Veritas Wealth Solutions

Thank you for your Support – Client Referrals

Veritas Wealth Solutions is grateful for the continued support we receive from our clients. A significant number of our new clients continue to come from your referrals. So a big thank you to all our clients who have passed our name onto family, friends and work colleagues. We strive to provide high quality advice and customer service to all our clients and your referrals infer we are achieving our goals.

Staff Updates

Veritas Wealth Solutions would like to congratulate director, Jodie Dickson and accountant, Allison Burman for recently being awarded industry professional certifications. Jodie has recently been accredited as a Certified Financial Planner® (CFP®) from the Financial Planning Association of Australia (FPA), recognised globally for upholding world class professional standards in the financial planning. Allison has recently achieved her Certified Practicing Accountant (CPA) qualification from CPA Australia. This qualification takes multiple years to achieve, including after-hours study and exams and professional experience. Please join us in congratulating Jodie and Allison on their outstanding achievements.

Certified Financial Planning Professional Practice

Did you know Veritas Wealth Solutions is recognised as a FPA Professional Practice? 100% of our financial planners meet the Certified Financial Planner® (CFP®) professional status and our practice certification demonstrates that we are committed to the highest professional and ethical standards.

Gift Vouchers Available for Financial Planning Initial Consultation

Do you want to give your siblings, children or grandchildren a good financial start in life? We have available gift vouchers that provide an initial financial planning consultation (approx. 60 – 90 minutes) with our financial planners Ken Wild and Jodie Dickson. Cost for the gift vouchers is $165. This could be the start they need to get on track and achieve a financially secure future.

New Year Financial Health Check – Are You on Track for the 2016 Financial Year?

Whilst many people make New Year resolutions to set personal goals, January is also an important milestone in the financial year. Reviewing your finances now allows you time to implement new strategies and/or make sure existing plans are running accordingly to schedule. We have included some items that should be checked or planned for now rather than in June of the financial year when it is often too late to implement.

For those working – check your Super Concessional Contributions (this includes Super Guarantee, Salary Sacrifice and personal contributions) to make sure you do not exceed your cap ($30,000 for under 49 years old, $35,000 for 49 and over) or look at making further contributions to make the most of what is still available. Remember deductible super contributions are only tax deductible in the financial year they are received in your super fund account and often the last quarter or monthly contributions are not received until the next financial year. Ask your employer or check your super fund account if you are unsure of the amounts that have been paid for this year so far.
For retirees – check that you are on track with your minimum pension withdrawal amounts. Scheduled fortnightly and weekly payments can sometimes fall short due to the timing of weeks in the financial year i.e. 25 payments rather than 26.
Be proactive – for those that tend to leave paperwork to the last minute start organising your accounts and tax paperwork now. This alleviates stress by not leaving it until the last minute and also assists in getting an idea of your current financial and tax position so you can utilise the next few months effectively and then;
Talk to us at Veritas Wealth Solutions to see what you can possibly take advantage of over the next few months or have any questions answered in regards to your financial goals before June 30 arrives.

The Hidden Influences of Your Brain – Part 1

Behavioural Biases

What time did you get out of bed this morning? How did you decide which sock to put on first? Did you have toast or cereal? Some of these decisions might have been made consciously. You set the alarm clock, for example. But many decisions are made subconsciously – the result of a habit, or an unnoticed behavioural cue, or a distant throwback to a something that helped our ancestors survive on the savannah perhaps.

What may surprise you is how many decisions fall into the subconscious category. While it is not precisely measurable, neuroscientists estimate that 80-95% of decision-making occurs subconsciously. That’s right – despite that our internal dialogue and subjective reality that tell us we are the masters of our own minds, the reality is otherwise.

In this article and the next newsletter we will examine:

Major decision-making biases that our brains expose us to;
Common investment errors that result;
Distortions these biases create on financial market prices and returns;
Five tips on how to avoid investment decision-making traps; and
How investors actually respond to these issues and opportunities today.

As we go, we will challenge you to identify hidden influences in a range of investment and everyday life scenarios. If you’d like to join us on this journey, you can start below, where we analyse Mark & Meg, a married couple as they decide to buy a new car.

Mark & Meg buy a car

Mark & Meg are a middle-aged professional couple in their 50s. Mark is a business banker at a major bank, while Meg works part time as a senior architect at a mid-sized local firm. With their mortgage now under control and the kids starting to become more independent, they feel it’s time to upgrade their car. It’s their family car, and Meg will be the main driver.

Drive to the dealer

On the way Mark & Meg discuss their preferred option – an Audi A4. It’s a stylish 4-door sedan that they both like. Meg’s parents have driven Audis for years and rave about how good they are. Recently one of the Meg’s friends bought an Audi A4, which Meg enjoyed taking for a test-drive.

What behavioural biases can you spot?

While recommendations from friends can be helpful, we tend to rely on social cues from others more than we should. In one famous study people were asked to judge which two of a small number of lines corresponded in length. It was an easy task, less than 1% of people got it wrong. However, to make it more difficult, the experiment was then altered. People were put in a room with 9 actors, each of whom chose before the test subject, and each of whom selected the wrong line. In that context, only 25% of people were able to consistently choose the correct answer. The surprising outcome from this study is that for most people, social influences are strong enough to overcome the clear objective truth. And, in case you are wondering, the social influence wasn’t just peer pressure – a similar effect was observed when subjects were told how others had responded, but were able to answer in private.

Being strongly influenced by our peers came in handy for our distant ancestors, much of whose brain structure is the same as what we now carry around in the modern world. The caveman who stopped to question why everyone was running, soon became dinner. If social influence is powerful where the correct answer is clear to the naked eye, we should expect it to be stronger in the complex world of investment decisions.

Parking the car

Mark & Meg soon arrive at the dealer and find a park around the back. As they step out of the car Mark notices something red on the footpath. He quickly recognises it as a $20 note. In one fluid motion he picks it up, shows Meg his lucky find, and happily plants it snugly into his wallet.

What behavioural biases can you spot?

Mark, and perhaps Meg too, are have been “emotionally primed” by this experience. Positive feelings associated with a small lucky find can have significant effects. In one study, subjects who found a small amount of money just prior to being asked to reflect on their life, reported being happier with their life overall than those who had not. The emotional priming can come from a range of sights, sounds and smells. In another study, being exposed to a happy face influenced people to drink more beer. This was effective even when they saw the happy face for no longer than a few micro-seconds – not long enough to even be aware they had seen it!

A significant part of our sub-conscious brains are used for processing emotions. Fear helped our ancestors clamber up a tree before they had been able to consciously process the sinister movement in the shadows. It is the protective effect of fear, in particular, that has made it one of the strongest influences on our behaviour, and one with significant implications for investment decisions and markets. In Mark’s case, the positive emotion that results from his lucky find may lead him to be more confident in his decision to buy a car. Consistent with experimental evidence, it is not inconceivable that by finding $20 Mark is now willing to pay $1,000 more for the car!

Comparing options

Inside the dealer, the smartly dressed and well-spoken salesman, Paul, helps them understand the benefits of their proposed purchase. Mark is keen to understand the after-sales support that will be available. He recently read a story where the author had a scary experience with his Audi failing on a busy motorway. The driver feared for his life as he manoeuvred away from a looming truck and felt let down by Audi.

What behavioural biases can you spot?

Theoretically, to make a proper assessment, Mark should compare long-term reliability data across different makes and models. Instead, we tend to be influenced by vivid stories and personal experiences. The more vivid, emotional and personal, the greater the impact. This is why charities present pictures and stories of individual children, rather than statistics about the millions of needy. We are more likely to give money to help a single impoverished child, than to hundreds of their impoverished classmates.

There is a cluster of related cognitive errors here:

We are overly reliant on evidence from small samples of data.
We rely too much on recent experience and expect it to continue.
We overweight low probability outcomes and underweight almost certain outcomes.

In Mark’s case, these effects may make him feel Audi’s maintenance record is worse than it actually is. For investors, these biases contribute to the “value effect”, which we will explore in later posts.

Negotiating the price

Mark and Meg have decided. They are going to buy a black A4. It’s two years old and has done 38,554 kms. The sticker price is $45,000 (drive away, no more to pay), but Paul says he could talk to his manager about doing them a better deal.

What behavioural biases can you spot?

The sticker price may be unreasonable, but it will serve as a strong “anchor” for negotiations, drawing Mark & Meg’s estimates of value toward it. Anchors affect us, even if we believe we are ignoring them. For example, in one study real estate agents were asked to value a property. Some were given the vendor’s price estimate; others were not. Theoretically, it should not matter – the agents were asked to provide an independent appraisal. But it did. Those who were given the vendor price provided estimates significantly closer to that amount.
Anchors can affect us even if we know they are irrelevant – and even if we know they are completely random! Numbers that are shown to us as a result of spinning a pinwheel or rolling dice have been shown to affect our estimates of the proportion of African nations who are members of the UN, or the number of months jail time an offender should serve, respectively. For Mark & Meg, the sticker price is likely to act as the most salient anchor. However, given the evidence, it is not inconceivable than the 38,544 km on the clock will also have an anchoring effect on their estimate of value.

In the case of investors, the purchase price is a powerful anchor, helping to create the “disposition effect” – an investment patterns that we will explore in the next newsletter.

The Duties of a Company Director

Directors and company secretaries have a number of responsibilities under the Corporations Act 2001 which are legal requirements and compulsory. General duties imposed on directors and officers of companies include:

the duty to exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are constantly aware of the financial position of the company and ensuring the company doesn’t trade if it is insolvent
the duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose
the duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company, and
the duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.

Duty to not trade while insolvent

Directors’ have a duty to prevent your company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, you must consider whether you have reasonable grounds to believe that the company is insolvent or will become insolvent as a result of incurring the debt.

You may expose yourself to criminal prosecution, substantial fines or to action by a liquidator, creditors of the company or ASIC to recover amounts lost by creditors due to your actions.

Your personal assets—not just your company’s—may be at risk.

Duty to keep books and records

Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance.

Although the Corporations Act does not require small proprietary companies to prepare financial statements, unless requested by ASIC or shareholders, they are considered a valuable tool for managing and monitoring your company’s financial position and performance for tax purposes or for raising finance.

For the purposes of an insolvent trading action against a director, a company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.

What are financial records?

Some of the basic financial records that the law may require a company to keep include the general ledger, recording all the company’s transactions and balances, cash records, debtor and sales records, creditor and purchases records, wage and superannuation records, asset register, inventory and investment records, tax returns and calculations, and deeds, contracts and agreements.

Other records your company must keep include:

registers of members (shareholders)
registers of option holders (if you have them) minutes of general meetings
minutes of meetings of directors
financial records that enable an assessment of the company’s financial position and performance and are sufficient for financial statements to be prepared (and audited if necessary) for at least seven years after the transactions are completed.