Ask Us – October 2017

Take the opportunity to ask our team of experts any questions relating to finance and mortgages, wealth and financial planning, and general insurance by emailing us on finance@bellpartners.com..

Exchange traded fund fear

Q: There have been some negative articles in the press regarding Exchange Traded Funds of late, should I be concerned?

A: Due to the increasing popularity of Exchange Traded Funds (ETFs) there has been growing scrutiny from certain sections of the media. While it is useful to provoke open conversation about all investment vehicles it is important to consider who may have an agenda to push and who may benefit from scaremongering.

Throughout the negative rhetoric around ETFs the terms index-based investments, or passive investments, are used interchangeably with exchange traded funds. It is important to realise that index tracking methodology was introduced in the mid 1900’s, well before ETFs rose to prominence. ETFs have only improved the efficiency of index based investing, allowing investor’s access to markets at a lower cost, with more transparency and a greater speed of transaction.

There is a suggestion that ETFs are fuelling a bubble. It may be too early to tell if ETFs will heighten market volatility during periods of stress, what is clear is that ETFs help underlying markets find a price when trading stalls. The liquidity provided by ETFs enables higher volumes of trading during such times as investors seek a quick response. There were bubbles in the stock markets before ETFs and there will likely be more to come.

Inflammatory statements likening ETFs to a Ponzi scheme are misleading and designed to grab headlines. Implying ETFs are becoming a self-perpetuating cycle, continually propping up the bigger companies within the index is an over simplification. In the most extreme example where the market is 100% indexed, it is correct that individual securities wouldn’t be priced accurately. However, that doesn’t take into account that there are multiple index providers each with their own methodology for constructing a given index, not all approaches are purely based on market capitalisation. Furthermore, despite their rapid inflows, ETFs only account for approximately 10% of global fixed income and equity assets. As investment in ETFs grows it will create opportunity for active managers and stock brokers to find value in other companies which sit outside the index to try and find outperformance. For these reasons, the above scenario of a 100% indexed market will never eventuate.

While it is important to be mindful of all commentary the fears expressed lately have been overstated. It places additional importance on the effective use of asset allocation and choosing the right index providers and fund managers.

Tom Harg, Managing Director @ Bell Partners Wealth

Cyber security protection

Q: How seriously should I consider a Cyber Liability policy for my small-medium sized business here in Sydney?

A: Very. According to a recent Symantec paper (Symantec Monthly Threat Report), there were 81,000,000, new pieces of malware created in April 2017, and over 1,000,000  web attacks were blocked each and every day in April – this volume was up 80% & 150% respectively when comparing it to the same time last year. In addition, your occupation in Healthcare is one of the top targeted occupations when reviewing the 2016 IBM Cyber Security Intelligence Index, along with financial services, transportation, manufacturing & government agencies.

Aside from the sheer volume of attacks, notifying the Privacy Commissioner is now mandatory for any breaches of privacy and lost data from your business – fines can now be up to $1,8M for companies.

So, what does a Cyber Liability protect you against*?

  1. 3rd Party Claims – if you or one of your staff members lose an IPad that contains your CRM and all client information, this section of the policy covers your liability to those clients for failing to keep their data secure – it covers claims for compensation by third parties, defence (legal) costs, investigation cost and fine and penalties from breaching the Privacy Act.
  2. First Party Costs – reimbursement for the costs you may incur to respond to a breach – IT forensic costs, credit monitoring costs, PR expenses, data restoration costs, extortion (ransom!) payments to Hackers!
  3. Business Interruption – this section provides reimbursement for your loss of profits resulting from any breaches, system outages, as well as any additional necessary expenses you may need to incur to continue business as usual.

* The above is general in its advice and policy terms & conditions vary between Insurers – please contact your Broker, or Bell Partners to discuss your specific circumstances   

Policies can start from as little as $1,000 per annum, inclusive of all taxes and charges so it would be our recommendation to strongly consider a Cyber Liability policy for your business. Of course, there are also things you can do on a daily basis to protect your business in conjunction with your insurance policy – please consider: backing up your systems very frequently, be aware & suspicious of emails from websites (check email addresses from Sender etc.), activate firewalls and use an antivirus program, and always install program updates.

Matt Bates, Managing Director @ Bell Partners Asset Protection

To fix or not to fix?

Q: I’ve heard a lot of people saying that now is the time I should be fixing my home loan interest rate. Is that the case?

A: Before you go ahead and fix your interest rate there are a few important things to consider. When you fix your home loan rate, you are entering a contract with the bank where your interest rate is set for a defined period – usually between 1 and 5 years. The fixed rate will depend on how long you are wanting to lock the rate in for; whether the purpose of your loan is for your own home or for investment purposed; and whether you are wanting to make principal and interest repayments or only pay the interest on your loan.

The advantages of a fixed rate loan are the ability to lock in low rates for years to come, certainty of repayment, and protection against future rate increases. The certainty of repayment is particularly helpful for those transitioning from renting, where they would usually have a set weekly rent payment that doesn’t change week to week, to mortgage repayments which under a variable rate can move up and down.

The main things to look out for with fixed rate loans are:

Most lenders will give you their fixed rate on the day your loan settles, rather than their quoted rate when you apply, unless you take out a “rate lock”. With some lenders, this means you lock in the rate at date of application (even if the fixed rate is lower at settlement) and for others it ensures you will not pay more than the rate at application but any fixed rate reductions at settlement will be passed on. The cost to take rate lock is usually either 0.15% of your loan amount or a flat fee of between $500 and $750.

Most lenders don’t allow you to offset against your fixed rate loan as you could against a variable rate loan. If you expect to have large lump sums in your account or want to make the most of an offset feature, a fixed rate loan may not be the best option. We regularly discuss split loans with our clients, where they may leave a sufficient portion of their lending on a variable rate product that can be offset over the term and fixing the rest. Most fixed rate loans also limit the amount of additional repayments you can make without penalty, and some go even further and say any additional repayments can’t be redrawn until after the fixed rate period ends.

Break fees. If you payout or close your fixed rate home loan before the fixed term ends you may be required to pay a break fee. We have seen these run into tens of thousands of dollars for some clients. This could be due to refinancing your fixed rate loan or selling your property during the fixed rate loan. It’s important to consider your plans and needs over the years you want to fix for before proceeding.

Fixed rates aren’t always lower. We see in many instances now where fixed rates are much higher (over 1%) against the corresponding current variable rate. If variable rates stay at current levels a fixed rate loan could cost you tens of thousands in extra interest.

Everyone’s situation and individual circumstances will be different, so we highly recommend speaking to a qualified expert credit adviser before locking in on a fixed rate home loan.

Mark Stevenson, Managing Director @ Bell Partners Finance