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

You may also enjoy these related articles:

1. Fee based advice hard to find
2. What is the value of financial advice?
3. Defining TRUE financial planning

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

You may also enjoy these related articles:

1. A guide to investment markets in 2010
2. Updated: AXA guide to investment markets
3. Investing between the flags

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. 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.)

You may also enjoy these related articles:

1. Avoid the Christmas and New Year Debt Hangover
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3. Not So Average Wedding Cost

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.

You may also enjoy these related articles:

1. Understanding Private Health Insurance
2. How to not lose your life savings

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.

You may also enjoy these related articles:

1. A guide to investment markets in 2010
2. Investing between the flags
3. Trading in Exchange Traded Funds

This article provides a brief overview of the four main types of personal risk insurance. Commonly these are referred to under the umbrella term of “life insurance” but they each serve distinct purposes. Think of each type as a different strand in your safety net.

For more detail on each cover please browse through my article archive. The archive includes articles on:

• Why you would have each cover
• How to work out how much cover you may need
• Statistics on the likelihood of events occurring
• The cost of items and services you may need if you were seriously ill or injured

Life (or Death) Insurance

Pays you a lump sum benefit on your death. Modern, quality policies often include a feature that gives you an advance payment if you are diagnosed with a terminal illness.

In my experience premature death is the life event most considered by people when they think of personal insurance. However it is perhaps the least likely event that can have a serious impact on your wealth creation. Therefore the next three types of life insurance cover are critical to understand.

Income Protection Insurance

I consider income protection insurance to be the most important personal insurance for anyone who is not yet financially independent. So that’s most adults.

Income protection insurance pays you a regularly monthly benefit while you are temporarily unable to work due to injury or illness.

Short term incapacity is one of the most likely events. And since many people would fall behind in loan repayments and bills if they were out of work for just one or two months, the impact of short term incapacity is high.

You can also receive a partial benefit when you are partially disabled and only able to work part time. This is a very crucial point as partial disablement is probably more likely than total disablement. So it is great to get some benefit to top up your part time income.

Income protection insurance generally pays up to 75% of your total remuneration package (including superannuation and non-cash benefits.) You can choose the waiting period before a benefit will be paid. Plus you can choose for how long the benefit will continue to be paid if you are long term disabled. Commonly financial planners recommend a waiting period of 30 days and a benefit payable up to age 65.

One bonus is that premiums for income protection insurance are tax deductible.

Total & Permanent Disablement (TPD)

Many people have some Total & Permanent Disablement insurance within their employer superannuation but it is rarely close to enough cover.

Total & Permanent Disablement insurance pays a lump sum benefit if you (as the name suggests) are totally disabled and are expected to be for the rest of your life. The rest of your life part is as determined by specialist medical practitioners.

Total & Permanent Disablement is a compliment for income protection insurance. Whilst there is some overlap having TPD is not a replacement for having income protection insurance.

When you are long term disabled you have extra expenses compared with being short term unable to work. For example you may require modifications to your car and house. You may also need to pay for a carer and other household services. If your partner becomes your carer then you’ll need to replace their former income instead.

Total & Permanent Disablement insurance can be used to top-up the extra 25% of your income not covered by income protection insurance. Plus you’ll need some money to cover the saving and investment you would have being doing if you worked your whole life. This can be used to meet your expenses from age 65, which is the maximum age for most income protection policies.

Trauma or Critical Illness Insurance

In my experience another life event that occupies people’s mind is ‘what if I get cancer or have a heart attack?’
Trauma insurance pays you a lump sum if you suffer a serious illness.

Importantly it has nothing to do with your ability to work as a result of the illness. As long as the illness is serious enough to meet the minimum medical definition (in your policy) then you can claim a benefit.

The four most common illnesses covered under these polices are cancer, heart attack, stroke and coronary bypass surgery.

Commonly you could use this benefit payment to help you meet the costs of medical treatment including medication.

Also, if faced with a serious illness many people would like to choose to stop working to focus their efforts on beating the illness. If you medically are able to work but choose not to work then income protection insurance won’t pay you a benefit. So you can use your trauma insurance to replace your income for a year or two while you choose not to work. This can also apply to replacing your partner’s income as many partners may like to be able to be by your side to support you.

You can claim on all four types

It is important to note that you can ‘simultaneously’ claim each of income protection, trauma and TPD insurance for the same illness. Here’s an example how:

• You suffer a serious stroke. It meets the medical definition so you claim your trauma benefit.
• Immediately you can’t work or do much at all so after 30 days you claim your income protection benefit. This keeps paying you each month while you continue to be disabled.
• After 6 months (or 12) you have not recovered your ability to return to your occupation and the doctors unfortunately say that you never will. You make a claim for your TPD benefit and receive a lump sum payment. This claim does not wipe out your income protection, which you continue to receive.
• Many years later you pass away and your partner receives a benefit from your life insurance. (At this point the income protection benefit does stop.)

How much cover?

To assess how much cover you need for each of the four types of personal life insurance you need to consider your personal life choices. These are individual to you so there is no set rule of thumb.

Insurance fills the gap between the wealth you need to find your desired life, and the wealth you currently have. So your required level of cover (sum insured) changes over time.

To get the cover right first you must consider the life choices you would make in each of the circumstances. Next you work out how much it would cost to fund those life choices.

The calculations can be difficult so use a financial planner to guide you through the process.

You may also enjoy these related articles:

1. Life Saving Advice
2. Thwack! Zero income. How long will you last?
3. The value of TPD Insurance

In my experience of working with people many want to start their own business. But their traditional education and employee experience often has not given them the toolkit to succeed.

In the video below Cameron Herold argues that we need to be teaching kids how to be entrepreneurs. Herold has been an entrepreneur since childhood and for the past 20 years has been coaching other entrepreneurs.

The presentation was recorded at TEDxEdmonton in March 2010. TED is an organisation devoted to “Ideas Worth Spreading” and includes many wonderful presentations of ideas that inspire you to learn more and take action.

In his presentation to TEDxEdmonton Herold shares some of the lessons he learned from his childhood jobs and business ventures that are important entrepreneurial skills. He also summarises some key entrepreneurial traits to teach our kids. Both will spark ideas in you that you can being to implement at home with your children of any age.

One idea that may challenge you is Herold’s attitude to paying children an allowance, or pocket money as we say in Australia. Watch below and find out his suggested alternative.

You may also enjoy these related articles:

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2. Manage your business brand on Facebook
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An off the shelf fund gives you great control

When you are thinking of getting more control over your superannuation, what control are you seeking? Is it more control over investment decisions?

Well, you already have plenty of that control in most off the shelf (retail) funds. For over a decade you’ve been able to choose the investment option within your current fund. And for nearly five years you’ve even been able to choose the superannuation fund (account) itself.

Are you seeking control over the money so you can spend it on yourself now? Think again – that’s technically illegal and scrutinised by the ATO.

What you can access and do in an off the shelf (retail) superannuation fund

• Access an investment menu that includes hundreds of different managed funds from most investment sectors
• Directly buy the top 200 (even 300) shares listed on the Australian Stock Exchange (ASX)
• Invest in managed funds that include internal gearing
• Buy some derivatives, such as some types of options and warrants

If you want all of those features you’ll pay a higher administration fee, but it’ll still probably be less than a SMSF would cost you.

If you don’t want any of those features you can find really low cost funds off the shelf (retail) that still give you control. The retail superannuation product market is so diverse you can probably find a product to suit your needs whilst also being value for money.

Do you really want to DIY your super?

Self managed superannuation funds may also often be known as DIY Super, which sounds attractive. But DIY is dangerous when you don’t know what you are doing.

Big penalties for non-compliance

Each member of a SMSF is also a trustee, which involves a lot of responsibility.

The SIS Act (Superannuation Industry Supervision Act) is huge and as trustee of your SMSF you are legally obliged to understand it and comply with it. If you don’t comply you could be stripped of your concessional tax status and pay the top tax rate. (i.e. no more 15% tax rate.) Ouch!

You can also be personally subject to a range of civil and criminal penalties for non-compliance.

Yes, you can outsource some of that compliance to a specialist financial adviser plus a compliance firm. But that costs money.

They’re costly

You also need to pay for annual financial accounts and audits. More money.

In a SMSF the costs can only be spread across four members, not thousands as with a retail superannuation fund. So your administration, investment and transaction costs can quickly add up to higher in percentage terms than in an off the shelf product. That’s why it’s best to wait until you have hundreds of thousands of dollars in superannuation before considering self managed superannuation.

When you may need a SMSF

There are some types of assets that retail superannuation funds generally don’t enable you to hold. If (big if) you need to hold these assets in superannuation then a SMSF may be appropriate for you. These assets include:

• direct property
• private business
• collectibles (for investment only – no personal use allowed. And a recent announcement suggested these ‘exotic’ assets be banned.)
• other direct investment assets. (e.g. that gold bar you just bought from the Perth Mint.)

In addition technically you can now ‘directly’ borrow to buy investment assets within superannuation. For example you can borrow to buy an investment property. If you want to implement that strategy you will need a SMSF (plus a nice sized deposit and good cash flow from contributions.)

Who definitely should NOT consider a SMSF

If you habitually ignore your superannuation, as evidenced by barely reading your annual statement, then a SMSF is not right for you.

Similarly if you don’t understand how superannuation works then don’t go near DIY Super. This may sound harsh, but if you have not understood this article then you’re probably not yet ready for a SMSF.

In summary the reasons a SMSF is not appropriate for most people include

• you can get the desired level of control from a retail fund
• you can access the desired type of investments from a retail fund
• you’re not interested enough to learn to fulfil the trustee’s obligations
• you want to minimise your costs
• you don’t currently have a high enough balance

What do you think? Anything I’ve overlooked? Please share in the comments below (you can be anonymous)

You may also enjoy these related articles:

1. Checklist to ensure your SMSF deed is up to date
2. Industry super funds are under-performing
3. Should you use a Corporate Trustee to run your Self Managed Super Fund?

As with most things whether you use a corporate trustee to run your self managed superannuation fund entirely depends on your situation. Your accountant is the best person to ask.

A Corporate Trustee is good if you fall into the following categories:

You are secretive and own lots of assets

Don’t want anyone to know what assets you own? A Corporate Trustee holds the assets in the name of the company. If someone does a land titles search using your name, they won’t find the real estate held in your SMSF.

The members of your SMSF change often

Your members are the Trustees. So when a member changes, so do the Trustees. In this instance, you have to go back to the local titles office and transfer the property into the names of the new Trustees. There are generally no state duty or Capital Gains Tax issues to do this. But there are administrative costs to transfer.

You love asset protection strategies

Assets in your SMSF are meant to be conservative – they are there for your retirement – not for speculation.  Risky or not, I have had clients that have ended up with negative assets in their SMSF. Insolvency ensures that the Trustees of the SMSF can go down with the sinking ship.

You pay land tax

In most States you pay a higher rate of land tax the more land you have. Therefore, if you and your wife already have a rental property then owning more land (as Trustee of the SMSF) increases the rate of land tax you pay. You can transfer the land out of your name into the name of your new company – for no transfer duty and no Capital Gains Tax. (Get the help of a tax lawyer.)

Corporate Trustees add expense and complication. Your Accountant is best to do the costs/benefit analysis.

For the definitive arguments for and against a Corporate Trustee visit LawCentral and subscribe for Platinum membership.

You may also enjoy these related articles:

1. Why you don’t need a SMSF
2. Checklist to ensure your SMSF deed is up to date
3. Industry super funds are under-performing

Imagine you are your five year old self – what would you do in that situation?

Two thirds of the children ate the marshmallow – some immediately, some after many minutes had passed.

The study is clearly an examination of the children’s ability to delay their gratification, which is a key trait in creating wealth.

The significance of the study was shown when the progress of the children was analysed over a decade later. The one third of the children who had held out the fifteen minutes to get their reward were assessed to have become more successful adults.

The study and its implications for success are discussed in the book “Don’t eat the marshmallow … yet!” by Joachim de Posada.

Watch Joachim de Posada briefly discussing the study in this video (6 mins). It’s worth it for the hilarity of watching the children resist eating the marshmallow. (It could be an entrant in “Funniest Home Videos”)

So, Easter Sunday may be the only day it is ok to eat chocolate for breakfast but do you have any eggs left today, just three days later?

To increase your ability to create and keep wealth start by saving some of your Easter eggs.

What do you think of the study and its thoughts on delayed gratification? Share your reactions inc the comments below.

You may also enjoy these related articles:

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