ‘off the shelf trust’ is right for you. You are far better to pay more for a tailored structured trust than a run-of-the-mill document.

A discretionary trust is called just that because the trustees (typically the parents in this context) can determine how much income may be paid to the beneficiaries of the trust. It is their discretion. The trustees can vary this amount from year to year.

A discretionary trust can achieve a number of objectives:
• It will take care of your family for the long term
• It has sound asset protection. That is your assets may be protected from creditors.
• A trust can be very flexible. It can assist in sharing the tax burden among your family and/or other members of the trust.
• It can trade in its own way but it is different from your personal tax structure and/or a company tax structure.

Once you have received advice and established the trust you must look at how you will invest and in what asset class. Use one of the strategies outlined in this chapter.

Can I lose on cash? I thought it was the safest asset.
Cash needs to be invested in order for it to grow. Just leaving your funds in cash will not produce growth in your overall wealth. It needs to be invested or otherwise inflation will eat away at your wealth. Yes, in this sense, you certainly can lose by investing in cash.

Isn’t fixed interest a low risk strategy?
There have been many examples of investors losing money on their fixed interest investments—one example is debentures. Some debentures are backed by second mortgages and when a property markets turns sour or slows down, some property developers are unable to sell their properties and therefore cannot pay back the loan. If you buy a bond for more than its par value (its original issue price) and that bond falls in value, you will lose on that investment if you need to sell it before its maturity.

What advantages does property provide?
Good property is a sound investment if it’s your home. After all, the purchase of your home is also a lifestyle decision. There are tax advantages in owning your own home upon sale , but the home loan is a non-deductible debt. There are no tax advantages with having this type of debt. It’s bad debt.