The Truth about Financial Planners/Advisors

http://www.asx.com.au/resources/podcast/library/investor_hour190906.mp3

Ok, I'm sure some (financial planners) won't agree, but I think this podcast is a must listen for anyone thinking of giving money to a financial planner.

Some of the main points from the podcast:
- Financial planners aren't advisors as such, they are distributors of financial products. Just ask them their opinion of a particular stock or sector or country, etc and see what they say. It will probably start with "sorry, but...
- You can be certified as a financial planner in 8 days! There is a more than likely chance that you are more qualified than your "advisor". Sure there must be very good ones, but chances are you won't get one of them.
- Alan Kohler recommends fee for service planners but many still take huge commissions. Freeman Fox (Peter Spann's co) is fee for service... and commissions-based AND they may take a percentage of your total investment. Capital erosion at its best!
- Numerous studies, tests and surveys conducted in Australia by groups like AFR, have concluded that you are more likely than not to receive bad advice. That may be subjective, but advice to change to a higher fee super fund with worse past performance is pretty black and white to me.


Anyway have a listen...

After listening to this in addition to recently testing an apparently very reputable planner out, there is absolutely no way I'd waste my money with them again. I realise people who don’t want to think about this stuff need advice somehow, but anyone willing to put in a tiny amount of effort is better off themselves I believe (especially with forms and online resources).

 

Confessions of a student planner - Planning - Money - Business - Home

This was posted on Somersoft "The Confessions of a Student Planner" and is well worth the read

Reminds me of the bit in Chan and Naylors book (going on memory here so may need checking) where the effects of tax on a 100% return is shown over 20 years and then compared against 48.25% tax on that 100% return

Difference between $1M and $5,500.00

 

My thoughts (as posted on SS) are as follows:

And this:

Cheers
N.

 

Unfortunately for the good ones... financial planners/advisors seem to have such a terrible name. If I mention the word to any of my friends or family the comments are always along the lines of -"scum", or "don't ever use them, you'll get ripped off!"

This has tainted the good, knowledgeable planners out there who don't just "sell" products.

Supposedly you can get the asic ps146 competencies with very minimal training and effort, even though the proper qualfiications such as a grad.dip in financial planning would take at least a year.

I think we need some name changes here.... maybe, the product sellers should only be allowed to call themselves "brokers". And the people that have appropriate qualifications and are not commission-based would only be called "Financial Planners".

Until something is done to properly differentiate them somehow, the above perceptions of the public will continue.

 

I found my FP to be realy good, pays his rent on time and has an easy on the eye receptionist

Bank FP sent me directly to the head of margin loans so another win there. Walking in with an idea in mind does sit them back a bit rather than asking him how you should make a .....load of money and then letting him tick boxes for you.

Being able to tick the right boxes and sign in the right places as well as knowing what seed capital you have helps get the margin lender onside too.

 

here's the lowdown on alot of FP's in Australia ... they really are just product floggers/salespeople ... then again .. there's a large marjority who aren't ...

If you ever start to talk to an FP and all they talk about are products ... as in ... u should invest in fund manager ABC walk away ...

What a TRUE fin planner should be talking about first and foremost is how to STRUCTURE your investments for effective estate planning and asset protection .. ie testamentary trusts, property investment trusts , EPOA's

also they should talk about structuring your superannuation ..

additionally they should look at how you want to structure your lifestyle and build your investment plan around it ...

remember if they start talking about PRODUCTS as opposed to INVESTMENT STRUCTURES then you've walked into the wrong office friend .. turn away and keep looking ...

 

Hi Gang,

Yep I think the financial planning industry has a real image problem. I've lost count of the number of people I have spoken too who rate them even worse than politicians, insurance salesmen & used car salesmen

However my experience with a number of them over the years suggests that a significant number of them are just glorified managed fund salespeople who are commission driven.

Cheers - Gordon

 

Quick thoughts on a Friday afternoon on this article

[quote = Christpoh Schnelle] One man's discovery of what financial advisers are taught throws light on its sales culture.

I am working on the sixth of eight modules to obtain my Diploma of Financial Planning and Advanced Diploma of Financial Planning. I enjoy the interesting and useful material but I am appalled by the implications of what I am encountering in the course. So we can establish he has no actual industry experience?

Everything in financial planning is geared towards pushing people into managed assets. A smaller push is to put people into managed investments outside superannuation. Blatant lie. In fact, currently the biggest marketing campaign in the financial planning industry is to put as much into super as possible due to changes in super laws

The impact of fees and charges is mentioned here and there but nowhere (neither in module Investment Planning 1 or in module Investment Planning 2 or any other module I have looked at) is there a discussion of the impact of fees and charges over time.Fair enough, I don't think anyone will argue the training requirements of financial planners are way too easy. With uni degrees becoming compulsory for entry to CFP programs, this is slowly being addressed. Long way to go though

There is a lot of discussion of diversification, because managed funds are more diversified. "If a client owns shares directly he or she should sell them to invest into a diversified fund"; I gagged when I read that. There is no discussion of the trade-off between diversification and fees and charges. The more you diversify, the more you pay. In some cases this is advisable. One has to look at the clients risk profile. A client with $5,000 in the share-market simply doesn't have sufficient diversification across the index - they are wide open to an Enron type situation, and most don't even realise

You pay the least when you own shares directly. You pay substantially more when you own an index fund. You pay a third of your assets every 20 years when you own an active fund, assuming 2 per cent a year in fees. If you include tax, you lose another 1 percentage point a year at least. Now you are down to 54 per cent - you have lost 46 per cent to a convenient ideal. Owning an undiversified share portfolio directly can end up costing much more than paying an extra 1% for a diversified portfolio. Clients need to understand the risk of only having a couple of shares.

Does diversification provide a benefit equivalent to a third or half of your money? Diversification does not increase returns; it just reduces risk. Over 20 years that risk is naturally greatly reduced.

This is significant, because even 60-year-olds have a 20-year investment horizon; 40-year-olds have a 40-year investment horizon. Risk profiling comment, not a diversification comment

The second convenient lie planners push is you should diversify no matter what your tolerance for risk is, even when you are young. However, since 1985, Australian shares have returned on average 11.1 per cent a year after inflation, while bonds returned 7 per cent and cash 4.9 per cent. Once again, diversification doesn't mean forcing an aggressive investor to invest in a conservative portfolio. Plenty of diversified managed funds have 100% in Aus/Global shares

Any planner who tells somebody with a 20-, 30- or 40-year investment horizon to leave 4.1 per cent (11.1 minus 7 per cent) on the table every year, tells them to give away 53 per cent, 68 per cent or 78 per cent respectively of their retirement assets.

One point I find utterly remarkable, is that Australian shares have returned 11.1 per cent a year after CPI over the past 20 years.

Over 10 years you triple your assets. Over 20 years you multiply them eight-fold, over 30 years 23-fold and 40 years 67-fold. Yet few people are that rich. Multiply $20,000 by 67 and you get $1.3 million. Fair enough point, but this doesn't just apply to investors that use financial planners - it applies to the entire population

You only need to make an average of 17 per cent a year on shares Easy to talk about, much harder to do in practise for 40 years and you are the second richest man in the world (Warren Buffett). Very, very few people really seem to understand the significance of these percentages.

The third, moot issue is superannuation. Financial planners seem to have a preference to get people to invest outside of super. If a client invests outside super, it will usually be in the fund of the adviser's choice with an ongoing commission to the adviser. Generally, if a client adds more money to an existing super fund the adviser does not get a commission. This is quite frankly, simply wrong - from personal industry experience. If Chrisoph talked about super switching so that advisors can get commissions, he may have a point.

The significance of the lower taxes in super leading to a much higher retirement income is barely mentioned and certainly never emphasised. All advice seems subtly skewed against the interests of the client.Again, in practice this is completely wrong

The fourth is direct property. There are no commissions in direct investment property. Therefore by far the weakest and least informative chapter in my text book was about direct property. Again, this is an education issue

The sample calculations were just downright weird. There was no mention of the benefits of depreciation schedules, of the risks and benefits of investing in direct property, etc. There was no discussion about any of the major property asset classes, such as houses v apartments, inner-city v suburban, nothing. A more subtle problem is that property is classed as a growth, ie, risky asset.

Most investors shouldn't have more than 60 per cent in growth assets (according to accepted financial planner wisdom) and almost anybody who owns an investment property will therefore have 60 per cent of their assets in "growth" assets.

The textbook ignores the fact that a residential investment property has a lot more characteristics of an annuity, with a stable income and only rare and brief occasions where its nominal asset price falls. Absolutely wrong. Income is definately not stable, and "only brief occasions where it's nominal price falls" is an ignorant statement based on the fact that property isn't valued every day like shares. One of the problems with property is that you can be affected by your neighbour losing his job and being forced to sell his house at a bargain price. This drives the price of your own house down. Property is a great investment, but it is definately a growth asset

There is a huge industry built on this parody of financial advice: the advice that only needs to take your client's situation into account; the advice that does not need to be in the client's interest.

Surprise: financial advice isn't in the client's interest. I have not come across a single case study where I would agree that the advice is in the client's best interest.Completely wrong in my experience, but it's possible we studied different texts

One more point: The Australian Securities and Investments Commission has a sample SOA (statement of advice, what financial planners give their clients) on its website. On pages 32 and 33, the sample adviser's proposed managed funds charge unbelievable commissions: 4 per cent entry fee, 2.5 per cent a year. Is ASIC aware that this represents an indirect endorsement of such practices? In practice, although 4% fees do occur (if a client agrees to it, then it is their own problem. If they dont but are still charged, the advisor is breaking the law) 1% upfront seems to be a common entry fee, plus 1% ongoing. Nothing like the figures discussed here

There is a great unmet demand for financial advice because most people I have talked to are intuitively wary of going to a financial planner. These people want advice but don't want anything sold to them; they prefer to get no advice rather than take the chance to get bad advice. They feel that the advice will not be in their interest.In my experience there are plenty of planners out there who work in the best interests of their client. The financial services industry is one of, if not THE most regulated industry in the country. No doubt there are still bad apples out there, and some things that have previously been done in the industry are an absolute disgrace, but in my experience, if you can find a fee-for-service CFP advisor who rebates commissions, you are well on the right track.

 

Scratcher Gillespie:

Let me guess, you're an FP?!

Your responses seemed very heavily biased towards FPs.

 

Yeah, I agree it is fairly transparant. However, we do suffer from a lot of misconceptions principally put forward by people with absolutely no working knowledge of the industry. The vast majority of financial planners take their ethical responsibilities very seriously, and from a commercial viewpoint - this makes sense. At some stage the consumer is going to find out he/she has been jipped. If you have done something un-ethical, you run the risk of being prosecuted by ASIC, sued by the client, and having your client-base destroyed through lack of trust.

Granted there may be occasions that financial planners do something that is in the interests of the client, but might not be the BEST course of action. However, from my experience, taking an ethical stance is in the long run MUCH more profitable via referrals from happy clients/non-clients who appreciate the honesty.

At the end of the day, it makes me angry that people with no knowledge of the industry whatsoever convince people in need of financial advice not to go to a financial planner because they think they may get ripped off. It's interesting when you eventually have to pick up the pieces for these people (and this especially applies to insurance), when something goes wrong and they are completely and totally unprepared.

One thing we always look to do is add value. Say a client comes in and we charge a 1% ongoing fee, working out at $500pa. However, we implement a salary sacrifice plan saving $1000pa plus getting a co-contribution of $1,500. In many cases, the costs of not seeking advice are much higher than those involved in seeking advice.

 

1% of what? Total asset value? Most people here would have $3-5m+, so 1% would be $30-50k.

I empathise with the plight of you guys (FPs). I'm sure you mean well, but a lot of people seem to take the whole FP thing very personally.

As for your insurance comment, I'm one of those people. As I've said in another thread, I have IP building insurance and that's it. I've done my own numbers and I simply don't think the myriad of "this and that" insurance is worth it. I eat healthy, get very regular exercise and don't smoke. I think of that as prevention rather than a monetary cure. Maybe both would be better, but I have reasons for my decision. I'm sure there are a lot of people with insurance that don't even do those basic things. That sounds somewhat counter-intuitive to me, but then again, I don't get a commission (just joking ).

 

I am in Sydney, and my FP is one of the Masterclass Financial Planners, and he has made the top 50 FP's year after year. He does not push any products, he looks at what our needs are and then suggests products. We went to see him about 4 times before he even charged us a cent. He also put us onto an amazing Mortgage Broker who in turn put us onto an excellent accountant, who both understand property. It's all good!!
Couldn't ask for better.
Cheers

Simon

 

Simon:

So it sounds like he's a 'pay for service' FP. That is, he doesn't take a commission on your entire bank role. I'm all for that type of FP and it's great that you're happy with the service.


Maybe you should do him a favour and promote his name, or maybe you want to keep him all for yourself.

 

Hi Iinvestor
No, not at all. If others on the forum would like to contact him, I am more than happy to PM them his name. I just don't know how "ethical" it would be to promote him on the site.
He does charge a fee for his service, but he also spends a lot of time with me on the phone and doesn't charge me a cent.
I guess he works for me and I am happy with his service. I have come to the realisation that I am no expert in this field, and that I prefer to pay an expert to help me. Ditto for accountants, mortgage brokers.
Cheers

Simon

 

Hi all

The Question i have is:

Is a Financial Planner the same as a Financial Adviser.

The reason i ask this is because i have heard that due to the complexities of the Govt requirements and thresholds etc One MUST have a Financial Adviser to sift through the best options for future retirement structure RE: Tax/ Income etc.

Cheers
BC

 

Yes to my mind they're the same.

You need to meet certain minimum training and experience/practical skills tests to advise in relation to financial products and services. Not all planners/advisers can advise in relation to all financial products. For example, not all FPs can advise in relation to derivative products like options.

Do you need a financial planner/adviser? Some people don't. But it depends on your level of financial understanding and experience.

In areas like insurance and superannuation in particular it can be helpful to have a specialist advise you. Bear in mind you don't need to follow their advice blindly! Tax can also be a complex area...but your accountant (or a tax lawyer) is best placed to advise you on tax...FPs will often (and should) have a good knowledge in that area but can't really give you proper tax advice.

Even if you're a very successful investor with lots of experience, sometimes it's helpful to have a different perspective in your personal "board of directors/advisers/mentors".

Hope that helps.

Cheers
N.

 

Thanks Nigel

Your reply is appreciated

Cheers
BC