Why performance based fees for advice won’t work

“About 19 per cent of investors say their preferred model for paying an adviser is performance-based fee,” according to Mark Johnston, principal of research firm Investment Trends. (Reported here today).

Performance based fees will not work for most types of financial advice.

Performance based fees for finance advice may only be appropriate when:

  • The advice service has a narrow focus solely on investment selection; and
  • The value proposition of the adviser is based on beating the investment performance of valid alternatives such as the broader market or what the investor could achieve on their own.

But that scenario is a very small portion of advice. It perhaps only really applies to stockbrokers and some other investment advisers.

Most financial advice provides a far broader service including providing intangible value such as clarity, direction, confidence and peace of mind. Other benefits include saving you time by handling a lot of research and paperwork on your behalf.

The advice fee is therefore relative to the value of such benefits to you. And it is separate from the investment performance.

Certainly performance based fees couldn’t apply to true financial planning.

The value of planning anything in your life is that it gives you greater confidence that you will get the future outcome or experience that you desire, how and when you want it. You get that confidence because planning and purposeful action actually increases the likelihood the desired outcome will occur.

If the financial adviser controlled every element of you achieving that life goal then maybe you could argue for a performance fee based on you getting the desired outcome. But they don’t control most of it – you do!

Traditional percentage based commissions on product sales are absolutely not the way to remunerate an adviser for strategic advice and guidance. But neither are performance fees.

The solution is a move to transparent fees agreed up front for a defined scope of advice. The level of that fee will be based on mutual agreement between you and your adviser to provide mutual reward:

  • The fee needs to be high enough to cover the adviser’s costs plus a reasonable profit margin;
  • Whilst also being low enough to represent value for the tangible and intangible benefits received by you

How I made a 5000% return in 1 month

In January I sold an investment asset that I had bought only one month earlier – and the sale netted me just under a 5000% return on investment. The investment I made was in buying an Internet domain name. It is like virtual property investment. To help you start learning more about investing in Internet domain names I’ve interviewed my domainer mentor, Ed Keay-Smith. Listen to the interview here.

In January I sold an investment asset that I had bought only one month earlier – and the sale netted me just under a 5000% return on investment.

Now I got lucky when a motivated buyer emerged within a month of my purchase. This is uncommon.

But what is common is that level of percentage return on investment, according to my mentor in this investment type Ed Keay-Smith.

The investment I made was in buying an Internet domain name. For example: MattHern.com.au. It is like virtual property investment.

I refer to this type of investment as frontier investing as it reminds me of the days centuries ago when people rode off into the Wild West and pegged some land.

Whilst very high percentage returns are possible, of course just like any investment you need to first learn a lot so that you know how to make a good investment decision. Otherwise you are just speculating. And if you are blindly speculating you are one small step from gambling.

How to invest in domain names

To help you start learning more about investing in Internet domain names I’ve interviewed my domainer mentor, Ed Keay-Smith. Ed is one of Australia’s leading authorities on the subject of domain names and domain investing and his blog and podcast at ozdomainer.com is read and listened to by domain investors across the globe.

In this 40 minute interview you’ll discover:

  • What exactly is an Internet domain name
  • Why you may want to invest in this type of asset
  • Why you may not like to venture into this frontier investment type
  • Several golden tips from Ed on how to generate domain ideas and work out if they may be valuable
  • Where to go next to learn more about investing in domain names

How to easily save 5% on your groceries

Groceries are one of the largest costs in most people’s budget, costing around 17 percent of average household spending. Did you know you could easily and legitimately save five percent on your groceries without changing your shopping habits? That would be over $500 per year for the average family. Both of the two large supermarket chains in Australia provide means to purchase their gift cards at a five percent discount to the card value. In this article I share two ways to get those discounted cards.

Supermarket shopper with trolleyGroceries are one of the largest costs in most people’s budget, costing around 17 percent of average household spending. (Source: Australian Bureau of Statistics Household Expenditure Survey.)

In my experience with clients, families easily spend above $200 per week on groceries –that’s over $10,000 per year.

Did you know you could easily and legitimately save five percent on your groceries without changing your shopping habits? That would be over $500 per year for the average family.

Both of the two large supermarket chains in Australia provide means to purchase their gift cards at a five percent discount to the card value.

At Coles

Across Australia you can purchase a copy of the Entertainment Book that contains hundreds of discount vouchers. In addition to the vouchers you can purchase Coles gift cards through the Entertainment Publications website at a five percent discount.

The way I do it is to buy a quantity of gift cards worth the equivalent of about one months groceries. Since I pay on my credit card which also has a monthly cycle there is no impact on my cash flow from pre-purchasing the cards. Then at the checkout I pay for my groceries using the cards.

In Western Australia the Entertainment Book costs just $65. Given that you can save hundreds of dollars per year on groceries with the discount it is a no brainer to buy a book.

If you want to get a copy of the Entertainment Book investigate your local charity, school P&C, sporting club or work social club as many of them distribute the books as a fundraising activity.

At Woolworths, Big W and Caltex

As a member benefit the RAC of WA provide the ability to purchase Woolworths Essentials gift cards at a five percent discount.

[Updated Nov 2011] You can easily purchase the gift cards in the RAC Online shop. Just login using your member number. RAC post the cards to you for free! The potential for lost mail may concern some but when I asked the RAC about their process in this circumstance I was very reassured. For added security you could use a post office box (like I do) or ensure you have a padlock on your mailbox (which is essential anyway in protecting against ID theft.)

Currently you have to visit a member centre to buy the gift cards and there is a maximum limit of $500 per member per day. Whilst it is not as convenient the savings make it worth the extra effort.

The Woolworths Essentials gift cards can be used at Woolworths supermarkets, Big W and co-branded Caltex Woolworths petrol stations. You could therefore save hundreds of dollars per year especially if you are the regular chauffeur to hungry, growing teenagers.

If you live in Western Australia, regularly shop at any of those three outlets, own a car and yet are not a member of the RAC then join up. At just $87 per year for standard roadside assistance it is a no brainer. You will end up in front.

Know any other sources?

I have heard on the grapevine there are other ways to legitimately purchase Coles and Woolworths gift cards at a discount. If you know of any other way please share your secret in the comments below. (You can be anonymous if you need to.)

Centrelink won’t save you

When I talk to people about the importance of erecting safety nets under their lifestyle I am often countered with “won’t I be able to get Centrelink?”

Centrelink is social security not social comfort nor social choice.

Theoretically social security is to keep you above the poverty line if misfortune strikes. But many who rely on Centrelink may argue they are below the poverty line (e.g. aged pensioners.)

Could you really survive on these amounts?

The current maximum rate of the Disability Support Pension is $644.20 per fortnight for a single person. That’s $16,749 per year.
How are you going to keep food on the table, a roof over your head and meet medical costs on that?

And let’s suppose you not really saving much for eventual retirement. Could you survive on
the current maximum rate of the Age Pension, which for a couple is $1,057 per fortnight (combined)? That’s $27,482 per year.

Erect a safety net

When it comes to the most important things in life there is no substitute for proper prior planning and purposeful action.

The personal impact of misfortune is bad enough without being compounded by financial stress. Take action now to erect a financial safety net to support you if misfortune strikes.

Updated: AXA guide to investment markets

Have you been watching the investment markets fluctuate over the past year and wondering if you should be getting back in, or just in at all?

If so you may be interested in this perspective published by AXA Australia today called Charting The Future – Guide To Investment Markets.

This is an updated version of the AXA Guide published in February. You can read that version here.

What do you think of the AXA guide?

Please let me know your reaction to the AXA guide in the comments section below.

Was it informative or too full of jargon? Did it take you closer to making an investment decision? What else would you want to know? Please share your thoughts below.