Speaking to ifa, ipac Western Australia chief executive Patrick Canion said the decision to cut the rate by 25 basis points will impact the work of advisers.
“For planners it means more work generally with each of our clients, either to restructure portfolios to ensure the right amount of income is still being generated by the capital, or helping clients restructure debt to take advantage of it, or reviewing their Centrelink entitlements,” Mr Canion said.
More broadly, the advice executive questioned Assistant Treasurer David Bradbury’s assertion that “all families and small businesses” will welcome the cash rate reduction.
“For people in debt (ie mortgage) reduction of interest is a good thing because if they keep repayments the same then obviously they will pay off debt quicker,” Mr Canion said.
“But for self-funded retirees, or pensioners, who rely on interest income to provide their income, it obviously means their income reduces.
“Typically, this would mean that they would need to consider alternative sources of income, such as dividends or rent, to replace that income stream.
“Small businesses don’t get too excited because banks usually use these reductions as a means to increase their margins rather than pass on the reduction.”
While for many, lower rates will be a positive in the current environment, “it just isn’t as simple as saying ‘lower is better’ or ‘higher is bad’,” Mr Canion said.
Gerry, you are bang on. It also needs to coupled with factor analysis to avoid “correlations going to 1.0”.
Put the two together and SAA can put in the rubbish bin where it belongs.
Now this article is an example of why the widely used risk profiling model does not work. A “conservative” investor is made to sit with most their capital in bonds and cash because that is consistent with their risk profile and daren’t the adviser muck around with that or risk coming under the wrath of compliance and FOS. Best Interest Duty (one would have thought) would mean the adviser needs to advise on what is best for the client…not what is best to protect the dealer group in case of a complaint.
It’s time dealer groups and FOS and whoever else is involved with this decision making, start looking at objectives based advice and letting advisers advise properly rather than being hamstrung on decades old and failed techniques.
Interesting dilemma. [b]For a risk averse retiree who has been happily invested in cash/ term deposits over the last 5-10 years[/b] do we increase allocations to shares and property to take advantage of higher yields?- Unlikely to be appropriate due to increased volatility and potential for capital loss.
Do we move out of cash and into bonds?- Given the low yields and potential for capital loss when interest rates inevitably increase this may not be appropriate either.
Do we move into higher risk fixed interest to obtain higer returns? This may not be appropriate due to higher default risk and potential for capital loss when interest rates increase.
Do we stay in cash/ term deposits and wait for interest rates to increase?
The danger is for classical return chasing.
interest rates this low can only mean what we all know is that the economy is slowing down. Take a good look at who is spending. Not many people are looking for this election to be over, so perhaps tis country can move on. it cant keep going this way for much longer, before more people are going to hurt.