Who would you trust your husband or wife with?

Now before you start to wonder where this question is going, let me tell you about a conversation I had with a friend the other day. My friend and I were having lunch and he has recently re-married and we were talking about relationships in general. Both being in the financial advice profession, we got to talking about who we would trust our respective wives to seek advice from (present company excluded), if we prematurely met our demise. We had a bit of a hard time nominating someone and yet we both know a lot of quality advisers. We didn’t analyse this in depth at the time (it would have been too D&M over a steak sandwich), but I did reflect on it later that day and here are some of my thoughts that you may also wish to ponder.

Getting financial advice is not like seeing a brain surgeon. If you need brain surgery, you only really care about the technical skill of the surgeon (though it is nice if he or she has a personality too). This led me to think that in financial advice, trust has more than one dimension:

1. Trust that the Professional is competent and will perform their job with due skill and care;
2. Trust that there are no impediments to the objectivity of the professional’s advice; and
3. Trust that the person is a warm, caring and thoughtful human being.

Now remember, we are talking about your nearest and dearest here, so all of these points carry some serious weight. Points 1 & 3 are pretty self-explanatory but let me clarify what I am saying in point 2.

Two factors that may influence the advice provided by your adviser are:

A. How your adviser charges for their advice, and

B. If the advice business is self-licensed or licensed by a subsidiary of a product manufacturer.

Want to know more?  These examples will help:

A. How your adviser charges

Let's say you want to build an investment portolio and you are tossing up between buying an investment property or starting a managed share portfolio. Your current adviser charges 1% of any assets that they manage. No prizes for guessing which option you will be encouraged to take. A true fixed-fee adviser would talk you through pros and cons of both options without an inherent bias as to the outcome.

B. How your adviser operates

Let’s say your adviser’s business is licensed by a company, known as a “dealer group”, that is majority-owned by an investment product manufacturer (think of household names in superannuation). The dealer group has an “approved product list” which effectively controls what products the adviser can recommend to clients. Which products do you think receive preferential treatment? In fact the only reason that product manufacturers own dealer groups is to create a captive audience of advisers to sell their products. Product manufacturers refer to advisers in these dealer groups as their “distribution channel”. Annette Sampson’s recent article "In search of advice instead of sales pitches" in the Sydney Morning Herald sums this up pretty well.

financial advice

So you see there are a few things to consider when you are selecting an adviser ….. it was with these things in mind that The Trusted Adviser group was born.

When the markets let us down.

Just listening to the recent news of world markets, got us thinking. 

We can’t control what happens in the markets – we can have an opinion, we can listen to others opinions but there’s nothing we can do, to affect the outcome.  So when the news is so depressing, what can we do?

In times like this, when our investments are heading south, we have to focus on “what we do” and “why we do it”, more than “what we have”.  What I really mean, is that we need to be more grateful.  Australians are very fortunate.  We have an exceptional lifestyle of choice, fine weather, supportive health system and although it’s not perfect, a better economic environment than most others.

In the last few weeks, we’ve had some sad news from a few of our clients suffering from life changing illnesses.  It’s a reminder of how precious life is and how we have to enjoy every day and spend quality time with our loved ones.  If we wait for the markets to improve, or we wait until we “have enough money” to fully enjoy life, then we may miss out.

Somehow, we all need to find happiness and joy in the every day life we live.  As Trusted Advisors we take our role in this very seriously.  How do we provide peace of mind, encouragement and support to clients, so that they can find happiness in their daily life?  We help them to find perspective.  We help them to make the most of what they do have.  We put the steps in place to make it easy.

Don’t wait for the markets to improve to find your happiness

There’s what the markets can do for you, there’s what you can do for you and there’s what a Trusted Adviser can do for you.  When the markets are letting us down, focus on what you can do and find out what a Trusted Adviser can do for you.

An investment not worth paying for

When you’re making any purchasing decision, you make a judgement about whether you believe you’re getting value for money.  Along with price, other things that may come into the calculation include convenience, great service or in the case of luxury goods, the perceived effect on your social status.  

But when it comes to money management, the one factor that should not sway the decision is the promise of “great investment returns”.  As alluring as this sounds, we know that this is a very bold promise and you should know how to check if your money manager (read: stockbroker, fund manager or financial adviser) delivers.

So here is a proposition for you:
 

If these stock-picking pros promise great returns, their performance should be measured against the market in which they are investing.  If they are picking Aussie shares for your portfolio, then you should know if they are getting a better return than the market itself.  Why?  Because you can buy the market yourself at a much lower cost!

Don’t get me wrong, these stock-picking professionals are trying to beat the market.  It’s just that it is really hard to do.  You don’t want to pay extra if the result is more due to chance than skill.  And that is what the evidence from Karaban & Maguire (2011) is telling us:  

The S&P/ASX 200 Accumulation Index has outperformed approximately 70% of active Australian equity general funds over the last five years, increasing to approximately 77% over the last year (mid year 2011).  At least 69% of active international equity funds underperformed relative to the benchmark over every time horizon. Over the last year, the index has outperformed approximately 80% of actively managed international equity funds. 

So if the odds of beating the market are that bad, why would you pay more for the promise of better returns? 
 

The Trusted Adviser.

DIY Share Investing: Prudent Management or False Economy?

Now that you know a bit about us at The Trusted Adviser, it's time to ask you a question - if you are a serious do-it-yourself share investor, why are you going it alone?  For many of you, the answer will be “So I don’t have to pay management fees” or it may be about something more fundamental like trust, or a lack of it, in the advice of others.  Whatever the reason, if you are serious about managing your money (and I am guessing that you are), it is essential that you know how you are tracking compared to the performance of the sharemarket index.  Why?  How else will you know if you are doing a good job?  And if you heed this advice, brace yourself, it could be a very humbling experience.

But investing is not just about return. There is the other small matter of risk to consider.  Now you may not agree with me on this, but I reckon hanging your hat on a handful of stocks is risky

• It lacks diversification, and
• It risks significant under-performance compared to the market.

What?  You don’t care if your returns aren’t as good as the market, as long as the return is positive.  If you think that and you’re serious about making money, stop reading now.

For those of you still with me, let’s get back to diversification.

A dozen stocks sounds diversified enough doesn’t it?  And where’s the risk in owning BHP, RIO, the banks, Wesfarmers, Woolies and Woodside?   Shareholders in General Motors thought the same way before the GFC didn’t they? But I hear you saying “GM was having trouble way before the GFC and everyone could see it.  I would never have invested in a stock like that”.  Hhmmmm….Wesfarmers went from $42 to $14 as investors nervously watched them negotiate with their bankers while chewing on a gob-full of debt from the Coles acquisition.  And what about RIO?  $124 to $24 as they carried the can (and debt) from their ambitious acquisition of the aluminium giant, Alcan.

Anyway, enough tripping down memory lane.

Under-performance relative to the market costs real money and that’s ignoring your hours of research.  Wouldn’t it be just a little bit disappointing if you were getting a less-than-market return for all your time and effort?  But I really enjoy it, I hear you protest.

Well if stock picking is one of your hobbies, here’s my advice

1. Pick a relatively small sum to play with – say no more than 10% of your investment capital 
2. Take less risk with the rest (check out our post on trying to beat the market - “An investment not worth paying for”).

financial advice

Our main message here is that successful investing is about only taking risks that are likely to compensate you with added return over time.  It is best summed up by our friends at Dimensional when they say: 

Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, and speculating on “information” from rating services.  To all these, diversification is the antidote.”1

For an academic perspective on diversification, you can also view this video:

The Trusted Adviser