Financial Planner Please!

Hey Scott,

Can the National Debt Helpline assist people who have no debt but need to work out what to do with their dwindling resources in retirement? I’m an accountant who knows a lot of people that really need some help understanding and figuring out their finances (legally I can’t give advice). If they can’t help, is there someone who can?

Thanks, Garry

G’day Garry,

Yes, there is.

Tell your clients to call Centrelink on 132 300 and arrange a face-to-face meeting with one of their Financial Information Service Officers (FISOs). They can help people sort out their Centrelink entitlements and will give unbiased general retirement planning advice that lays out their options, without the hard sell. It’s a free service, and I wish more pensioners knew about it.

Scott.

I just called … to say … I WANT ALL YOUR MONEY

Hi Scott,

I got a random call from a financial advisor that I have never dealt with before. I have been meaning to get some advice for a while now, so the timing was great. He projects to add $500,000 to $1 million in compounding interest by the time I retire in 22 years, plus savings on my life insurances and income — for an $8,000 set-up fee, plus a 3.5% ongoing annual management fee on my super. How do I work out if it’s legit?

Belinda

Hi Belinda,

You had me at “random call from a financial advisor that I have never dealt with before”.

What would you do if a random bloke called and began chatting you up – talking about candlelight dinners, long walks on the beach, and getting financially frisky. What would you say to him?

You’d tell the creep to bugger off!

Well, this salesperson is trying to sweet-talk himself into your financial pants, Belinda!

Instead, I’d suggest you call your super fund (hopefully a not-for-profit industry fund) and book an appointment with one of their fee-for-service financial advisors. As a general rule the first hour is free, and there’s no smutty talk.

Scott.

Weapons of Mass Destruction

Hi Scott,

I am just about to finish my uni degree and have landed myself a full-time job at a small accounting firm. Before I plough into the life of debits and credits, I want to make sure I join the best super fund in the market. I have looked at various funds that use indexing and have low fees. However, I have read that they use ‘derivatives’ in their portfolio. Have you looked into the portfolio breakdown of these funds? Derivatives have resulted in a lot of mess in the past for a lot of people.

Skeptical Sam

Hey Sam,

You’re asking all the right questions.

Stockspot found that index super funds beat 90% of all other super funds — both retail and industry — over five years. However, not all index funds are created equal.

For example: REST super use Macquarie Bank’s True Index fund, which charges no fees.

What’s the catch?

Well, Macquarie True Index uses ‘derivatives’, which essentially means that it isn’t required to invest in the actual shares that make up the index, only to guarantee to provide the returns the index makes.

But what happens if Macquarie doesn’t come good on their promise?

Well, that is the risk you’re taking.

REST say they’ve done their due diligence and are comfortable with the risk.

I agree with them. However, personally, I want my index funds to actually own the underlying shares.

Scott

How a Financial Advisor Can Make You a Millionaire

Hi Scott,

My daughter is a hardworking 22-year-old who lives in a share house. She is struggling with her living expenses.

(I pay for her weekly grocery shop, and she feels bad about it). She earns $3,068.32 after tax each month.

Here are her monthly expenses:

Rent $760
Financial advisor $190
Savings $400
Share portfolio $250
Insurance $58
Super $100

She feels grateful that her financial advisor has enabled her to do all this. Is there anything she could be doing differently?

Maria

Hi Maria,

The monthly expenses you’ve listed come to $1,758, which means your daughter has $327 a week to spend on food, booze, bills and transport. That’s doable. (I lived on less when I was 22, though admittedly I drank a lot of homebrew, ate spag bol most nights, and drove a 1966 XP Falcon that mostly ran on potato skins.)

Having said that, she needs to eat without resorting to dumpster diving. I’d suggest she looks at scaling back her saving for the moment rather than relying on you (of course a ‘care package’ from Mum now and then never hurt anyone).

Other than that, your daughter is an absolute bloody legend.Let me paint you a picture:

Let’s say she invests that $250 a month into the share market, from age 20 to 30 (starting from zero and assuming an 8% return) could grow to $43,460.

Then, at age 30, she stops saving, leaves the investments to grow, and never puts in another dollar.By the time she’s 65, that $43,460 will have grown to $642,571.

Noice … but let’s not stop there ‒ let’s make her a millionaire!

I’d suggest your daughter meets with her financial advisor ‒ who has done a terrific job setting her up ‒ and get her to have an awkward conversation with the advisor.

Play him Bette Midler if you want, and assure him ‘you’ll always be the wind beneath my wings ... but I ain’t paying you a monthly retainer anymore’. Then, she adds the $190 a month she’s paying to the advisor, and add it to her low-cost index fund.

If she does, her end balance will be boosted to $1,001,130.

Scott

The three questions my financial advisor couldn’t handle

A woman I’ll call Lynne emailed me with the subject line “Devastated”.

Here’s what she wrote:

Scott,

Over the past three years I had become increasingly anxious about the state of my finances, which have been controlled by my ‘trusted’ financial advisor of seven years. Finally, I sent him an email last Friday asking him the three questions you suggested in your book.

He replied the following Monday, terminating forthwith his services! I am a single mother of three adult children, without a home, living alone, paying rent. During the seven years he has been my advisor, my capital assets have been reduced by over $500,000 (to $800,000). What can I do?

Lynne

Bingo Bango!

I’ll answer Lynne’s question in a moment, but first, here’s the cut-and-paste email I wrote about in my book:

Dear (advisor’s name)

I’ve decided to do a review of my finances. Could you please do the following three things for me:

1. Print me a statement that clearly shows my annual percentage return since we began, net of fees.

2. Benchmark my return against the relevant accumulation index for the same period.

3. Provide me with an itemised list of fees (expressed in both dollars and percentages). Include any and all ongoing fees, commissions and administrative costs that I’m charged.

Kind regards,

Client

Lynne, you can almost picture how this went down:

Your advisor double-clicks on his email: “Oh, I got an email from Lynne, I wonder what she’s up to …”

As he starts reading, his eyes begin to squint like he’s getting a root canal.

And then he gets to the end of your email and theatrically spits out his frappuccino all over his mainframe, which ricochets and ruins his Roger David tie.

Lynne, know this: good advisors ‒ and there are many ‒ actually want their clients to ask them these questions. They can justify their fees because they’re working in their client’s best interests. A good advisor wants smart clients who understand and value good advice.

A shonky advisor, on the other hand, will do what this guy just did ‒ sack you and move on to the next chump. They see you as their meal ticket. It’s not personal. It’s just lunch.

Now, I spat out my coffee when I read that your assets had decreased by $500,000 over the past seven years (thankfully I was not wearing a tie).

Here’s why:

Aussie shares have achieved a compound annual return of 8.5% over the past seven years, while international shares returned 14.5% a year, according to Vanguard. In other words, a $10,000 investment would have grown to $17,701 (Aussie shares) or $25,801 (international shares).

Over the same period the average default super fund (with a higher weighting to cash and fixed interest) has returned 9.1% per year (industry funds) or 8.4% (higher-fee retail funds), according to ratings agency Chant West.

Someone needed to be given the boot here, Lynne, and I don’t mean you.

So now it’s time for you to write a few more emails. The first is to make a complaint to the firm. The adviser’s financial services guide will tell you how to do this (look through your paperwork and you’ll find it, otherwise call the firm and request a copy). The next is to lodge a complaint with the Australian Financial Complaints Authority (ACFA) via their website (afca.org.au/).

Look, one of the biggest fears we all have is looking dumb in front of others. And sometimes experts can use that against you ‒ whether they’re a mechanic, a doctor or a financial planner. Perhaps that’s why you didn’t act on the feeling you had in your gut about this bozo for three years. Yet the smartest people are those who fearlessly ask the simplest questions, and then back themselves.

So back yourself. Remember, no one cares more about your money more than you do.

Tread Your Own Path!

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

A Total Disaster

Hi Scott

I am a 50-year-old widow with an eight-year-old. After nursing my partner through cancer (he lost his battle on Boxing Day), I have just refinanced my house to consolidate some credit card debt. I have also borrowed an additional $100,000 to invest. My financial planner suggested this as a way of getting my mortgage down. Now I am starting to panic about maybe doing the wrong thing, but I don't see any other way of reducing my debt quickly and setting myself up for retirement. I am really nervous.

Rachel

Hi Rachel,

I’m really sorry for your loss.

Now I don’t know your personal situation, only what you’ve written. So, like everything I write, this is general advice from a guy who doesn’t have a vested interest in flogging you anything.

I’ve had the privilege of working with many widows over the years, and if I was sitting across from you there is absolutely no way I’d advise you to borrow $100k to invest.

Why?

Because your partner just died, and you have a young child. This is not the year to be making major financial decisions. It’s the year to hold on and grieve.

Yet I totally get that you’re clutching for security when your life has been turned upside down.

However, this isn’t the way to do it. The truth is that debt always makes life more complicated. It always makes life more stressful. And heaping on more stress right now is the last thing you need.

You have 20 years (or so) before you retire ‒ so there’s no need to panic. Amazing things can happen when you work diligently towards a commonsense goal, but the first thing to focus on is getting yourself right.

Scott

Your Book Is Stressing Me Out

I started reading your book last night and was discouraged when I read about your SMSF strategy. About two years ago, on advice from a financial advisor, my husband and I set up an SMSF, and we have since purchased a property with it. It was extremely stressful to set up, and the cost of ensuring compliance is ridiculous. My question is: should we close it (and how do we do this?),  or would the financial and emotional cost be too high?

Prue

Hi Prue,

I must admit it doesn’t look so good.

For one thing, I’d be very wary of having the bulk of my super assets tied up in one investment property.

I’m yet to see a case where someone has bought a residential investment property via an SMSF that was actually a good deal for the client. Often they’re a three-way play — an accountant, a financial planner, and a property developer who share in upwards of $50,000 commissions they load onto the purchase price of the property (plus the SMSF fees, plus the borrowing commissions).

I’d also be very wary of the adjectives you’ve used in describing the process thus far: “extremely stressful” and “financial and emotional costs”. Sounds more like a colonoscopy than holistic advice.

But I don’t have all the facts. So if I were in your shoes I’d get some second opinions — firstly a valuation on the property from a local real estate agent, and secondly an assessment of the SMSF from an accountant with no links to the guys who set it up. Once you’ve assembled the facts, act quickly. I’ve never seen more time turn a bad property into a good one.

Scott

Baby, I’m Bamboozled

Hi Scott,

I just had a long chat with a financial planner. The topic came to rolling over to their actively managed SMSF, and I asked them about using a low-cost passively managed super fund instead. They then bamboozled me with talk of MERs, ICRs, fully-franked dividends and tax credits, and how these factors mean that their actively managed fund would perform better than a passive fund (even after fees). Can you enlighten me, please?

Terry

Hi Terry,

An example will work best here.

It’s like you go to your doctor for your annual check-up and say, “Do you think I should eat more fruit and veggies, and perhaps do 30 minutes of exercise each day?”

And the doctor replies, “Bugger that! I’m offering 20% off lypos this week. Wouldn’t you like some washboard abs, Tubby? Well, you can have them — next week. We’ll just suck that lard out like liquid. No lycra needed, and better than eating bloody broccoli!”

Bottom line?

The advisor just bamboozled you with bulldust.

There are three things you need to understand.First, finance is the only industry where (in most cases) the more you pay the less you get.

Second, you don’t open an SMSF (Self Managed Super Fund) for higher returns. Studies show that 80% of managed funds fail to beat a simple index fund over five years, principally because of the fees managers charge. There’s no way they can guarantee higher returns.

Third, you should walk away from any professional who tries to bamboozle you. At the Royal Commission this week, ASIC’s Peter Kell said the regulator had found that 90% of financial advisers who provided advice on SMSFs failed to act in the best interests of their clients.

Trust your gut!

Scott

How Do I Find a Financial Advisor?

Hi Scott,

I have read lots of advice about avoiding excessive fees charged by financial planners. Problem is that we still need one! My wife and I now have over $1 million in super — $400,000 in Australian Super and the rest with a non-bank retail manager (it’s an Asgard account with three managed funds). This is all great, but we’re in our early 50s and need some professional help to manage it. Any ideas?

Will

Hi Will, You’ve done well!

Let me be clear about this, the biggest cost you’ll face in dealing with an advisor is ‘compounding fees’.

I’ll give you a really simple example:

Let’s go to ASIC MoneySmart’s super calculator (moneysmart.gov.au), and punch in some numbers. I’ll assume you want to retire when you’re 67 and you currently earn the average wage.

You have a choice between two funds: what the calculator calls a ‘medium high’ share fund that charges 1.3% in fees, and another fund called ‘medium low’ that charges 0.3% in fees.

Let’s assume they both earn historical rates of return on shares on your $1 million fund.

If you choose the lower fee fund, you’ll have $270,000 more in your account after 15 years when you retire.

That’s why when it comes to choosing your advisor it’s incredibly important that you pay a true professional a reassuringly expensive one-off fee for independent advice (it could be upwards of $5000). However, make it a non-negotiable that you are invested in an ultra-low-cost portfolio that compounds without any tacked-on costs.So, how do you find such an advisor?

Well, just like any relationship, the first time is free — and then you start paying. So I’d suggest you go on dates with at least three financial planners before you commit.

Scott

We Smell a Rat!

Dear Barefoot,

My wife and I desperately need your help. We have been following your wise advice for many years. We do not earn a lot (I am on $80,000 a year) but by implementing your plan we have accumulated $1 million in super, $250,000 in shares and $160,000 in savings. I am 64 and want to retire, so I went to see a financial advisor. He recommended we take all our super and invest it in five Vanguard ETFs plus an SPDR Dow Jones Global Real Estate Fund. We smell a rat ‒ do you?

Frank

Hi Frank,

Before we get into sniffing rodents, first let me give you a pat on the back: on your income you’ve played an absolute blinder — well done, mate!

Now, I don’t know what you’ve got a whiff of, but I’m not sure if we can call it a rat just yet. See, the Vanguard ETFs (exchange traded funds) and the SPDR (or ‘Spider’) ETFs are ultra-low-cost index funds — the fees are around 0.20 per cent, or $200 for every $100,000 invested. To quote financial rapper Jay-Z, “I got 99 problems but the fees on these ETFs ain’t one”.

That being said, things might get a little pongy if the advisor tries to wrap in substantial admin fees on top (not that I’m saying they will, but keep a close eye on it). Know this: on your balance, paying an additional half a percent will end up costing you an extra $100,000 in fees over the next decade. Ay caramba! That’s a lot of Coronas!

Look, if you’re going to invest your super in low-cost index funds — and that’s a smart strategy — I’d suggest you do it via an ultra-low-cost industry fund. You should be able to replicate the advisor’s stated portfolio for fees of less than 0.10 per cent, and under $100 a year in administration fees.

Sniff, sniff!

Scott

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

How to ruin your financial life

He didn’t even introduce himself.

An old bloke just walked straight up to me, poked his knobbly old index finger into my ribs, leaned in, and said:

“They don’t listen to you, do they!”

“Huh?” I replied, cowering like a schoolboy (I was at a function, and I didn’t know this old codger.)

“I’ve been reading your questions in the newspaper for years … and they don’t listen to your advice!”

He did have a point. Maybe my message just isn’t getting through. After all, each week I try and give people honest, commonsense advice to help them out.

Fat load of good that does!

So this week let’s try something different — a bit of reverse psychology.

If people don’t respond to good advice, maybe they’ll listen to some bad advice?

So in honour of the old bloke, let me give you half a dozen ways to totally screw up your financial life.

How to Lose Your Shirt in the Share Market

Buy shares based on the tips of your brother-in-law (a 43-year-old IT helpdesk employee who ‘dabbles’ in shares, porn, and sporting memorabilia).

Yet what if you are not lucky enough to have a brother-in-law who has outspoken views on things he knows very little about?

Easy.

Just read scary newspaper headlines: “Sell Everything!”, “Prepare for a Cataclysmic Year!”

(The Royal Bank of Scotland made these headlines in January 2016. Since then the US stock market has jumped 35 per cent, while our market is up around 18 per cent … not including dividends.)

And after you’ve bought some shares, make sure you watch them right throughout the day.

Do not take your eyes off them for a second.

The minute the shares go up, buy more. The minute they go down, sell.

Okay, so now let’s focus on losing money in something you are an expert in: property.

You’ve been living in a house your entire life … right? How hard can it be?

Let’s roll.

You: Property Mogul

If you buy an investment property, don’t buy a good-quality family home from your local real estate agent.

What do those losers know?

Instead, go to a wealth-creation seminar, preferably hosted at a suburban Holiday Inn conference room.

You want a tanned fellow from the Gold Coast who’ll teach you the ‘secrets’ the rich have been keeping from Domino’s-Pizza-munching plebs like you.

Ideally, you’d like a complicated strategy that involves you purchasing ten properties in ten years and will have you retired at 40 and living off $229,345 a year!

Go ahead and buy a property from the spruiker using ‘OPM’ (Other People’s Money), interest only (remember, the more debt you have, the wealthier you are). Location? Preferably South-East Queensland, though what matters most is that the property you buy at the seminar is located somewhere far, far away. While you’re at it, use their legal representatives and mortgage broking ‘team’. It’s so much easier than worrying about all those annoying details yourself.

Yet the real money is made (and lost) in business.

You’ve read Donald Trump’s The Art of the Deal, and look where he ended up.

Okay, so he did get a multi-million dollar loan from his father, but screw it — let’s do it!

How to Go Broke in Business Without Even Trying

Start a business you have no experience in, preferably in partnership with your ex-boyfriend … preferably funded with credit card debt.

Focus on ‘brand positioning’ (business cards, a fancy office, an agency-designed website) before you even think of finding any customers. If your product is as good as your friends on Facebook think it is (38 ‘likes’ — you GO girl!), customers will beat a path to your door.

And what if you can’t think of an idea for a business?

Easy. Just buy a franchise, like Pie Face, or 7-Eleven.

They always work out well.

Harness The Secret

Money can be attracted through your mind.

(Picture me rubbing my temples as I write this).

Let’s be clear: God wants you to be rich.

The 800 million people in sub-saharan Africa? … not so much.

But you? … Sure.

Now, one way to awaken the spiritual money muse is to always keep $2,000 worth of cash ($5 notes) in your wallet. It’s a sure-fire psychic signal to the universe that you are bathed in abundance.

And it works! Every time you open your wallet you’ll see your riches … and so will the sketchy dude waiting behind you at the Taco Truck on King Street.

Now repeat the affirmation: “please, take my money, just don’t hurt me”.

How to Find the Wrong Financial Advisor

Once you’ve got a bit of dough … you need to share it with someone. So it’s time to find the most expensive financial planner you can find.

Judge them on (a) their car, (b) their office, (c) their pinky ring.

Let them know you’re a player.

Explain that you want the most expensive super fund they have. Your retirement is no time to be a tightarse.

And when they explain it to you in terms you don’t understand – nod like an idiot.

And make sure you invest in things you don’t understand.

And if someone cold-calls you about an investment opportunity, under no circumstances should you Google them.

Who cares what other people’s experiences have been?

Let’s be honest, the interwebs is just full of freaks that like cats anyway. If you are tempted to go near Google, the only keywords you should use are: “get rich”, “lifestyle design”, “Barnaby Joyce”, and “Multiple Streams of Income”.

Let’s be honest though, the real reason to get rich is so you can exert control over your family, right?

Well, I’ve saved the best to last.

How to Ruin Your Relationships

If you’re dating, don’t talk to your partner about their financial situation, or their views on spending and saving.

Didn’t your mother teach you anything?

It’s rude to talk about money — and unless you’re loaded it’s not going to help you in the sack anyway.

Split everything down the middle except for: your secret shopping money, your secret mistress money, and your secret betting money. Oh and keep a little set aside that your partner doesn’t know about, just in case you have to run. Because you will, eventually. And divorce will be the final crowning achievement of your financial life.

So there it is: six simple ways to completely screw your financial life.

Are you listening? Don’t make me have to poke you in the ribs.

Tread Your Own Path!

The overnight $60,000 pay rise

Can you imagine getting an immediate $60,000-a-year pay rise?

Well, that’s what happened this week to a bunch of young blokes that I work with.

Even better, the average 20-something who got the pay rise is pulling in a whopping $371,000 a year.

I’m talking about AFL footballers … who this week scored a six-year, $1.84 billion collective pay deal.

But now for the tackle: despite the serious dough they get, a lot of these players will end up kicking their finances out of bounds on the full.

It’s a worldwide phenomenon: American footy players (lycra and crash helmets) earn an average of $US1.9 million a year, but most of them are broke within three years of retirement. NBA basketball players earn an average of $5.15 million a year, but 60% of them are broke within five years of hanging up their boots, according to a fascinating ESPN documentary called Broke.

How does this happen?

Well, this week I sat down with a bloke who knows: North Melbourne coach Brad Scott.

A few things you should know about Brad: first, he’s whip smart; second, he cares deeply about his players; and third, he happens to be a Barefooter!

(Oh, and fourth, I’m helping his boys this year … with their finances, not with their footy. Obviously.)

When it comes to footy and finances, Brad has seen it all.

In fact, when he was first drafted in the nineties, he was paid an outrageous sign-on fee:

“I got seven and a half grand”, he tells me.

“… and $250 a game.”

(And, just like my sheepdog Betty, if he got rubbed out or injured … no pay.)

While you may scoff at the players’ pay rise (and pay packet), after 20 years of playing and coaching Brad knows why many of them end up broke.

Let’s start the siren.

Show Me the Money!

“Part of the problem is that everyone else thinks they’ve got it made”, says Brad.

And then he proceeds to throw cold water over the “$371,000 average wage” claim that’s bandied around in the media (and by yours truly at the start of this column).

“Look, of the 44 players on our list, only 14 are earning above the average wage, and the rest are below it … and that would be similar for all the clubs.”

And ‘below’ is actually … really low:

The minimum wage for a rookie is $71,500, and for a second-year player it’s $100,000.

Sure, good money for doing something you’d do for free … but you’re hardly turning up to training in a Porsche 911.

And herein lies the problem:

“When you’re a young AFL footballer … you get a lot of female attention.”

“And the players … well, they’re not going to downplay the image. Really, it’s not in their interests to say … ‘hey I umm, actually don’t earn that much money’.”

And it’s not just the girls. Often when the players go home they shout their mates, and their families, who all believe they’re loaded.

I know what you’re thinking at this point: “Yeah, but that’s just what they start on, they’ll soon earn the big bucks.”

And you’re right.

Brad tells me that when some young players get a sizeable contract that can mean their salary is double or triple their first pay. And that’s when the real problems begin.

He’s My Private Banker

When your income triples, so do the opportunities to spend it.

There’s no shortage of banks — with private bankers in tow — wanting to lend these players huge sums of dough, to fulfil their Instagram images.

“The average AFL player career is just three years”, says Brad soberly.

“So, yes, technically they can service the debt while they’re playing … but what happens when they stop?”

A financial shirt front. “I’ve seen it too many times”, says Brad. “Plenty of guys I’ve played with end their career with a negative net worth position.”

That’s why Brad tells his players there’s only one thing he’s really impressed by: “It’s not what you earn, it’s what you save.”

Boofhead’s Bar and Grill

The final trap for many players … the world over … is that they tend to invest badly.

“They often invest in exotic investments”, says Brad.

Generally, it’s not their idea either.

The one thing I’ve learnt from dealing with professional sportspeople over my career is that there’s always a ‘bunch of blokes’ waiting around to hip-and-shoulder them into something complex, confusing, and high risk: restaurants, bars, property developments, you name it.

And best of all?

These high-tax-paying players can be so negatively geared, they’ll be positively screwed!

The Good Coach

The AFL and the clubs understand the problems players face, and that’s why they’re investing a lot into player development. Every club employs staff whose sole role is looking after player welfare. Plus, each player is mandated to have at least one weekday off per week to focus on professional development, either study or work placement.

Before the final siren sounds, the last word must go to Brad:

“The reason I’m passionate about financial education is that I’ve seen too many players who struggle after retirement, when they should be a step ahead. The reality is that a lot of players don’t succeed in the AFL — but they can all succeed in life.”

Tread Your Own Path!