New to investing, visited a financial planner

Hi All,

I'm new to managing my finances (up until now I just spend and run amok), I recently saw a financial planner for a preliminary interview, I was quite happy with the info he gave me, but I thought I'd do a bit more research before committing. The problem I'm now facing is that originally I only wanted to employ a planner to organise my finances as I'm not particularly clued on or interested, and because I'm doing more research I'm realising that it's important that I be educated and understand whether the choices he presents will work for me.

Further, how do you really know if the financial planner you see is going to help, I don't know enough about finance to determine this.. I mean he seemed sincere, I asked if he makes any kickbacks/trailing commissions etc, he said he doesn't make any profit by recommending one MF over another so he's relatively unbiased, the only thing he makes commission on is Life Insurance.. he provided me with a Financial Services Guide, and explained the different type of strategies in broad terms.

Though I'm still waiting on the statement of advice he indicated that he would probably look to leverage my cash for investment in equities. I've got friends who say margin lending is too risky, also is this the right market to be doing this (I notice many of the MFs are performing quite poorly at the moment)?

How much more do I have to make from investments which are leveraged (say 50/50) to make it worth while? I understand I can claim about 30% of the interest on the ML as a tax deduction. He indicated that I could make around 11% from equities/investments, is this attainable? seems high to me!

I've got no debt, about $7k in savings, so I'm pretty much a clean slate. Is just sticking my savings into an ING 5.85% account so bad? Will the benefits of following an advisors advice net me more money after paying commission and financing the leverage?

He charges 1%, is this fair?

Anyway, thanks for the advice, sorry to post a big question as my first post.

Cheers,
J.

 

Hi Janus and welcome to InvestEd!

Big questions are always welcome. I'll just touch on a couple of issues to start with and perhaps others can chip in with their views.

1) Well done on not only deciding to take control of your financial future but actually doing something about it!

2) No doubt the Financial Planner (hereafter FP) did a thorough interview (what's often called a "fact finder") to find out a lot about you. Key things include some of the points you've flagged like savings, debt level etc. Other issues you should think about and should have been asked about would include:

a) your age
b) income, expenses and free cash flow
c) investment objectives
d) timeframe
e) attitude to risk (e.g. could you sleep at night knowing your shares will fluctuate in value)
f) lifestyle requirements and dependants etc.

The answers to these issues will influence your financial plan.

3) Friends, albeit well meaning, say all sorts of things which can either encourage or discourage us from investing. The question is this: are your friends more financially savvy than the FP or others you're taking advice from? Do your friends actually understand the pros and cons of borrowing to invest (and margin loans in particular) or are they just passing on a 3rd hand opinion they got from their uncle's barber's best man

4) Borrowing to invest, i.e. leveraging your investments is a two edged sword. Whilst it will magnify returns it also magnifies losses. Of course you aim to borrow only to buy assets which will (over time) grow in value and which produce an income (again which will hopefully grow over time).

5) Interest on a loan (not principal repayments) where the purpose of the borrowing is to acquire income producing assets should be tax deductible. That is the cost of the interest can be offset against the income from your job so that your taxable income is lower and thus you'll pay less tax. Of course to the extent your investments are producing income then that will need to be added onto your income...but that's money you haven't had to work for. In addition the return you make may be in part in the form of a capital gain, which may be taxed concessionally in some circumstances (that's probably a topic for another day).

6) Why might investing in an asset such as shares or property be better than putting your money in the bank? The answer is that "cash" i.e. your bank deposit is not a GROWTH asset. All you get is the 5.65% per annum return on your money. Whereas, shares, for example can both grow in value and generate dividends. I.e. you could say buy a share for a $1 and over time find that it is now worth $2 and in the interim it may also have paid out to you a 5 cent dividend - i.e. a bit like the interest on your bank account. Another benefit of dividends is what's called franking credits (again that's a topic for another day but it can mean you pay less tax on a dividend than you would on an equivalent amount of interest).

7) The flipside though of investing in growth assets is that they are riskier than just putting your money in the bank. I.e. whilst the potential upside is much greater, you could also (if you don't invest wisely) lose all your money.

8) Is 1% fair? 1% of what? Your $7,000? So he's getting $70 to prepare a statement of advice? That sounds extremely low. Presumably he's getting paid otherwise somehow.

hope that kicks things off.

Cheers and welcome again.
N.

 

Hi Nigel,

Thanks for the info!

The 1% is of my capital (I believe, have emailed him to confirm this.. he said he sees this as a long term situation, so while he might not make much now, if he helps me grow my wealth, he'll also benefit in the future) I guess it could be 1% of my income, but I doubt that would be the case.

As for the statement of advice, I pay upfront for this, he said anything from $380 to $800 depending on how many options they need to come up with, and how complicated it is. Apparently the cost goes wholey to a para-planner who actually processes and builds the statement of advice.

How do I figure out if the person I'm considering is a successful FP, I mean he's a registered FP.. but does that mean the options he'll offer will be good advice? I've done a lot of searching on the internet, but I can't find any sites that review FPs?

 

Ok, so the cost is 1% of the capital invested/managed. on top of this I'll probably pay 1-2% to the MF for admin/management fees (the FP advises that he does not use MF's who charge entry/exit fees.

So if I can make 5.85% in a bank account, I effectively need to be making over 8.85% to make this exercise worth while. Should I go with this option (ie. with the FP?)

 

No one but you can answer that question.

My further comment would be this: you can't save your way to wealth. You must invest in growth assets. A bank account is not a growth asset.

Borrowing to invest can also be a great wealth builder because you are able to control a much larger investment on which growth can occur. Borrowing to invest in cash is not an option obviously (who'd borrow at 7.5% to get under 6% back!!! ).

Investing in shares and property has a variety of different tax advantages. There are no tax breaks on interest from a bank account. After tax at say your 30% rate you're making say 4% then less inflation at say 3% you're actually making say 1% real return or less on the high yielding bank account.

So if you stay in cash you're missing out on two of the key wealth creators - growth and the ability to leverage that growth. And the cream on top of the tax advantages.

BUT at the risk of sounding like a broken record it will all depend on your personal risk tolerance, objectives and timeframe. For example if you were to say you wanted access to the $7k within the next 12 months to say buy a car or go on a holiday, then cash would be appropriate because you don't have TIME to ride out the market's fluctuations.

I guess you need to establish those things before you can make your decision.

What do others think?

N.

 

Nigel,
Seems to me that Janus does not understand what you are trying to tell him.

 

If I didn't borrow to invest I reckon I'd just forget it and live the "high" life.

Your fp is your consultant, ie he/she works for you. I think you are entitled to ask them a few questions about their past performance. If they aren't charging you yet then you could always ask another fp for their advice and compare them.

 

Ok, in that case I might ask the FP to give me an indication of their track record? How would I know that they're telling the truth, is there some way I can ascertain their track record indirectly?

Thanks

Tropo, you're right

 

"Tropo, you're right "

I know....I am always right even if I am wrong.

 

Hi Janus

Besides all the reading that I'm sure you're looking forward to doing there is an excellent information source on the ASIC site about what to look for when choosing an FP who's right for you. Take a squiz here for starters:

http://www.fido.asic.gov.au/fido/fido.nsf/byid/17896255FC1DE10ACA256B03001F3997?opendocument

A good financial planner, who is truly taking your best interests into consideration and not just recommending some investment that's going to make him commissions, is worth his/her weight in gold. Their aim should be not just to advise on where your money should be invested (and remain impartial whilst doing so) but to set up a plan and a structure that will take you through life and hopefully into a comfortable retirement. Finding an FP who is also up with the latest legislation and can apply this skilfully to your situation is also important. Personal Investor magazine (which no longer exists as it was replaced by the recent AFR Smart Investor) ran an excellent article on MONEY MAKING MASTERS in their Aug 04 edition, which basically tested FP's on their technical prowess and knowledge and came up with a list of 50 MasterClass FP's. If you can find a back copy, it makes for great reading.

Hope this has helped somewhat.
Good luck in your search- put in the time required and you will be rewarded. Much of your financial education needs to come from your own understanding first even before you visit an FP and it appears as though you are well on the way

 

Nigel and Jacque have said some great comments.
The only comment I can add is this - if I were just starting out now, I would want an FP who deals in the 3 major asset classes - those being Shares, Property and Cash.
Most FP's just deal with shares (i.e manged funds), and don't include property investment at all. You have got to have both. I cannot stress this enough - having both property and shares/managed fund spreads your risk.

You can try both Steve Navra , or Peter Spanns organisation as they deal with both.
Try either www.navra.com.au (you will need to the course, which is excellent value) - or www.freemanfox.com.au

 

Thanks Perky, I can appreciate that spreading your portfolio between cash, property and MFs can reduce the risk overall.

I'm wondering with property investment, since I don't have a lot of capital, is investing in a property trust going to reduce risk for me in the same way, is this truly a diversification of my assets? I understand that there are benefits to investment propertys in negative gearing, depreciation and growth, but to get into an investment property in my situation seems pretty unlikely, how much capital to you realistically need to have an investment property?

So much to learn !

 

Cool, thanks Sim.

The more research I do, the more I'm thinking that in the current economic environment, particularly the way the markets are now (having had a bumper couple of years), I might just be best off to continue saving, maybe wait for a pullback in the markets to invest in some MFs.. and aim to put money into an investment property if I find the right place in a few years.

Thanks all for the advice, much apprecaited.

 

Ahem......

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2005713891

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2005893175

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2005848446

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2005607220

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2005742398

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2005634378

They may only be units and townhouses but suburbs are still sound- plenty of stock around for this price range.

 

Hi Janus

I think you'll get something from attending some seminars like Steve Navra, Bill Zheng etc. I'm not saying necessarily do everything they promote, but it'll give you the taste for the potential of what you can do if you get stuck in. Or maybe books will work for you - I just find hearing a good presenter explain the concepts gets me motivated.

Leaving your money in the bank till the media and the masses say its a good time to invest is the same as digging yourself a hole and sitting in it, IMHO. You need other people's money leveraged in growth and/or income-producing assets as soon as you possibly can. There's still plenty of opportunities around

Have fun ;-)
Carl

 

I think its great to have personal investing rules, but I know a few people who are sitting on a bucket load of wealth and are invested predominately in individual units sitting in small blocks on good land. If Janus does due diligence and finds something that suits the future plans, I still can't see how leaving money in the bank or adhering to the investment rules of someone in a different situation would help their cause ?

I agree there is merit in saving if it helps you meet your goals, but not if you have already saved enough to get started on working your way toward your goals, and are simply not doing anything because of apathy :
http://www.invested.com.au/forums/2/there-cost-apathy-832/

It does of course come down to Janus' personal situation. Best to do whatever you are comfortable with, with enough discomfort mixed in to make it exciting