Tunnel vision cost $5,000 a year

A couple of months ago I met Kate at a 40th birthday party. Kate had tunnel vision – metaphorically speaking – and her tunnel vision was costing her abut $5,000 by her own estimate. The problem was, Kate was blissfully ignorant to her condition. That was, until she met me.

A couple of months ago I attended a friend’s 40th birthday party and met one of her lovely friends, I’ll call her Kate. Once Kate discovered I am a financial planner the conversation inevitably turned to managing money. I’m ok with that as I love helping out.

After letting on she was a bit older than 40 and maybe even late 50s or early 60s I asked if Kate had been to one of the many free retirement planning seminars that are offered by financial planners around the place. The reply was:

“Yes, I’ve been to quite a few. But they always seem to want you to come in for a meeting and sign up for a $3,000 financial plan.”

I hear that a lot, but this time I quickly shoved another canape in my mouth to stop my urge to evangelise.

Imagine my shock when 10 minutes later we were discussing the transition to retirement strategy and Kate came out with:

“Lots of people at work have told me I’m crazy not to be doing it, but I just haven’t got around to it. Oh, it’d only save me about $5,000 in tax a year.”

Did your jaw just drop too?

That’s irrational! How can you be happy to pay an extra $5,000 of tax per year but be unwilling to pay $3,000 once-off for comprehensive retirement planning advice?

Kate’s mistaken beliefs about the value of financial advice had given her tunnel vision in regards to getting professional help.

That tunnel vision was costing her at least $5,000 per year by her own estimate. Imagine how much more benefit she perhaps could get from advice that she was was not yet aware of.

Are your beliefs about financial advice and financial advisers giving you costly tunnel vision?

Were those beliefs formed years, even decades ago? Were they formed just on someone else’s experience, not even your own? If so, the industry has changed – a lot!

Perhaps it’s time to take the blinkers off and discover what you don’t know you need to know.

Beware of industry super fund advice

I’m annoyed! But rather than pointlessly vent,  this soapbox article is an attempt to turn my recent annoying experience into a useful lesson for all.

Many people I meet are wary of going to their bank to get financial advice. They say they don’t want to just be sold the bank’s products.

The Industry Super Fund Network loves criticising financial advisers on the same issue and a related issue about commissions.

Well a financial adviser from a major industry super fund just disclosed that his job is to keep accounts within his employer’s product. (Like bank advisers he wouldn’t be authorised to advise on anyone else’s product anyway.)

The lesson here is to have your eyes wide open if you get advice from the advisers tied to your industry superannuation fund. It could be just as restricted as if you get advice from your bank.

Don’t assume the advice will be in your best interests having considered all available options.

I say that last bit because it was a discussion about the limitation of his employer’s product that led the adviser to the inadvertent disclosure. He was annoyed at the product’s limitation which could ultimately result in $500,000 dollars flowing out of the product to a retail superannuation fund. (And it wasn’t even a fancy facility I was looking for – just something pretty simple.)

So my mind wonders…do the industry super fund’s advisers not recommend certain actions to clients because their product couldn’t facilitate it?

I err on the side of trust in people’s positive intent and assume the industry super fund advisers don’t consciously make such limited recommendations. But maybe their brains are so accustomed to the limitations that their brains no longer even flag the alternate strategies for consideration? Hmm…

So beware – the advice from industry super funds may be cheaper in fee but costly in consequence. Importantly don’t assume it is any less conflicted or limited than the advice from your bank that you are so wary of.

Misleading marketing finally acknowledged

I shudder whenever I see the big newspaper and magazines advertisements of companies that purport to teach people how to easily & profitably trade shares and derivatives (like options, warrants & CFDs). They promise so much confidence and certainty of gains.

According to their website (accessed 20 April 2011) the business Safety In the Market (operated by The Hubb Organisation Pty Ltd) has “assisted thousands of Australians [to] discover how they can trade the financial markets safely and profitably” since 1989.

That’s over 20 years of big promises.

Finally the regulator ASIC has reigned in their promises by obtaining court orders preventing Safety In The Market from making or publishing misleading or deceptive representations about its trading methodology.

ASIC’s concern was about claims that the methodologies were “proven”. A nice piece of marketing bollocks you will read in lots of adverts.

This kind of grandiose marketing can go on for years before the regulator gets around to taking action – as you can see by SITM’s longevity. So just because an organisation has been around for years don’t interpret that as being evidence of a basis to their big claims.

As always be aware and ask yourself if you have what it takes to be one of the minority with the intelligence and discipline to consistently make a profit.


Beware of fake financial advice websites

Yesterday the Australian regulator ASIC advised they have taken action to close down some fake financial advice websites as well as closing the companies behind them.

Fakers tend to try to make themselves look as legitimate as possible so as to trick the unsuspecting user.

For example one of the websites ASIC closed down quoted a fake Australian Financial Services Licence (AFSL) number.

Just because someone quotes a registration number that looks authentic don’t assume it is real. With companies and financial services you can search the ASIC register by number to confirm who really is registered with that number. I strongly recommend that you do that.

For example you can search the ASIC AFSL Authorised Representatives register for the number 238821 and you will find me, Matt Hern. (and discover my middle name.)

In their media release ASIC provide the following six point checklist for consumers who are contemplating using services from websites:

  • Is the company a registered Australian company? (Check ASIC’s register)
  • Does the firm hold an Australian financial services licence or authorised representative status? (check ASIC’s AFS licensees register)
  • Does the firm’s licence conditions specifically authorise them to operate managed discretionary account services (MDAs)? This licence authorises the licensee to carry on a financial services business; to provide financial product advice for MDA services; to deal in a financial product by issuing, applying for, acquiring, varying or disposing of a financial product in respect of MDA services; and to deal in a financial product by applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of MDA services
  • Have you received a Financial Services Guide (FSG)?
  • Have you received a Statement of Advice and an Investment Program?
  • Does the firm have professional indemnity insurance?

(I am not sure how you check the professional indemnity insurance beside asking for a copy of the certificate.)

What price for financial advice?

Two days before Christmas the Australian Securities and Investments Commission (ASIC) released an interesting report into the financial advice industry titled “Access to financial advice in Australia“. There are many interesting insights in the report – the one I will highlight today is the cost of delivering financial advice.

In conducting the research ASIC “surveyed 35 holders of an Australian financial services (AFS) licence (licensees) selected as a sample of the personal financial advice industry“, as well as more detailed discussions.

The ASIC research reveals that “Licensees reported an estimate of the cost of providing comprehensive financial advice to a client in the range of $2500–$3500.” (para 171, page 42)

The report does not go into greater detail but I suspect that cost estimate does not include the cost of providing support in implementing the advice. That would be an additional cost to licensees. I also suspect (know) that more specialised advice and complex client situations have a higher cost to deliver the advice.

No business owner interested in staying in business wants to sell their services for less than it costs them to deliver them. In fact to reward them for the risks of entrepreneurism they need to add a profit margin above the cost. (Many professional service industries target a minimum profit margin of 30% in order to be sustainable and rewarding.)

So in shaping your expectations of what advice will cost you (“the price”) keep in mind what it could actually be costing the adviser to deliver it to you. By quoting you a fee in the thousands they are not having a lend of you, they are just trying to stay profitable.

ASIC noted in summary  “Overall, it appears that the costs of providing financial advice are much higher than the average amount consumers are willing to pay.” (para 169, page 42)

That is no surprise to anyone in the industry. But it is a big problem as it means that many people miss out on getting great advice because we as an industry traditionally haven’t clearly articulated the value of advice. But the value of advice is a topic for another article.

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

If your only tool is a hammer

You may be familiar with the adage that to a person with a hammer every problem looks like a nail.

This is very applicable in the world of financial advice and many clients are not aware of it.

Unfortunately, when you don’t know any different you are often also oblivious to the consequences, which include:

  • Missed opportunity
  • Higher stress from strategies and products that don’t ideally suit your personality and needs
  • Higher costs and lower value-for-money
  • Missed lifestyle goals

Example Hammers in The World of Financial Advice

A tax accountant thinks a Self Managed Super Fund is the answer to getting control over your superannuation.

Why? Because they’re not licensed to recommend other off-the-shelf products. (Which, by the way give you great control without the legal responsibility of a SMSF.) And because they’re not licensed to give such advice they naturally wouldn’t spend any professional development time researching alternate options.

A stockbroker thinks owning direct shares is the best way to create wealth.

While a real estate agent or property developer thinks residential investment property is the best way.

And your mates and colleagues think the best way is the way they are doing it!

Why? Because it’s probably the only way they know. (Plus you doing what they suggest sub-consciously validates their decisions. It’s a psychological phenomenon of herding or “group think.)

(Apologies to readers in the above professions who cleverly operate outside the above generalisation. Keep it up!)

Ask Yourself

Since so many types of professions can call themselves “financial advisers” ask yourself which tool is the focus of their tool box?

You Need A Team with a Tool Box

The truth is that there is no one best way and no single tool that will be all you need through your life.

Almost everything in life requires money to facilitate it. So your financial planning and management needs to be as deep and broad as your life.

That’s a life long job that requires a diverse tool box.

Rather than doing and knowing it all yourself you outsource some of that planning and management to the financial professions.

Your best solution is to build a team of experts.

Your Team

Your primary contact when managing your finances should be a comprehensive financial planner.

True financial planners have a tool box full of various tools. They assess the problem/goal and then select the right combination of tools.

Taking the metaphor deeper, true financial planners may not actually swing all the tools themselves. After identifying the right tools they may recommend specialists for certain tools that you need.

This is illustrated in the image below:

Who to call

So when you have a financial problem or a decision you are mulling over don’t just speak to your accountant or investment adviser. They may not have the right tool for the job.

Instead speak to your financial planner who has a comprehensive, contextual view of both your situation and the world of financial strategies.

And if you don’t yet have a big picture person in your team then call me today.

What do you think?

Share your thoughts about this perspective in the comments below. I’d love to know:

  • How do you currently solve the bigger picture aspect of your financial decisions?
  • Who do you turn to for help?
  • Who are valuable categories of advice professionals in your team?

And what financial decisions are occupying your mind right now? Complete the survey here

An example of how DIY is costly

Do-it-yourself financial planning can be costly because often you don’t know what you need to know.  With a litte more knowledge you would make a more informed financial decision that can both save and make you money.

This was clearly illustrated in my conversation just now with one of the other tenants in my office building. Let’s call him John…

John’s DIY Superannuation Strategy

John mentioned that about 18 months ago he had cancelled his salary sacrifice into superannuation because, with markets falling the value of his contribution reduced soon after being made. Now that markets have recovered substantially he is going to restart his salary sacrifice.

That all sounds reasonable, right?

Well it was a costly decision and not because of the market movements.

The bit John overlooked…

One of the main benefits of salary sacrifice to superannuation is that you save tax on your gross income. By cancelling your salary sacrifice you end up paying more tax.

I asked John “did you know you could’ve directed your superannuation contributions into a cash investment rather than your former investment option?” Clearly he didn’t know that.

John could’ve kept saving tax by continuing to salary sacrifice to superannuation. In addition he could have avoided losing money on the contributions by directing them to a cash option.

Asking a smart financial adviser before changing his strategy would’ve meant John was wealthier already. The advice fee would’ve been quickly covered by avoiding a costly outcome.

If you, like John, didn’t know you could do that in your superannuation then I am pleased you have read this article. Ponder this: is it possible there are other things about superannuation you perhaps do not know that could be making you wealthier?

If you don’t know how, just ask

Perhaps the next questions that may pops into your head is “how?” How do you direct your contributions into cash but keep your existing balance invested and positioned for recovery?

Well, there are plenty of low cost, value-for-money superannuation products that have that facility. (Hint: they are generally not the industry funds who spend your money on advertising.)

Just ask your financial planner to review your superannuation account. Call me for a low-cost quick super review to see if there are better value-for-money accounts available to you.

John may also have benefited by pondering this before he acted: by what percentage does your investment in superannuation need to fall so that your “loss” equals the extra tax you would pay at your marginal tax rate (by keeping the contribution outside of superannuation)?

Do-it-yourself financial planning can be costly. Great financial planning advice will minimise your downside as much as maximising your upside. You’ll only know when you give it a proper go by hiring a true financial planner (like me, of course. 🙂 )

Latest Research: You Save More by Paying For Financial Advice

Want to save more money? Then pay for financial advice. That is the one of the findings revealed in this latest research by KPMG/IFSA. Clients of financial planners on average save over $2,400 per year more.

To some people it is a statement of the bleeding obvious to say that getting financial advice is an investment not a cost; you make more than you pay.

However, I know from talking to people after my seminars that when they are struggling to save money they also mentally struggle to pay for support in creating better behaviours.

What we professionals and our clients have know for decades has today been confirmed by research – clients of financial planners save and invest more for their future lifestyle.

On average clients “save an additional $2,457 each year, compared to a similar individual who does not have a financial planner.”

Source: KPMG Econtech research for IFSA (Investment and Financial Services Association).

Personally, I charge less than that amount for my Cash Flow Coaching program, which is just like having a personal trainer for your saving. Clients typically get control of where their money goes, accelerate their debt repayment and start saving for important lifestyle goals.

When you consider how much interest you save on your credit card and other debts then cash flow coaching delivers a very immediate return on investment by boosting your savings.

So if you are a little financially unfit enlist in a boot camp for your saving. Call or e-mail me now to join my cash flow coaching program.

Product Aligned Advice is (Mostly) Irrelevant

SMH article: “Finance advisers mostly a sales force, report says” is wrong and potentially more misleading to you than product-aligned advice.

The Sydney Morning Herald will have you falsely believe that “the financial advice industry has been dealt a blow with evidence that some of its biggest names – AMP, Colonial, and BT – are mostly telling clients simply to buy products offered by their parent companies.” Read the original SMH article.

That conclusion is wrong. Believing it will cause you unnecessary stress and probably lose you money.

The reality is that this product focus is stressing about the detail and missing the big picture.

For example, product focus is like stressing about finding the best pair of mountain climbing shoes.

  • What if you’re never quite sure you’ve got the best shoes so you never set off on your trek up the mountain? (Behaviour and delay)
  • What if you set off but you’re on the wrong mountain? You get to the top and you look across and realise you actually wanted to summit a different mountain? (Life goal clarity)

The greatest cost in wealth creation is behavioural. The long term lifestyle cost of a slightly more expensive product to get you from A to B is minimal when compared to the cost of delay.

Don’t allow worry about product-aligned financial advice to cause you to procrastinate from taking positive action with your finances. The procrastination will be far costlier to your short and long term lifestyle.

Further the product has nowhere near the impact of getting the right strategy and being clear on your goals. And since goals clarification and strategy selection are the steps before product selection all good financial planners will advise you on that irrespective of them being tied to product provider. That is the true value of planinng your finances.

Stop worrying about finding the best investment product and just take positive action today towards your personal clearly defined goals.

If you need greater clarity of your goals and you need support to consistently take action then hire a financial planner to guide and suport you. They’re like a personal trainer for you and your money.

P.S. Just in case you’ve assumed I am tied to a product provider – I’m not. I deliberately choose my licensee to ensure I can recommend an extremely broad range of products across many providers. I am aligned to your best outcome not to a product. (Just ask my clients.)

Find the right property mentor

One of the messages I teach is to “Do What You Love; Outsource The Rest“. When it comes to direct investment in residential property it can be tricky to implement this due to the presence of too many biased spruikers. Neil Jenman refers to them as “selling machines” in his insightful article, which I recommend you read in full here.

Following the recent drop in real estate prices I have noticed many spruikers coming out again in force promoting their services and properties. If you perceive property to be “cheap” and are tempted into buying now please read Jenman’s article.

One of the valuable insights in Jenman’s article is when he busts the myth that property prices double every seven to ten years:

“In 1890, the average Sydney home price was $1,446 (£723). If property really does double every seven years then, in 2009, the average Sydney home will be worth $189,530,112.”

Neil Jenman has been in the real estate industry for decades and is now also a consumer advocate. Here’s his view on investing through property investment clubs and the like:

“In my opinion, investing in property via a Selling Machine company, which is rapidly becoming the most common way to invest in property, is the worst way to invest in property.”

“…all [investors] have been ripped off because they have paid far too much at the start – and they often pay far too much in holding costs.”

When direct investment in real estate becomes the right strategy to achieve your life goals find the right mentor to help you and ensure they are biased and/or incentivised to achieving your best outcome rather than theirs.

What a CFP represents

Certified Financial Planner logoCertified Financial Planner, or CFP is the top level certification for financial planners. It takes quite a bit  of knowledge, skill and experience to be awarded this certification.

When seeking financial planning advice, especially for the first time I recommend that you start by speaeking with CFPs. You can find them on the Financial Planning Association website.

To raise awareness of Certified Financial Planners the Financial Planning Association has released a 60 second video, which you can watch below (or here on YouTube.)

Please leave a comment below to let me know if you think it is effective. Would you now want to see a CFP in preference to any other financial adviser?

I genuinely want to read your comments as I often send my two cents worth to the FPA. You can leave an anonymous comment if you like. Thanks.

Defining TRUE financial planning

I wish I could tell you that there was a definition of financial planning that the entire industry, regulators and government agreed upon. Sadly that level of consensus is something I can only dream about in my lifetime. To me true financial planning is about maximising the likelihood that you have the financial resources to always live the life you’d love, now and in the future. In shorthand I think of this as financial fulfilment.

During April I’ve conducted a couple of days of Coffee Cup Coaching sessions for some of the team at Chevron here in Perth. Interestingly some of the feedback has been that it was good to have gained an insight into financial planning. (Quite a few had not seen a financial adviser of any sort before.)

Why did I write “of any sort” above? Well, because there are no restrictions on who can call themselves a financial adviser.

And the sheer breadth of what could come under the banner of “financial advice” creates a lot of confusion. The sad consequence of the confusion is that in my experience most people have a very incomplete picture, which leads them to avoid seeking financial planning advice.

True Financial Planning

I wish I could tell you that there was a definition of financial planning that the entire industry, regulators and government agreed upon. Sadly that level of consensus is something I can only dream about in my lifetime.

So I am going to share with you my vision of true financial planning that I strive towards when working 1-on-1 with people.

My definition

To me true financial planning is about maximising the likelihood that you have the financial resources to always live the life you’d love, now and in the future.

In shorthand I think of this as financial fulfilment.

It’s much more than just investment advice

Every day you make many decisions that involve or impact upon your money, that impact upon your financial resources.

The lifestyle you lead is the cumulative impact of the daily decisions you make in managing your money (and other things). The breadth of the possible lifestyle outcomes over time is illustrated below.

Financial Outcomes Over Time

Some of those possible outcomes may fall within your vision of “living the life you’d love, and loving the life you’re living”. Many outcomes probably don’t.

Managing Money with Purpose = Financial Planning

Remove all the preconceptions from what you’ve heard or experienced and zoom up to a bigger picture. Financial planning is simply managing your money with purpose.

The purpose being to achieve the life outcome where you have the money to be, do and have what is really important to you.

Viewed at that higher level managing your money with purpose and achieving your desired outcome is something you could do yourself. (If you spent the time to acquire the knowledge and expertise.)

A qualified financial planner’s role is to help you achieve your desired life outcome quicker, easier and more enjoyably than if you do it yourself.

True financial planning in practice

In practice true financial planning is a dynamic, ongoing process just like your life is. The key conceptual elements are illustrated below.

Financial Planning Process

It seems obvious to start with your goals. My experience has been that many people can’t clearly articulate these, and have difficulty prioritising them. In that case you go back (or deeper) one step to uncover your values, to understand what is really important to you.

Your life experience influences your values and they shape your tangible goals. Your goals filter in the appropriate strategies, which in turn illuminate the every day tactical actions you need to take to get the lifestyle outcome you want.

That is why there is no cookie cutter, no one size fits all. And it is also why you should not automatically do what your mates or colleagues are doing. They’re not you – you are unique.

The value of true financial planning advice

When you consider that true financial planning is about maximising the likelihood you will be able to always live the life you’d love the value is immeasurably large. And the biggest benefits are the intangible peace of mind and comfort.

Conversely, the cost of not doing it can be immeasurably large on the downside. (Know anyone who is a miserable soul because they “can’t afford…”?)

You can read more detail about the value of financial advice here.

How to have the money for what’s important to you

If you’re not living the life you’d love and part of the reason has to do with money then a true financial planner can help. Similarly if you are not confident that you’ll have the money in the future to live your desired life.

And if you’re not clear on what you want or what is most important to you then a really good financial planner can coach you through uncovering those things. That will be the first part of their process of working with you.

If you like the sound of true financial planning that I described above then call me because that is what I do.

Stimulate a Financial Planner

As the first of the Government’s fiscal stimulus hand outs are distributed, the Prime Minister Kevin Rudd is urging Australians to be patriotic and stimulate the economy by spending it. Retailers would love you to spend it in their shops before Christmas, but economists agree that it doesn’t really matter what you spend it on, as long as you do not hoard it.

Here’s a novel alternative: stimulate a financial planner.

If you’re doing it tough in the area of managing your bills then spend some of your hand out being coached on managing cash flow.

If it’s a mountain of debt that’s casting a shadow then pay for advice on the most effective way to get out of owe and into dough. A little bit of money invested in learning to do it well is better than just continuing to do it poorly.

Learning new, improved behaviours is a gift that keeps on giving. You deserve it!

Ord Minnett building crack advice teams

The state of Australian and International share markets has been so bad that stock broking firm Ord Minnett has formed teams to advise clients how to make money selling drugs like crack.

Perhaps they have not read the excellent book “Freakonomics” By Steven D. Levitt and Stephen J. Dubner which explains that many drug dealers still live with their Mums because most dealers don’t make much money.

Ok, so maybe the real story is something different. But when that headline arrived in my e-mail in box this morning, I did start to wonder

Have a terrific weekend   🙂