Hey Kids, Let’s Learn about Credit Cards!

Dear Scott

I am a teacher and I just got an email which made me angry, and I have you to blame... or should I say thank? You see, our children are attending a compulsory ‘StartSmart’ lesson once a week hosted by the Commonwealth Bank. I looked at the program for Year 3, and what is the very first concept they mention? You guessed it, credit cards! I will be attending the session with my students and I can already feel the rage inside.

Narelle

Hi Narelle,

They’re talking to eight-year-olds about credit cards?

That’s kind of … shocking.And the concept of compulsory corporate-branded education reminds me of ‘Hamburglar University’.

However, you’re a teacher, which means you can be a force for good. You can stand up and fight for your kids. If I were in your shoes, I’d talk to your principal about kicking the CBA out of your school ... and use it as a financial lesson for the kids.Here’s how you can explain it to your students:

“The CBA has spent millions of dollars of their shareholders’ money buying their way into classrooms.

“Their motivation is to make that money back by signing you up to be their customer.

“One of the bank’s most profitable products is a credit card, and when you turn 18 they’ll likely send you one.

“The bank brings mascots to assemblies, like ‘Cred’, which make credit cards sound normal.

“However, the truth is that you should avoid them.

“This week ASIC released a report that showed that one in six people are caught in what they call a credit card ‘debt trap’. Worse, they found that young people’s credit card debts were ‘of particular concern’, and that they ‘were more likely to be in delinquency, and multiple cards were over-represented’.

“The CBA will never tell you that they’re ‘debt traps’, because it’s how they make their money.

“However, that’s not independent education; it’s really just another form of marketing. And that’s the reason we decided to kick the CBA out of our school.

“Now that would be a fantastic financial lesson!

Scott

When the Bank of Mum and Dad Goes Bad

Can you remember when you got your first credit card?

Mine was automatically bundled into my NAB student banking package when I went to university. At the time NAB said it was a smart idea for students to have access to a ‘low-rate credit card’ for ‘emergencies’ (like bar night).

That card allowed NAB to begin building a marketing profile on me. Through the positioning of minimum repayments on my statements and online banking, they trained me to see their credit limit as my money.

Then they began bumping up my credit limit.

That’s how the game works.

Commbank are doing this right now with their latest advertising campaign, which targets young people to sign up for their ‘low-interest’ Essentials credit card … instead of going through the hassle of borrowing money from their parents.

One CBA billboard says: “Because the Bank of Mum and Dad will probably give you a lecture, and you had enough of those at uni.”

Their TV ads show millennial kids having to suck up to their parents ‒ listening to their dad’s jokes, eating their mother’s terrible cooking ‒ just so they can borrow some money. CBA’s tagline at the end of the ad says: “For when you’ve outgrown the bank of Mum and Dad.”

A spokesperson for CBA said their ads aren’t manipulative in the slightest.

In fact, they’re in it to help young people:

“We believe it’s really important to help young adults develop good financial habits, such as budgeting and managing their money wisely. As they move into full-time employment, their spending and payment habits change, and this includes using credit cards.”

That’s the corporate spin, though there’s no way they actually believe it.

It’s all just part of the game.

(To be fair, the vast majority of CBA employees are hard-working, diligent professionals who care deeply about their customers. It’s just the top brass that are knobs.)

Tread Your Own Path!

Help! I Don’t Want a Tax Bill!

Hi Barefoot,

I am 27 and work as a carpenter with a small construction company. The accountant I have always used (who always got me a good refund) retired at the end of last year, and I am worried I will have to pay tax this year. What can I do to get around it? What deductions can I claim? I just want to break even and not have to pay anything!

Ben

Hi Ben,

Your old accountant was probably a very nice chap, but he didn’t have wizard-like ‘tax deduction’ powers.

He either fibbed on your behalf (highly unlikely) or you simply got what you were entitled to.

So here’s a hack for you:

Download the ATO’s myTax app, via your myGov account.

The myTax app will pre-fill all your information (though you’ll have to wait till August for this). Then you’ll be able to click ‘Calculate’ and see whether you’re due a refund or up for a tax bill.

On past experience, you might well get a refund.

However, if you are up for a bill you can at least extend the time you have to pay it until May next year, simply by lodging your tax return with an accountant. This’ll give you plenty of time to save your backside off.

Yet what can you do to actually lower your tax this year?

Well, there’s not much wizardry on offer now that we’re in the new financial year, I’m afraid.

And it’s not advisable to fudge your tax return. It’s possible to do, since the ATO operates under a self-reporting system, which means it’s totally up to you what you put on your tax return.

It’s a bit like lying to your mother … you’ll be caught out. That’s because the ATO data-matches 640 million separate transactions ‒ cross-referencing bank accounts, share certificates, Centrelink payments and more (which is how they get all your data to prefill the myTax app).

They have the computing power to check the legitimacy of every single tax return.

And they will.

Go to the ATO website and check out their work deduction guide (building and construction employees), and then go through your bank statements to see if there are any purchases you can claim.

Having said that, you can claim up to $299 in work-related deductions without having any evidence or receipts, however you do need to be able to show how you worked out your claims.

Anything over that, however, needs to follow three rules: it must be related to your job, you must have receipts, and it can’t have been reimbursed by your boss.

OK, now it’s time to think ahead — what can you do during the coming year to really save some cash?

The best tip is to get a 100% tax deduction by having your boss pay for some work-related expenses.

You should be able to negotiate extras, like having your employer pay for your phone calls (or cover part of your monthly plan), getting an allowance for work-related travel, or having them pay for a course that will make you a more profitable employee.

This 100% deduction can’t be claimed on your tax. But it’s a much sweeter deal overall than those ‘fully tax-deductible’ purchases you can claim, which really just mean you’re spending one dollar to get 45 cents back (and that’s only if you’re paying the highest rate of tax).

A final tip for the coming year:

The ATO now has an app (called Australian Taxation Office), and it’s pretty good. It allows you to take photos of receipts and enter work-related deductions on the fly. If you’re claiming a car expense, it has a built-in GPS tracker to record car trips. And it feeds directly into myTax.

Download it and get on the front foot for tax time next year.

Scott

You’re a Self-Promoter, Barefoot

Hi Scott

Love your work but am getting a little tired of all the self-promotion of your book. Yes, it’s great and I have bought it, put it to good use and made some gains. I also love reading your column for the weekly advice, but it seems that your every response encourages people to buy your book. Is your column at risk of becoming a grand-scale advertorial and therefore undermining your independent credibility?

Bill

Hi Bill,

I apologise profusely, and I will stop in three months.

Promise.

(Bill, just skip over the next question; it’s only going to make you angry.)

Scott

What About Helping ‘Tweens’ Too?

Scott,

Last night I was reading your book and my 11-year-old son asked me about it. I was reading the chapter about credit cards, so I explained the dangers of them to him. Would you consider revising your book and targeting ‘tweens’ like my son? He is faced with so much more ‘negative temptation’ than I ever was. He talks about an online shopping site called Wish, and he also talks about gambling because of those horrible Lottoland and Sportsbet ads. I think your advice and guidance would help reinforce some good financial messages for kids.

Nikki

Hi Nikki,

As luck would have it, I’m currently writing a new book ‒ The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need ‒ that helps parents to raise financially fit kids of all ages, including tweens. While my last book focused on doing ‘Barefoot Date Nights’, this one focuses on the entire family having ‘Barefoot Money Meals’.

It’s due for release in September. (Calm down, Bill. I told you not to read this!)

Thank-you for reading,

Scott

I Didn’t Get Paid!

Hi Barefoot

Interesting column last week about super not being paid. In my office almost everyone has not been getting super since November last year, and some for 12 months. But, like you said, it shows up on our payslip as being paid. A few people have approached the boss as far back as last year, and as recently as two weeks, and the boss said that there was a ‘glitch’ with MYOB and that the money is in the ‘cloud’.

Mel

Hi Mel,

It doesn’t sound like a glitch ... more like you’re getting stitched.

Times change but the bulldust stays the same: it goes from ‘the cheque’s in the mail’ to ‘the money’s in the cloud’.

Well, after 12 months of not being paid super, it’s about time you made it rain ‒ with your boss’s money!

I’d suggest you go to the ATO website, lodge a complaint, and have them investigate.

Legally, employers have to pay super at least four times a year.If your boss is looking to the clouds to pay your super, it tells me that:

One, the business is struggling. Or two, your boss is a crook.

Neither bode well for getting a gold watch in 20 years’ time.

Time to start looking for another job.

Scott

Here’s What I Really Think About the Acorns (Raiz) app

A lot of people ask me about the youth-focused investing app Acorns.

Its ‘killer app’ is that it collects your spare change and invests it in the share market on your behalf.

The company recently changed its name to Raiz Invest, and this week it had an IPO (initial public offering) and became a public company trading on the ASX (ticker ‘RZI’).

If you’re one of the 160,000 young people who are already a Raiz user, or if you’re just an interested punter, you may be wondering if you should invest in RZI.

Well, thankfully, the difference between being a private company and a public company is kind of like the difference between going on a first date and going on your seven-year wedding anniversary: there’s a lot more disclosure.

So let’s take a look-see.

Raiz states in their prospectus that they make their dough by charging users maintenance fees, account fees, netting fees and advertising fees. Lotsa fees. However, these fees only amount to small beer for the company, because the average Raiz account balance is just $1,234 (not a typo!), according to the company.

Looking at their cash flow statement, it shows ‘receipts from customers’ in FY 2017 was $990,424.

However, ‘payments to suppliers and employees’ for the same period was $3,005,078 (also not a typo!).

Feel the burn, baby.

Raiz has recently launched a super fund version of the app (which is cheap, but not cheap enough for my liking), and is also expanding overseas by targeting kids in South-East Asia, which seems like a very slow ramp-up to me … I’m not sure how much spare baht teenagers in Thailand will have to invest.

So, how did Raiz’s debut on the stock market go?

Not well.

The share price plunged 20% on the first day. Though I don’t think it helped that ‒ of the $15 million the company tapped investors for ‒ $2 million was trousered by staff, including a $1 million cash bonus for the CEO.

So should you invest via the Raiz app?

I think it’s a great introduction for novice investors, which is why it’s been so successful. However, after a certain point the fees Raiz charges are too high for what amounts to a cute index fund app.

So should you invest in the Raiz company itself?

Based on what I’ve read, they won’t be getting any of my nuts.

After all, I’ve always thought of Raiz (Acorns) as being a little like your first teenage love:

Memorable, but you’re not going to stay with them long term.

Tread Your Own Path!

The Billionaire

Dear Mr Pape,

My name is Lachlan, I am 16 years old, and I live on the Gold Coast.I have a keen interest in finance and economics, and through my part-time job I have been able to build a share portfolio worth $3,000, on top of $2,000 in savings. I would like some help on how to best manage my funds as I look to achieve my one life goal: to reach a net worth of $1 billion.I have thought about joining a super fund, but that idea has continuously fizzled out because I am sure I will never need it. If you could provide me with some information about how best I should go organising my finances, it would be greatly appreciated.

Lachlan

Hi Lachlan

Look, I like ambition as much as Malcolm Turnbull ... but your one life goal is to become a billionaire?

Just 0.00002% of the global population are billionaires. I fear you’re painting yourself into a corner, cobber!

Anyway, let’s hear from one of them, Bill Gates: “I can understand wanting to have millions of dollars, there’s a certain freedom, meaningful freedom, that comes with that. But once you get much beyond that, I have to tell you, it’s the same hamburger.”

He’s right.

Being a billionaire won’t make you a thousand times happier than being a millionaire. As Bill says, you can achieve the lifestyle and the freedom you want with a few million bucks ‒ which is still ambitious but, with enough time and the right plan, is achievable.

So your first goal ‒ your only goal ‒ is not to strive for some pie-in-the-sky figure you think will make you happy.

Rather, it’s to focus on finding something that is guaranteed to make you happy.

How do you do that?

My friend Arun Abey, a wealthy man himself, has a strategy he calls ‘the three circles’.

It involves asking yourself three questions:

What am I deeply passionate about?

How can I work, over many years, to become truly great at it?

And, finally, how can I make enough money from doing it?

Fulfilment is found at the intersection of these three circles.

One last thing: you should keep this article and re-read it in 40 years’ time.

Scott

Special Q&A with Kelly O’Dwyer.

This week I’m doing a special Q&A with the Minister for Revenue and Financial Services, and the Minister for Women, Kelly O’Dwyer.

Costello’s Regrets

Barefoot:

Your old boss, Peter Costello, says he regrets not doing more to lower fees on compulsory superannuation. Would you consider tendering out a default fund and making the big institutions bid ‒ lowest fees wins?

The Minister:

“I actually think Peter made some very good points.

“It’s very, very clear to me that for far too long people have been ripped off. Super funds need to understand that it’s not their money ‒ it’s their members’.

“Look, this cosy, opaque system that we’ve had for many years has come to an end. That’s why in the Budget we got rid of exit fees … because it was a barrier to switch. Our job as the government is to make sure that people’s money is protected and ensure they’re not going to be gouged with fees and charges.”

Women and Money

You have an interesting remit ‒ responsible for financial services and women. We know women retire on less than men, around $120,000 less. What can you do to change that?

“When it comes to super, we know that our Budget changes means that 2 million women will have their super balance protected from being charged inappropriate insurance.

“Another 1.3 million women’s super balances will be boosted by $2.5 billion by our plan to cap fees on small balances to 3%, and actively charging the ATO to reunite people with their lost and inactive super.

“These are very practical measures that are good for women. However, this is a passion of mine, and I’ll have a lot more to say about it in the Economic Security Statement in spring.”

Insurance and Young People

I applaud your decision to stop people under 25 being compulsorily charged insurance within super. However, the big insurers say it will increase premiums across the board by 30%. What do you say?

“I say that young people are being exploited and used as a cash cow for the entire pool of users.

“And I think that’s wrong.”

The Royal Commission

The Royal Commission has shown us that there are deep-seated cultural problems in the finance industry. How does the industry win back trust?

“There’s no question trust is at an all-time low.

“However, understand that the majority of people employed in the industry ‒ some 400,000 people ‒ are actually going about their day and doing a good job.

“The real responsibility falls on those that are in charge ‒ the boards ‒ and the CEOs need to ensure that they act with integrity. And if they don’t, we need our regulators to keep them accountable. That’s why as a government we’ve said if they are caught out doing the wrong thing, they can be put out of business, or put in jail.”

Thank you for reading,

Scott

Proud, Angry, Happy!

A couple of day ago I finished reading your book, and immediately phoned my bank (Suncorp). My husband and I have had our home loan with them for close to 10 years. I told them I was currently paying 5.02% and would like them to reduce the rate. The woman I spoke to said the bank would review it, and after a few minutes on hold she came back and said my new rate was 4.02%. I must admit I had a little cry — not sure why … proud … angry … happy! I will be phoning them every six months from now on. (I have also bought three more copies of your book and given them to my nieces.)

Melanie

Hi Melanie,

Let me channel my inner Oprah: You go, girl!

Even better, like ‘O’ I can give you the equivalent of a free car:

If you’ve got a $300,000 mortgage, with 15 years left on the clock, that five-minute telephone call has saved you $27,618. A few taps on the MoneySmart mortgage switch calculator suggests that, if you maintain the same minimum repayments as your current loan, you’ll save $36,908 over the life of your loan and be debt free 15 months earlier!

Thank-you for reading

Scott

I Am Never Looking Back

Dear Scott,

Six years ago I left my ex, due to him punching me. It was the right thing to do, but it certainly set me back financially. That is why I have found your book so amazing. I already feel much better about my situation. I have my new fee-free accounts set up with better interest rates, have been on the phone to my super, and have split my money into ‘buckets’. This is the start of financial control, for my sake and my children’s. While I still feel anxious ‒ as a single parent with a mortgage and $8,000 of debt (personal loan and credit card) ‒ I feel more in control, and I know I’ve got this! I am never looking back.

Tanya

Hi Tanya,

What you’ve done is taught your kids two amazing life lessons.

First, that domestic violence is not acceptable.

Second, that you are strong enough to stand on your own two feet financially.

Thank-you for reading,

Scott

Can I Afford to Become a Mum?

Hi Scott,

My husband wants us to have a baby, but I am petrified at the thought of not earning money. How far backwards would we go if I can work only a couple of days a week, and/or have to pay daycare fees so I can work? Hubby runs his own business earning around $120,000 a year, and has two small business loans for equipment. His income varies month-to-month, so it is my wage ($57,000) that gives us the steady money. We have no loans other than our mortgage, and have Mojo tucked away. But can we afford a baby? Please tell me it’s going to be OK!

Hannah

Hi Hannah,

It’s going to be OK.

(Well, so long as you haven’t gone all ‘postcode povvo’ and got a supersized mortgage.)

I’ve spent my entire married life as a small business owner, so I have some ideas.

First, you are very much a part-owner in the business, so you need to be across the numbers, even if that means sitting down with the family accountant and having them explain the current state of the business to you. Fact is, you’re going to be relying on this business to take care of your family, so you need to know it inside out.

Second, the benefit of understanding the true state of the business isn’t just that you’ll stress less, but that the two of you should be able to set some realistic 12-month business goals, both in terms of lowering costs and increasing income. Write them down, and review them at least quarterly.

I actually do this with my wife on our Date Nights. At the start she was more ‘nah’ than ‘yeah’, but after seven years of being my partner in the business she’s shown insights I would never have had. Plus she’s actually way more hard-nosed than me when it comes to negotiating deals.

Finally, I’d go out on a Barefoot Date Night and sketch out your buckets – Daily Expenses (60%), Splurge (10%), Smile (10%) and Fire Extinguisher (20%) – and base it only on a conservative estimate of your husband’s income from his business.

If the numbers stack up, it’s time to become a mum!

Scott

Helping Out My Mum

Scott,

At the age of just 30, I am VERY aware of the importance of super. Here’s why. My mum is two years off the pension and has $8,000 in super. Yep, not a typo. I am going to ‘gift’ her $200,000 or so from the sale of my house (I have another, so will not be homeless), and she will be able to buy a house on which she will owe nothing. I have two questions for you. How might this ‘gift’ affect us? And how can Mum, who works full time earning $40,000 a year, maximise her super in the two years of work she has left?

Tracy

Hi Tracy

I hope my daughter looks after me as well as you do for your mum!

First up, let’s look at what you’re trying to achieve: you want to put a stable roof over your mum’s head so she has a sense of security and doesn’t have to worry about moving.

If I were in your shoes, I wouldn’t just give her the cash.

Instead, I’d consider buying an investment property in your name and renting it out to her.

There are three advantages to this:

First, when she goes on the age pension she’ll get rent assistance ‒ the maximum payment is $134.80 per fortnight.

Second, as long as it’s an arms-length transaction, you’ll be able to claim the interest and related expenses of the property against your tax, like any other investor can.

Third, it makes things a lot simpler. You should have a written tenancy agreement that sets out who pays for what, and what upkeep she’s expected to do, just like you would for any other tenant. That’s not only going to help you prove this is an arm’s-length transaction, but also manage everyone’s expectations. Also, in the event of her passing, the property is yours and is separate to her estate.

Now, as far as how your mum should manage her money over the next few years before she retires, here’s what I’d suggest if it was my mum:

When she retires she’s going to live on $23,597 per annum (the maximum pension for a single person, not including rent assistance and the health care card, worth at least $1,500 a year).

I’d encourage her to be a ‘practice pensioner’ – by living off that figure now and saving the rest of her wage.

Her aim should be twofold:

First, to have a goal of at least $100,000 in super when she finishes full-time work in five years (not two!).

Second, to never retire … keep working part time at least a day or so a week, and supplement her pension by up to an additional $6,500 a year (which, thanks to the Budget, will increase to $7,800 on 1 July 2019).

The upshot is that you’ll have an investment property with a great tenant. Your mum will have the security of a home, plus $100,000 in super to draw on, and she’ll be earning more in retirement (after tax) than she is right now!

Of course, you should run this past your accountant and financial advisor, but that’s how I’d do it.

Scott

Okay, I’m Angry

Commbank chief Matt Comyn is sorry …

He’s sorry his insurance guys ripped off terminally ill parents who took out life insurance with the bank.

He’s sorry his financial advisors ripped off retirees for millions of dollars with fraudulent advice.

He’s sorry the bank ripped off dead customers, by charging advice fees for no service.

He’s sorry the bank lost 20 million customer statements, and didn’t bother telling those affected.

And now he’s sorry that his bank teller staff scammed school kids’ Dollarmites accounts.

You’ve got to hand it to the CBA, their fraud has a kind of … circle of life to it, right?

This week we learned that thousands of children’s Dollarmites accounts were fraudulently manipulated by CBA staff, so they could earn bonuses and meet aggressive sales targets.

Hang on a minute:

Why would the bank link sales incentives to those cute-looking little Dollarmite accounts?

Because their Dollarmites program is easily the most successful marketing campaign in Australian history. In fact, one analyst has suggested Dollarmites was worth an astounding $10 billion to the bank.

How?

Simple. The CBA pays schools a token kickback for signing up students. Yet it’s chicken feed for acquiring a long-term customer. Especially when Choice magazine says that close to half of those Dollarmites end up staying with the CBA.

For well over a decade I’ve been calling out the Dollarmites program. Australia’s largest issuer of credit cards teaching kids about money is like Ronald McDonald teaching kids about nutrition.

Besides, the Dollarmite Youthsaver accounts terms and conditions are rubbish. Parents would be better off saving for their kids  in a high interest online savings account, and throwing their edu-marketing in the bin.

Look, I’ve dedicated my life to delivering independent financial education, and I can tell you that kids don’t learn much from the Dollarmites cute cartoon mascots like ‘Cred’, who rides a skateboard and is ‘a real cool dude’. Rather, it’s when Cred morphs into a credit card, and is mailed out to fresh-faced 18 year old cool dudes, that their real education begins.

There are well over five hundred thousand kids who are unwittingly enrolled into the CBA’s marketing database.

As parents, it’s time for us to tell the Commbank that their sleazy circle of life has to stop right now.

It’s time to ban Commbank from our classrooms.

Sorry, not sorry.

Tread Your Own Path!

The Big Budget Changes You Missed

Far as I can tell, we’re the only country that goes a little ‘Hollywood’ for the Budget. Other nations just read theirs out on a Tuesday afternoon in parliament, and no one gives a toss. Not us. We lock all the journalists up, and give the Treasurer the prime-time razzle-dazzle.

And last week’s Budget was a little … Family Feud. A bit, er, boring.

So what did we learn?

My first takeout is that Australia is the Jay-Z of the world economy … we’re swimming in cash. That’s largely because there’s been an uptick in the global economy, which is boosting the price of our resources. It’s also because unemployment is low. Oh, and also because we’re running a fairly aggressive immigration policy.

This pile of cash is what’s funding the centrepiece of the Budget ‒ a $10-a-week tax cut for low- and middle-income earners. It’s also what ScoMo hopes will fund what is effectively a ‘flat tax’, where 94% of the population pays 32.5% or less.*

*In seven years’ time.

Look, in seven years’ time I plan on living on a Tuscan vineyard so I can drink vino and wear slacks without socks … but I’ll have three kids in primary school by then, so the closest I’ll get to bellissimo is my local, La Porchetta.

Bottom line?

I’m not getting my holiday, and you’re not getting your flat tax.

Anyway, while the tax cuts stole the limelight, the real story ‒ which was largely ignored ‒ was the changes to super.

So here are three things that really deserve prime-time attention:

First, if you’ve been shocked by what you’ve seen at the Royal Commission (and you should be), you can now teach these bozos a lesson, switch your super fund, and not get whacked with an exit fee.

(Still, anyone who’s tried to roll over their super knows it’s harder than breaking up with your high school sweetheart. There’s so much back and forth, so many itty-bitty details and forms … it’s almost like they want you to give up and keep your money there!).

Second, a campaign that I’ve been banging on about for years is the rort of compulsory life insurance through super. Young people collectively pay nearly $200 million a year in life insurance they don’t need. The Government will now force super funds to stop automatically charging young people under the age of 25. That’ll add thousands of dollars to young people’s end balances.

Third, the government is finally moving to protect one of the biggest cash cows of the super industry: the 6 million inactive (read: forgotten) accounts that super funds feast on. The Government has put a fee cap on these low-balance funds and is making it easier to consolidate them.

All in all, it was a terrible night for the super fund lobbyists, which means it was a great night for you and me. In fact, I think the super changes will potentially have a bigger long-term impact than the short-term tax cuts. Just don’t expect to read too much about it. After all, super isn’t very Hollywood, is it?

Tread Your Own Path!

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

Financial Planner Wants Advice

Hi Scott,

Am I in the wrong job? I am a financial planner. No, seriously please keep reading :) I got into the industry after being retrenched, as I was looking for something that would pay better than an admin job. I do my best to provide advice that is free from bias and not tied to products. Trouble is, sooner or later my boss is bound to notice and move me on. How do I help Aussies with their finances and still put food on my table?

Tim

Hi Tim,

The old saying ‘don’t hate the player, hate the game’ is true in financial services.

The Royal Commission is great, but unfortunately it tends to tar everyone with the same brush. The overwhelming majority of financial planners and mortgage brokers are good, hard-working, ethical people like you.

It’s the game that sucks. It’s been set up by the banks and AMP. It’s called ‘vertical integration’, and it’s basically where the banks manufacture products and then employ planners to sell them. If you’re working in a Holden dealership, you won’t be selling Fords.  Hopefully a recommendation from the Royal Commission will be to break up the vertical integration game. Yet what advice would I give you right now? Well, there are truly independent firms that charge hourly rates. Or there are financial counsellors, who do important work without flogging products.

Scott

Lock ‘Em Up!

Here’s something shocking that I learned about this week.

Apparently there’s been a spate of violent home invasions in which young thugs have been terrorising vulnerable pensioners, and it’s been going on for years.

In fact, one young thug was caught stealing $120 from a little old lady.

And when the cops caught up with him, and questioned him on it, he repeatedly lied and said it wasn’t him.

Yet, when he went up against the magistrate this week, he not only admitted his guilt but admitted he’d lied through his teeth to save his backside.

I’d say this young thug is heading for the slammer.

Okay … so I just made all that up. There was no gang. No young thugs ripping off $120 from pensioners.

But there is a gang … of wealthy, old banking executives on multi-million-dollar salaries who didn’t have to climb through a window — they were greeted at the front door.

And, according to the Banking Royal Commission this week, they didn’t steal $120 — they stole $120 million.

And that’s just Commbank, who the Commission called the ‘gold medallist’ in fee-for-no-service. Hell, they even slugged dead people fees for advice. For 10 years. Seriously, these guys are good!

All up, across the industry, some 306,000 people have been charged a combined $216 million for services they didn’t get.

And in the case of AMP, the Royal Commission found they’d even systematically lied about it to the corporate cops (ASIC).

(Though let me point out that while this has shone a light on what I’ve been saying about AMP for years, their investment bond — which I’ve previously said I’ve liked — is still a decent product.)

Yet let’s be clear — there will be no jail time.

Instead, the bosses will apologise — via their underlings, who they’ll send off to be shot on the Royal Commission’s frontlines — and they’ll quietly retire on their multi-million-dollar bonuses.

But here’s the rub: at its core, the banking and finance industry is based on trust. You need to trust that the company you’re dealing with won’t rip you off, and that they’ll have your best interests at heart.

What we’ve seen at the Royal Commission suggests we can’t trust them. And that’s backed up by ASIC, which recently found that in the case of bank employed advisors, in 75% of cases the adviser didn’t act in the client’s best interests.

Can you imagine our young thug appearing before the judge: “Look, Your Honour, I’ve made mistakes. I’ve robbed hundreds of thousands of defenceless pensioners for years. So it’s clear what I really need to do is … address my internal processes.”

Yeah, nah. I’m with ScoMo on this one. Lock ’em up.

Tread Your Own Path!