Ask an Advisor: Dominic Alafaci – Best way to invest for kids?

Alec: [00:00:15] Welcome to another episode of Equity Mates podcast that helps you on your journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Ren or Alec. My name is Alec, but people call me Ren is what I should say, and I'm not joined by my equity buddy Bryce. This is me solo with our latest instalment of Ask an Advisor, the series where we get some of Australia's best financial advisors in the studio and we put your questions to them. We know the cost of financial advice is too high. It's unaffordable for a lot of people and we want to use the platform we've built at Equity Mates to help in our small way. So if you have a question that you want an expert to answer, you can hit us up at Ask an equitymates.com or you can jump into the Facebook discussion group and ask us there. The advisor that's joining us today is Dominic Alafaci. He's the founder of Collins House Private Wealth. He's a financial advisor with more than 40 years experience in the industry. No one better to help answer some questions from the equity mates community. Before we get to the interview, an important reminder. While Dominic is licensed and while we at Equity Mates are Licence were not aware of your personal financial circumstances, the advice that you hear on this show is general only. So make sure you considering how it applies to you and your specific financial circumstances and if you do need further help, do reach out for professional advice. With that said, let's get into it. Here is our latest episode of Ask an Advisor where I sit down with Dominic Alafaci, the founder of Collins House Private Wealth. Well, Dominic, thanks for joining us today on equity mates. 

Dominic: [00:02:00] My pleasure, Alec. 

Alec: [00:02:01] So we love doing these episodes because for so many people in the equity mates community, they would love the opportunity to speak to a financial advisor, but they don't quite have the money to do it. And so we love the fact that we have this platform and we can get great advisors on and, you know, put, put out, put the community's questions to you.

Dominic: [00:02:21] So you're doing a bit of a medicare. There should be a rebate for financial advice as a rebate when you speak to your doctor. But with your money, you've got to pay for it yourself.

Alec: [00:02:31] I love that.

Dominic: [00:02:32] Medicare for Financial Advice. Now I've got a lot of good ones.

Alec: [00:02:36] Yeah, that is great. Well, maybe you and I start lobbying our local members after this, and.

Dominic: [00:02:41] They let us say SFI on a podcast. That's our chance. 

Alec: [00:02:45] You can say. You can say whatever you want. 

Dominic: [00:02:48] That's sweet. Fanny Adams. Most governments are broke. They won't want to spend a cent on anything else that can be used by the public for free. 

Alec: [00:02:56] Well, until the governments, you know, pull their finger out and do some may change in policy. In this space, at least we have people like you giving their time to speak to the community. Dominic, So we appreciate it. And as we say for every episode, but particularly for episodes like this, while we're licensed here at Equity Mates and while Dominic is a licensed financial advisor, he's not aware of your personal financial circumstances. So any advice, anything that we speak about here is general advice only. It's for education and information purposes only. If you're unsure if you want further clarification, do seek professional help. Maybe hit up. Dominic will include Collins House contact details. So you can reach out to his team if you want to speak. 

Dominic: [00:03:39] Further interest on that ALEC most financial services guides which is called an FSG, outlines what we can and can't do under the Corporations law. So if anyone's listening out there and they're unsure, download the FSG from their financial advisory firm, have a read if it'll outline what they can do and what they can't do. That's until Michelle Levy's changes come through perhaps next year. But at the moment it is very onerous on the advisor when we speak about anything. 

Alec: [00:04:07] Hmm. Well, Dominic, we've got five questions from the equity mates community today. They've been submitted in our Facebook discussion group and via email ask at equitymates.com if you have a question about the first one comes in from Dylan and he asks What's the best ETF you would recommend to clients for passive investing if they were to choose one ETF for the rest of their lives? 

Dominic: [00:04:32] Oh indeed. Cue. 

Alec: [00:04:34] Oh wow. Okay. 

Dominic: [00:04:36] I stream. Dylan's a young person has got a ten year time horizon plus is not risk averse and will not look at the daily unit prices and soil his paints when things go down and sell out. So it's probably. Well, there's a couple of there's a dozen you could choose, but that's probably, you know, the one of the most aggressive and likely to give you the highest return to see me the rational investor.

Alec: [00:05:04] Yeah. So and Q for people playing along at home is betashares NASDAQ 100 ETF, which tracks the top 100 non-financial stocks on the US NASDAQ index. What about if someone was a little bit more risk averse? 

Dominic: [00:05:22] Probably qual Kuga, which is the Vaneck Quality Fund, which looks at I mean, sometimes the terminology varies from company to company and they try to differentiate them themselves by using fancy language. But essentially there's a filter to try and find the quality stocks that are available internationally.

Alec: [00:05:46] Yeah, love that. All right. Well, two good ETFs for people to go and do their own research there and a Q and qual. Now Dominic, I guess it maybe it's a signal of where a lot of the equity mates community are up to in their lives. But these days we're getting a lot of questions about investing for kids. Yep. And so we've got a couple of questions on that topic. The first one comes in from Jeremy and he asks a more general question, so he wants to know what the options are for investing for his children. They each have a reasonable sum in their bank accounts around ten grand each, and they're both under ten. So either those lemonade stands are doing really well or Jeremy's been helping his kids. But he wants to know what he should do to get them a better return and set them up rather than just sitting it in the bank and getting the interest on the savings account. 

Dominic: [00:06:40] Okay, look, we have a vested interest in this Nick statement to Colin's house online, which is part of the Colin's house dot com website. You can go and visit it there. Mal, who's one of the investors, is a friend, I suppose, who I've known for a long, long time. He generally, honestly set up accounts for his kids. Exactly like your question, your person. You just ask the question then. And his comments on the website, it's very simple. You invest in a diversified, low cost fund that can provide various asset allocation mixes if they're really young, ten years of age, and they don't need the money for at least ten years, I probably go for the high growth one, but you really need to look at your time horizon. So that's one option. Investing in a low cost diversified portfolio of ETFs that's managed by a professional investment committee. The second option is do nothing and get that money and pay off your mortgage, parent and interest. Remember that you've stolen the money from the kids and give them the same rate of return you've made after tax. Because remember, paying off your mortgage is a response rate of return of probably 6% these days. And I can invest your money and get 6% after tax. So I would thieve the money off the kids personally and I wouldn't invested in choice or anything else for that matter. But remember, I have a covenant between the family members so. Well, that money that Grandpa gave you for your birthday and your christening and what other other things in your paper and I don't have a paper and a ten. But what if you did your mining of Bitcoin or whatever you've done? They can generate that money, steal it off them with the intention of repaying it and repay them back with a gift down the track. That's a second option. It's the most tax effective and every fund manager in Australia will want to punch me on the nose because there's no business for them. But that's what you should do. And the third option is to use for charity, which is an education fund. That's assuming you want a fund for education or generation life. If you just want to generally use a bond, which is a tax paid interest. And so they are three strategies invest in the market, rape and pillage your kids bank accounts, but promise to pay it back with a gift equal to the 6% or probably 10% rate of return you've saved or invest in a tax paid bond. 

Alec: [00:08:59] Yes, I hadn't heard of the charity. I just googled it when when you said it there. So for people who are looking at the exorbitant cost of private school fees and trying to figure out how they should manage that, what are these education bonds? 

Dominic: [00:09:11] Okay. Well, assuming that's assuming you don't want to help your child buy a home, it depends on what you want to do. If you want to help them get into the property market, it is playing a. Or Plan B, if you want to specifically just fund for education, it's a tax paid bond. So it's a friendly society, a life insurance company that's got a pooled fund of assets. You buy into it. It pays tax at around $0.25 in the dollar, sometimes less. And the beauty of the security one is when you take the money out, if you take out $1,000 down the track and 900 is your capital and a thousand and $100 is the profits after tax event, you get it almost like a franking credit pie to. So you end up taking out you get an extra $390 or $350 depending on the tax rate. So it's very, very tax effective. It's specific for education. If you then change your mind and don't want to use it for education, you can use it for just a general tax paid bond. And we could spend an hour on the all traditional life insurance tax paid bonds, but we won't do that now. 

Alec: [00:10:17] Yeah, fascinating. So there was a question in a Facebook group that was also on the, you know, investing for kids. And I guess it was less about the what you invest in and more the how you set it up because there are so many questions around, you know, there's all these brokers and platforms that let you open kids accounts now. But then if you're using the parent's tax filing number and then you're paying distributions, you're paying the parent's tax rate, basically. I'm just going to ask you a general question. How and especially particularly around the tax treatment of investing for your kids. 

Dominic: [00:10:56] If you set up a trust and you hold the funds on behalf of another person, namely a minor and the trustee distributes it to the minor, then the first $469 is not taxable of taxable income. So if you find a fund that produces unrealised capital gains, then you're not going to have much of a problem. But technically someone has to pay the tax along the way. You can transfer it to the the minor when they become an adult at age 18. And there's no CGT implications. And the question is whether or not you actually go to the trouble of setting up a real trust or you just have a trust written down on a piece of paper in the loungeroom. And, you know, I don't think the tax office is going to deny you if you use the latter and you don't get a formal one drawn up. But if your intention is to set aside funds for the benefit of another person and you act as trustee, put your tax phone number down to pay any tax over the $416 unearned income of minors, then I think you'll be right. The bonds, on the other hand, take all that away from. You don't have to do any of that. It's much, much simpler. So that's a tick for bonds. But you do pay tax at the average of $0.25 in the dollar, and you might, depending on your circumstances, pay tax at less than $0.25 in the dollar. If you do it through like a like we do with the Collins class online or choice of portfolios or a broker account depends on your personal circumstances. 

Alec: [00:12:29] So something you that you mentioned there that you transfer you can transfer the shares to your kids when they turn 18 without triggering a capital gains tax event. I didn't realise that because. 

Dominic: [00:12:40] They're not really yours. You're holding them in trust for someone else and they're not. You don't have a beneficial interest in them, therefore there's no change in beneficial ownership. 

Alec: [00:12:49] Right. So. So to be clear, it's only if you've set up the trust either formally on the back of the napkin, if you just own shares and then you decide you're going to transfer them to your kids when you're 18, that doesn't count our Banga. Now, this question in the Facebook group mentioned a vehicle called a Bear Trust. Is that a particular type of trust parents should know about? 

Dominic: [00:13:11] A bear trust is a trust. It's just one thing that doesn't have any other discretion. So it's ideal for these circumstances. I guess you could use a bear's trust.

Alec: [00:13:19] Okay. All right. Well, I think we've covered the investing for kids stuff well enough, I'm sure. As is always the case with this stuff, you answer one question and come back. So if people do want to get more into this, ask an equitymates.com or the Facebook discussion group or Colin's house and you can reach out and speak to a professional there. But, Dom, the next question we've got comes in from Brad also via email. So he's studying an undergrad in para medicine and loves learning and so doesn't have any formal training, you know, he didn't study finance or anything like that but wants to keep learning. His goal is to pay off his mortgage and be financially free. I mean it's not all about goals but he wants to know is there a particular further study that he could do, you know, either formally a diploma or an advanced diploma or informally, you know, online courses or something that he could keep studying and advance his investing journey? 

Dominic: [00:14:21] Mm hmm. Look, I'd probably save his money if he wants to pay out his home loan. Don't spend any money on. Of course. Just do it. Number one, you can get some great looks, there's a couple of good books you can buy. There's Warren, the Warren Buffett ten Golden Principles, which are brilliant. That's a great book to read. There's a good article from Cornell University, Myopic Loss of Vision. It helps people understand why human beings make stupid mistakes when investing. They're always short sighted. They're looking at short term. They should be long sighted when you're investing for long term assets. I wrote a book a few years ago called Grow, Manage and Protect Your Wealth. I wouldn't do a course to pay out your loan. I'd save the money and adopt a disciplined approach to paying more into your mortgage each month that you can afford. And just stick to that. 

Alec: [00:15:13] Yeah, love that. We'll include the links to the article and the books in our show notes if people want to find out more. The next question comes in from Niall. So he's done pretty well for himself over the past few years. He's had some very healthy returns on Tesla and Nvidia. And the question now becomes should he let them ride or take profits? And I'm not going to ask you to give us the analysis on those two particular stocks, but his question is just more general. You know, he makes the note that most investors want to know how to buy individual stocks. Most financial media is talking about buying stocks, but he wants to know, how do you know when to sell, when you should take some profits off the table, when you should take them all off the table? How do you actually think about the other end of the investing journey which is selling?

Dominic: [00:15:59] Good question. Three, three parts to my answer. Why did he buy the stocks in the first place? What was his objective? He needs to look back at that. If it's just simply to make money or at least achieve this objective. Nvidia is my favourite stock in the world. Just about being an old gamy. I'm glad to see all those motherboards I spent money on. Made them lots and lots of profits down the track. So what was your objective? You achieved objective then sell out. It's the whole lot. If you achieve your objective, most people will keep some money in there and perhaps keep half. The other question is do you have a diversified portfolio? Because if you don't, you're taking a huge amount of risk. If these are the only two stocks you've got, Well, you're a no. It doesn't matter how much money you make. And you could have easily invested into duds and lost your shirt. So if you don't if you don't adopt this vacation, you're an absolute nothing. And I have seen I can just if I've got I mean, people have got you know, it doesn't matter how old you are in this case, retirees with all their money in one particular fund, I seen it on TV, 6%, you've got to be joking like that. Fund me. You should have maybe five or 10% of your money and they're not 100%. So in this case he's got 50 and 50 diversify. And the third thing is your tax situation. If you're making this money and you've now got the opportunity to sell out, take a gain, pay the capital gains tax and you've got a mortgage, I would sink that money straight into the mortgage. Because the riskless rate of return is almost double what the interest rate is and you can't invest. With zero risk, anything in anything other than your family mortgage. 

Alec: [00:17:42] Now, you've mentioned mortgages a couple of times, and I think while we've got you, it's worth just asking a question or two on housing, because it is is front of mind for so many people. There's obviously been a lot spoken about the mortgage cliff and, you know, people rolling off fixed rates and going to variable rates. And I'm sure clients that you're speaking to sort of facing into this. What's your advice for people in the equity mates community that are looking at, you know, doubling the interest rates in the coming few months? 

Dominic: [00:18:14] It's a bit like you're on a nice cruise. Everything's beautiful. The sun is shining. 5 minutes later, there are dark clouds. The ocean starts to swell. You just have to buckle down and ride through it. Unless you want to jump overboard and have the increase of the potential of dying. So you don't want to jump into the. You don't want to abandon ship. You've got your ship. You've spent money on it. Knuckle down. Stop buying Netflix. Stop playing bloody. Whatever the games are, people play. Stop using Uber, stop using Uber eats, being really frugal and ride through the storm. Because when you get to the other side of this storm, you'll be laughing. All the people who have because markets, whether they be financial markets, property markets, it's a transfer of wealth from the impatient to the patient. So if you can get through this, you'll be one of the ones that's been patient and hasn't sold at the worst possible time.

Alec: [00:19:15] Mm hmm. Yeah. You think this would be a bad time to sell that? 

Dominic: [00:19:20] Are the. I'd be buying more if you had it. If you had the capacity to buy more, I'd be buying more in this market because it's really, I suppose, opportunistic. But there'll be distressed sales coming along. Now, whether there's a willing seller, the person has no choice. They're not willing. There are forced seller and there's a willing buyer that's just life. So whether it's your pushbike that you have to sell, you don't really want to sell it, you love it, but you can't afford the next interest repayments, you might have to walk a bit more. That's bad, but it's good for the person who bought your carbon fibre bike for $1,000 off what you paid for it a year ago. So that's just life. But at least you've got that $4,000 you got out of the deal goes towards saving your sheep, keeping your house afloat. It's a horrible situation to be in. 

Alec: [00:20:14] It is. It is. It's a it's a funny dichotomy that we're sort of saying in the equity mates community. I'm sure you're saying it as well, because on one half people are in houses and they're struggling with mortgages and the other half of people aren't in houses. And Sascha and I are in this pocket. And, you know, we were struggling to get into mortgages. And it just seems the one universal thing is that everyone is struggling with housing one way or another. 

Dominic: [00:20:38] And the dumbest thing the government's doing and I love migration, don't get me wrong, but at this point in time, what are they doing flooding the country with hard working good migrants and good luck to them. I have nothing against them, but that's going to increase slightly the demand for housing but rental as well. So and then they've increased landlord costs by by land tax, increasing the nominal. Some of the clients, elderly clients that I have, good, hardworking people haven't dodged a tax bill in their lives, just have worked hard. Some of them are having to sell their properties because the cost of maintaining them with the increase in requirements for lease leaseholds to be more in favour of the tenant, which is I suppose a good thing in the long run. But the timing of all of these things is utterly ridiculous and they're putting all of the pressure on the land owners to sell because they can't afford the increase in government taxes. And we all know that all federal governments around the world, just about and state governments, especially in Australia, are bankrupt. And there's only one thing in life that's guaranteed taxes will go up, there's just no debt. So if you had my closing line on this is if you're facing a capital gains tax, pay it now, because I can guarantee you it'll be a higher rate down the track. And whilst you're holding that asset, the holding costs are only going to get higher and higher. So bite the bullet. If you got gangrene in your foot, chop it off because you lose your whole leg in a couple of years time are terrible. You can't septic when you when you're approaching 65. Saying it all. 

Alec: [00:22:23] No that's the thing I mean yet you've say you've lived through market cycles and you've successive governments and you know that's, that's a perspective that we appreciate, you know being able to put our questions to someone who's sort of seen it all and advised. I wouldn't even guess how many people you've advised over the 40 years you've been an adviser. 

Dominic: [00:22:41] Probably about 8000, I think. I think that's about right. It's quite a lot. I had to give a summary to somebody a while ago, and I think it was 8 to 10000 I've spoken to. So they go, wow. 

Alec: [00:22:56] Well, Dominic, we appreciate you taking the time. If people want to find out more about Dominic and the work that you're doing at Collins house, private wealth is the best place to go. 

Dominic: [00:23:07] Your website or just explain. We've got two services. If they've got a small amount of money to invest and they're looking for a good home for it with six different model portfolios, I'll say, Wow, I'm very proud of our ESG balanced portfolios returned 10.23% for the last 12 months, which is outstanding. You can buy that directly. It's nowhere near our costs and is by the Collins house online. There's lots of information, but you must read the PDS before you invest. If you want to have a chat. To me, I'm happy to give people a free consultation through our tele finance link. Tele go online to Collins has a column again, you can click on the appointment, but it's really for people who need funny personal advice and want to pay for it down the track. I'm happy to chat to them. It's gonna be a three minute conversation. If you've got no money and you want me to work out how to walk on water, I'm sorry, I can't. And that'll be the end of the conversation. But if you have a genuine need, it might be, you know, potential inheritance or you have a family law issue, or you might have you might be a self-directed client, we get lots of these where they get a bit sick and tired of doing it themselves, that I might get elderly or unwell and they need someone to sort of be the safety net to hold their hand for, for a particular period in the cycle. We're happy to help. 

Alec: [00:24:30] Yeah, love that. Well. Dominic, we appreciate your time. Good luck with everything. And I'm sure we'll speak again at some point. 

Dominic: [00:24:37] Thanks, Alec. Good luck to you guys. Nice meeting.