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.

You may also enjoy these related articles:

1. Defining TRUE financial planning
2. What is fee for service financial advice?
3. Profit sharing with your adviser

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.

You may also enjoy these related articles:

1. Product Aligned Advice is (Mostly) Irrelevant
2. Beware of fake financial advice websites
3. Fee based advice hard to find

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.

You may also enjoy these related articles:

1. What price for financial advice?
2. Australia’s Top 50 Financial Advisers
3. With math this bad would you trust this adviser?

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.)

You may also enjoy these related articles:

1. What price for financial advice?
2. Beware of industry super fund advice
3. Product Aligned Advice is (Mostly) Irrelevant

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.

You may also enjoy these related articles:

1. What is fee for service financial advice?
2. Beware of fake financial advice websites
3. Beware of industry super fund advice

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 fee for service financial advice?
3. What is the value of financial advice?

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

You may also enjoy these related articles:

1. Retirement simulator launched by AMP
2. Defining TRUE financial planning
3. How to reduce your tax

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. )

You may also enjoy these related articles:

1. Has some of your superannuation been stolen?
2. Time for tax planning
3. Staff get more legal rights to claim superannuation in company collapses

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.

You may also enjoy these related articles:

1. How to easily save 5% on your groceries
2. What is the value of financial advice?
3. An example of how DIY is costly

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.)

You may also enjoy these related articles:

1. Fee based advice hard to find
2. Beware of fake financial advice websites
3. Beware of industry super fund advice