The Web We Weave
"A good adviser will save you far more then you will ever pay them."
There is no doubt that technology has changed the way we live, but it has also changed the way we receive and interpret information.
We are now bombarded with news every minute of every day, advertising campaigns which look a lot like documentaries. So what is true and what is not? How do we know and how can we find out?
The problem is not the information we receive, the problem is how we sort out the rubbish from the facts. It is quite often said that you cannot fool all of the people all of the time, the fact is you do not need to. Simply fool most of the people all of the time and they will silence the rest.
Today I would like to look at a couple of examples of where the general public is being fooled in the area of Financial Advice and economics. This is not a comprehensive list of items but simply examples which have come to my attention due to the work I do.
1. The new Financial Planners Association (FPA) television ad. They clearly state that if you are looking for a Financial Adviser then you should make sure that they are a FPA member, as that way you can be assured for receiving the best professional advices at the highest standards.
Storm Financial services was a member of the FPA. Storm's collective loss to clients is around $3 Billion. The founders are well off and continue to live in Brisbane. The FPA took no compliance reviews of Storm while they were a member and only acted after the collapse of the business. The full extent of their action was to fine Storm $20,000. The fine was never paid.
A professional body not only holds their members to a higher level, they also audit their members. So is the Ad true, will you be safe using a FPA adviser?
2. Unemployment – most of us take the headline figure as the easy way to determine if unemployment is up or down. Certainly the media does not make the effort to look at further.
A quick visit to the Australian Bureau of Statistics will give you a completely different story. For August 2011 the unemployment rate is 5.3% up 0.1% from the previous month. Not too bad and below the historic levels. But on closer inspection we reveal that in August 2011 12,600 people lost full time employment of which 2,900 moved to part time employment. In July 2011, 22,100 people moved from full time to part time employment.
This trend is a clear indicator that unemployment is on the rise. More people are working less hours and therefore making less money. It is getting tough out there and a lot tougher than you are being told.
We also need to understand what the government defines to be employed, below is an extract straight from the Australian Bureau of Statistics;
2.34 Employed are defined as people aged 15 and over who, during the reference week:
• worked for one hour or more for pay, profit, commission or payment in kind, in a job or business or on a farm (comprising employees, employers and own account workers); or
• worked for one hour or more without pay in a family business or on a farm (i.e. contributing family workers)
Show me someone who makes enough money in one hour to cover their weekly living expenses.
3. Financial Planner fees – new laws are coming in called “opt in”. This is where the adviser must write to their client each 2 years and have the client confirm that they are still happy to pay their fee. Sounds completely sensible.
Again let’s take a look at the fee structure. In a managed fund platform the average fee is 2%, of which the adviser received 0.5% or about a quarter of the total fee. If you have $100,000 invested the yearly fee is $2000 and $500 goes to the adviser. At an hourly rate of $170 per hour this covers around 3 hours of advice per year. This barely covers the compliance costs to an adviser. However if you opt out, the adviser no long is paid any fee and you no longer receive advice. You are still however paying the fund manager $1500 per year or 1.5% and no one is watching your investments for you. You tell me who the big loser will be?
4. Industry Super Funds – from little things big things grow. This is true. Unfortunately it is not your investment which grows it is the Industry Super fund.
Industry Super fund are cheaper then retail funds. Normally the fees on an Industry Super Fund are around 1-1.5%. On a retail fund you are paying around 2%. The difference is around 1%. So if you have a balance of $500,000 in Super your fees in an industry fund will be $5000. In a retail fund it will be $10,000 so about double.
But what do you get for the extra? First you have access to an advisor who should on their own justify the extra funds. You need to look at an adviser like an Accountant or Solicitor, do you do your own tax or conveyance work. Do you understand the super rules.
A good adviser will save you far more then you will ever pay them.
In an industry super fund for your $5,000 you receive nothing. No advice on superannuation. No advice on investments. No advice on the level of insurance you should have. You have no idea when you can retire or if the investments you hold suits you.
The message of the Industry Super Funds is simple, advice is worth nothing, every super fund provides the same return and it is only the fees which make the difference.
This could not be further from the truth, good advice makes money. This is why the rich value their advisors.
These are just a few examples of how we the public are deceived. With all that is going on in the world the average person has little or no chance to be on top of the truth.
The only way to be well informed is to have a reliable adviser whose goals are aligned with yours.
In the Financial Investment space we aim to be this advisor.
Let us know how we can assist you.
Investment Education
Reader Comments (2)
Before I answer I would like to help. In reading your blog it would appear that either you or someone close to you has lost money as a result of bad advice from a Financial Planner. Being burnt by bad advice is generally enough for people never seek advice again. Perhaps the best course of action for you is to obtain advice to help with the recovery. I am more than happy to offer you a free appointment to assess your situation.
In between the lines you raise a very valid question, “how can an investor identify a great adviser?”
We would suggest that investors focus on three questions.
Are the financial adviser’s fees aligned with my best interests?
How the adviser charges you, the client is important. To provide our clients' the best service we structure our fees to match their needs. If it is once off advice you are seeking we charge an hourly rate, if it is ongoing management of your investments our fees a linked to the value of your investment. In short as your investments go up we make more as they go down we make less. An asset-based fee structure aligns the incentives for the manager and the client, so allocation choices are completely objective with a common interest in the most appropriate investment strategy. Our advisers are paid salaries and therefore are not sales orientated but service orientated; they receive bonuses based on their contribution to the firm not based on the money they bring in.
Does this financial adviser recommend only one product or service?
Our planning process consists of developing, implementing, or maintaining a financial and estate plan, and selecting the most appropriate investments for a specific objective. Our wealth management services involve in understanding the most appropriate investments for each client, and implementing those transactions. This requires regular communication with each of our clients, and we make an effort to be in regular contact with each client to ensure that we're doing the best possible job for them. It is the continuing monitoring of the investments, which adds value long term. We do not subscribe to the one size fits all strategy. We view gearing as a very high-risk strategy, we rarely allowed clients to move above a 50% total gearing level. This had the affect of our firm only having to deal with 5 margin calls through the entire GFC.
Are all adviser created equal?
Unfortunately, not all people have the same moral fibre; the same is true for professionals. Some are merely investment salespeople, without the education or inclination to offer true, comprehensive financial advice. The education requirements to be a financial adviser are not high. Each license holder, of which we are one, decides what level of education that their advisers require.
All four of our financial advisers have bachelor degrees in either commerce, economics or law and are Commissioners for Declarations. In addition to this base level of tertiary education our firm boasts a Certified Practising Accountant (CPA) specialist accredited financial planner. Two advisers are currently working to achieve postgraduate qualifications and all are PS 146 compliant. Our advisers agree to a strict code of professional conduct with their respective governing bodies, undergo a background check and disclose any issues related to professional conduct.
When all is said and done - Credentials are important.
FPA and ASIC
You raised the point that the FPA and ASIC provide little protection. To a degree you are correct, the best protection anyone has is common sense. If you do not fully understand something it is best not to act until you do.
The value of Financial Advice cannot just be measured by the return on the investment; advisers provide value through advice on superannuation, taxation, insurance and estate planning. I would be interested when you determined that all advisers are bad, certainly not before you invested. The GFC has been the worst financial event this generation; all of my clients have lived to tell the tale. All suffered a fall in their portfolio from the highs of 2007 but this is expected, most have portfolios, which are producing more income now than they were back in 2007. I cannot speak for all Financial Planners but I would expect that most be in the same situation as us.
Events like the GFC and the tough legislation, which was brought in as a result of failures like Storm Financial, help rid the industry of rough advisers.
Firms like our welcome the current reforms.
Jason Fittler