Your 6-Step Financial Health Check

By Kate McCallum, Multiforte Fianancial Services - www.multiforte.com.au

As we approach the end of financial year, it is a perfect time to take stock and conduct a health check on your finances. So with that in mind, we share our 6 steps for assessing your financial health.

Here is an effective framework to ensure you're financially on track:

1. Is your net worth growing fast enough?
This is one of the best barometers for measuring financial health, and provides an easy way to detect whether a longer-term problem may be emerging. An improved position can come from growth in your assets, and/or repayment of debt.

Do you know how the amount of net worth you need? And by when? Are your current sources of wealth meeting your present needs as well as providing you with savings for your future lifestyle?

If your wealth is in poor health, then you need to understand why. It may be a short term factor like the recent market downturn, an unexpected expense or a career change. If it's because you're consistently spending more than you earn, then this is unsustainable - and needs to be addressed urgently.

2. Are your advice and investment fees a fair deal?
Concerned about fees and her stagnant investment balance, a new client had asked her previous adviser what could be done differently - his answer, "nothing". As it turns out, her fees on a $560,000 investment are now half - saving her more than $7,000 each year.

Most people pay too much. We commonly see annual platform and investment management fees of around 2% to 2.5%. Halve this for different value portfolios (see table below), and you have significant dollar savings each year.

Portfolio value    Estimated annual saving
$250,000            $2,500 - $3,125
$500,000            $5,000 - $6,250
$750,000            $7,500 - $9,375
$1,000,000         $10,000 - $12,500

Are you paying too much? Would you like to save thousands a year? Contact us to find out more.

3. How is your performance against benchmarks?
The first thing to do is to objectively measure two key characteristics: return and risk. Most investors focus on the return - where information is often readily available - but don't have the information or tools to assess the risk.

A self-directed client asked us our view on one of the top 5 performing international share funds. Its one-year performance was strong. But, when we assessed the risk it had exposed investors to in order to achieve that return, it was literally off the scale. Way too much risk for the level of return.

Accurate benchmarking is a complex area - and one which we'll discuss more in our next newsletter.

4. How are you sleeping? Does your portfolio require maintenance?
The financial crisis reminded many investors that they tend to overestimate their tolerance for risk and volatility - so you may want to re-visit your investor risk profile. This is also the time to see whether your portfolio requires rebalancing to your strategic asset allocations. Getting off track can expose you to unnecessary risk and/or dampened returns.

5. Are you still adequately insured?
Evaluate your disability and life insurance coverage. Do you have enough? Too much? Our case analysis shows that nine out of ten professionals and senior managers have gaps in their insurance cover that leaves them and their families exposed to significant financial risk.

6. Do you need to make any changes to your estate plan?
Check the beneficiaries you have named on your super accounts your life insurance policies are still appropriate. A common trap is naming a beneficiary that is not a financial dependent, which can result in unintended tax liabilities.

You also want to check your Will at least every three years, including reviewing the people you have named as guardians for your children, executors, trustees and those with powers of attorney.

Like help with your financial health check? If you would like to undertake an objective financial health check, we would be delighted to help.

Maybe you're unhappy with your current advice and would like to 'road test' an alternative adviser. Or perhaps you wish to retain your current adviser but would like to have a second opinion. Either way, we can highlight valuable areas to help you improve your financial outcomes or simply provide peace of mind.

Simply call 02 8209 1607.