All I want for Christmas...

With Christmas rapidly approaching, it has been interesting to observe the increased activity by financial institutions vying for superiority in the credit card space.

A recent report prepared by Roy Morgan Research on behalf of the Australian Retailers Association predicts that in Australia, retail spending for the month leading up to December 25^th will be somewhere in the vicinity of $41 Billion.  That’s a lot of reasons for the banks to ensure they are well positioned to get their slice of the Christmas pie.

The current flurry of advertising is designed to lure customers into transferring balances from credit cards held with another bank (or banks as the case often is).  The benefit is that you can reduce the interest rate currently being paid on outstanding balances down to somewhere between 0% and 2% p.a. for a period of up to twelve months.  The great part is that all the interest you’re going to ‘save’ for the next year can be diverted to purchasing those gifts you really want to give, including those you wish to give yourself.  After all, it is Christmas and you have been good!

Great news that the banks are so generous right?

Now consider that the level of core credit card debt, that is, the debt that ostensibly remains outstanding at the end of each month, currently stands at approximately $38 Billion in Australia alone.  If we use a typical rate of interest charged on outstanding balances of say 18%, this puts the annual interest bill at around $6.85 Billion.

To make matters worse (or better if you have a bank logo on your shirt), total credit card debt is supposedly up around the $50 Billion mark, if we include all the ‘interest free’ amounts that are yet to move into the period when the full interest rate is charged.

The process for a balance transfer involves an application for a new card with an institution other than the one with which you have the existing card (and outstanding balance).  Obviously, the banks are not going to allow you to take funds upon which they are earning 15% - 20% p.a. and convert it to a lower rate.  Sure, it’s Christmas, but how far do you really expect that to get you?

As part of the new application, you will be asked to provide your existing card details and if your application is approved, within around three business days, a deposit will be made in to your existing account in order to clear the balance.  This is where the fun starts…

There is no additional action taken after this point, meaning your old trusted friend is cleared and waiting in anticipation for the moment it will be brought back into action so you can ‘come in and save’ at your local retailer.  For most, it takes just a matter of days for this situation to deteriorate when the whole point of the exercise was to alleviate the burden of the credit card debt.

Of course, if you have an outstanding balance on your credit card, the balance transfer option can be financially beneficial.  However, prior to applying for the new card, it makes good sense to contact the bank with which you hold the existing account and ask them to suspend or close the account.  They will allow the amount outstanding to remain in place and will simply cease allowing further transactions to be added (except for the annual card fee and interest).  Then take a pair of scissors to the card so you’re not able to use it again.

The temptation of having a cleared and available balance on the credit card is enormous.  If you think you are disciplined enough not to suspend your existing account and cut up your card, remember that your outstanding balance, along with the other $38 Billion exists because discipline doesn’t come easy to most.

If you require assistance with your discipline, or want a helping hand to structure a payment plan that will get you through the repayment of your credit card debt in a manageable way, talk to your trusted adviser – financially, it could be the best learning experience you ever have.

What if I get the worst run of returns in the worst order?

When we invest in markets, we know to expect volatility.  We also know that diversification and a long term timeframe will help to manage this volatility and give us a reward for the risk we take.

A further sub-set of this general market risk that many investors do not know about or address is sequencing risk.

Put simply, a father of 60 and son of 30, choosing the same assets for their superannuation portfolio and both measuring their average return at 8%pa over a 20 year period, will likely have very different investment experiences, due to sequencing risk.

To start in understanding this issue, consider these points:

1. When you experience a 10% loss in one year, followed by a 10% increase the year after - you are not equal.  It takes a higher rate of return to recover from a downward turn.
2. Secondly, losing 10% on a $10,000 portfolio (when you're young and uninterested in retirement) has much less impact than losing 10% on a $1 million dollar portfolio, 2 years out from retirement.  This is known as the "portfolio size effect".
3. Finally, we have to acknowledge that you regularly add to your super portfolio over time and there will be regular income you want to withdraw from your account one you retire.  These inflows and more importantly, when they occur - have an impact.

To highlight this issue, let's look at 25 years of hypothetical returns and re-arrange those annual returns to occur in 3 different orders.

If you were 40, saving for retirement over this 25 year period - your retirement savings bucket would vary considerably depending on the order in which you experienced the returns, as seen below:

  

Similarly if you were aged 65 and about to retire, your retirement bucket would last for vastly different timeframes depending on the order of returns you experienced.

Hence we are faced with a challenge.  We know that the majority of Australians do not have enough capital or money in their super bucket to park it in cash and live off the interest.  We know that having some exposure to growth assets will be necessary to ensure our funds last, but what if we get the worst run of returns in the worst order?

New rankings published by Mercer on October 15, 2012 suggest that Australian super funds have the highest share of their holdings invested in growth assets in the world.  So this suggests that we may feel the brunt of sequencing risk more than other countries.

Sequencing risk can be addressed in a strategic way that accounts for the possibility of negative returns in the last stage of accumulating your wealth (pre-retirement) or early stages of retirement.

Milevsky & Salisbury (2006) suggest that there is a retirement zone.  So if you're 40 now and plan to retire at 60 and we assume that you will live until you're 90, between the ages of 50 and 70 you could be taking a strategic approach to your asset allocation to tackle the impact of sequencing risk.  You may be relying on your super fund trustee to get this right for you, but we warn that a "default" asset allocation that you haven't chosen to suit your personal needs and objectives could be very risky.

The Association of Super Funds of Australia (ASFA) recently published this average asset allocation of "default" strategies which is between 56-70% invested in volatile, market-linked assets.

Outside of the family home, the next largest pool of assets is typically capital accumulated for your retirement.  Based on the impact sequencing risk can have, perhaps it's worthwhile having a trusted adviser show you ways to manage this.

The 4 Things Every Investor Should Know

We live in challenging times.  It has been a long time since rising markets have been so generous as to forgive the sins of a poorly constructed investment portfolio.  And it is in uncertain times such as this that it is worth remembering what we can rely on.  
With this in mind, we thought it timely to list the definitive top four investment principles that every investor should know:

1. How you allocate your investment capital across the different asset classes is by far the biggest determinant of portfolio performance.  Academic research shows that more than 90% of the long-term performance of an investment fund, is determined by its asset allocation.   Market-timing and individual stock selection are shown to have been unable to produce enough value to overcome the associated operating expenses and transaction costs of active management. Stock-pickers take note!
2. Stop thinking that you can second guess the market.  All the news, good and bad, is already reflected in the market price. Also, the probability of you being consistently smarter than the collective knowledge of all other market participants …. well, let’s just say that it is improbable.  Empirical research has found that even professional fund managers who do this for their day job have real trouble beating the market consistently.  And most don’t.
3. The best protection against volatility is diversification, both across the asset classes and within each asset class. Yes we have all heard this before – that is because it is an investment truism, so don’t break this golden rule.
4. Heads and tails … risk and return, two sides of the same coin.  When risk is high, investors gravitate toward safe assets and away from riskier assets.  The prices of riskier assets adjust downwards thereby offering a higher expected return for those assets.  This reminds us of a great quote from Warren Buffett  “Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance”.

Sorry if we are sounding like a broken record here but these are the fundamentals of a good investment strategy ..... applying them provides the highest probability of a successful investment experience.

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Image: FreeDigitalPhotos.net

One of life's lessons ...

Our 100% growth investors have had a bumpy ride, like most over the last few years, but it's very interesting to note how quickly the recovery can happen - you can't afford to miss it.

To 2nd April 2012, our 100% growth investors - diversified across domestic, developed international hedged markets and emerging markets experienced a - 6.17 % return for the 12 months.  But when you look at what has happened in just the last 92 days - they've had an 11.09% recovery.

To look at a longer period, if you invested $1,000 in the ASX 300 in June 1992 through to December 2011 - you would have achieved 8.8%pa average return - $5,232.  Not a bad average given that we've had the Gulf War, 911, the Afghan War and a GFC during that period.  However if you missed only the best 15 days in that 19 year period, because you retreated to cash when the world looked uncertain and markets got volatile, or perhaps you got concerned about what the European Debt crisis would mean for stock prices, then your average annual return would have dropped to 5.1%pa or only $2,641.

Unfortunately fear drives many investors to miss the returns that are available to them.  They're convinced that they know something that the market doesn't.  It's just not true - the market is efficient at taking all new information and factoring it into prices very quickly.  We are more globalised than ever and whilst pricing mistakes can happen, it's not as often as you think.

It doesn't help investors that most economists don't get it right either.  In the SMH/Age Economists survey on Jan 6 2008, 28 leading economists forecast that the $AUD would go up to $0.90 US cents (from 88c), the cash rate would go up to 7.5% (from 6.75%) and that the ASX 200 would go up 8% to 6800.  What actually happened was that the AUD dropped to 70 US cents, the cash rate dropped to 4.35% and the ASX 200 was down 41% to 3722.

Then in Dec 2010, the same SMH/Age Survey (21 economists) forecast the AUD down 10% - it went up 5%, forecast the cash rate to go up to 5.25% from 4.75% and it went down to 4.25% and that the ASX 200 would go up 8% to 5169 and it went down by 14.5% to 4056.

The video clip below, The Investment Answer, provides some useful insight.

The lesson is to realise that market timing will cost you more than it will save you.  Successful investing does not require a crystal ball - it requires discipline.

Breaking up: What's the difference?

Recently, we learned of a case regarding a client concerned about the fees being levied against their superannuation fund for the level of service being delivered by their existing financial adviser.

There was an obvious lack of clarity around fees and when the client asked some clear questions, there was a distinct lack of clear answers. Not surprisingly, this left the client questioning the integrity of the relationship, which had existed for around 10 years.

Of particular interest is the client's recognition that during times when performance is positive, as was the case in the early years of the existing relationship, the fees are often ignored.

In response, the client made an appointment with the long term adviser of another member of his family.  After a detailed inspection of the facts, the adviser was able to confirm that the total fees being charged against the portfolio were amongst the highest they had seen over the past 15 years.

The adviser then calculated the ongoing costs of an alternative administration system with an asset-class portfolio, and set a fixed retainer style annual fee in line with the service required by the client.  When compared to the existing costs, the results were staggering.

This got us at The Trusted Adviser thinking.  What could the difference in fees be for a client in a similar situation, over the course of 20 years?

Using all the facts and figures from our earlier example and a simple calculation methodology, we put the difference over a 20 year period at around $83,000*.

Bear in mind that the reduction in fees in our example includes the client having engaged a fee for service, professional Financial Adviser who uses asset class investing.  Not a bad outcome in our view.

Naturally, there are an endless number of assumptions that can be made about what the results could be.  However, a simple fact is:  the higher the fees you are paying, the more return your assets are required to generate for you to break even.  It really is a negative sum game.

This issue has led us to place some attention on a current marketing campaign of the National Australia Bank, commonly known as "Break up with your bank".  We think this is an excellent campaign and the concept can be considered in so many other areas of life.

In relation to financial advice, it is so important that you are engaged with your adviser.  That is how you are able to gain the most value out of the relationship.  In our experience, clients who continually seek professional advice are taking action, as opposed to not taking action, which makes all the difference over a lifetime.

If you feel something isn't quite right, be sure to ask questions until you are satisfied with the answers provided.  If this doesn't work, as the NAB suggest (at least on the topic of banking), maybe it's time to consider a break up.

* Starting capital: $300,000.  Term: 20 years.  Return: 5% p.a. average.  No additional contributions.  Fee differential $2,600 p.a. 

Can You Manage Yourself?

Happy February everyone!  I don't think "Happy New Year" sounds right anymore now that we are in February ... and where did January go already?

Anyway, year 2012 is in full swing and 2011 is over!  We might have seen Aussie Cadel win the Tour de France in 2011 but it was a forgettable year for investors.  This fact was reinforced with me just last week when my neighbour (one up and one across) called me to ask if he could catch up to discuss setting up a Self-Managed Super Fund.  In case you were wondering, he called because it was 8pm, otherwise it would have been a chat on the front lawn.  His primary reason for wanting to set up a Self-Managed Super Fund ..... Control.

When super fund returns are negative, the urge for control is understandable and perfectly rational.  There are of course, a few things to know about Self-Managed Super Funds before jumping in the deep end. This article by Bina Brown in The Sydney Morning Herald does a good job of explaining what you should consider so I won't say it all again here.

What I do want to say about SMSFs is that the administration costs of having one can vary greatly.  Often these costs are billed on an hourly rate and that means that the final bill can come as a surprise.  We prefer a fixed fee service agreement and if you already have an SMSF or are thinking about one, take this as a suggestion: Speak with your accountant about setting a fee so that you know what you can expect to pay.  As a guide, if you have less than ten investments in your fund and you transact infrequently, you should expect to pay no more than $2000 for the accounting and audit costs combined.  How does this compare to the costs of a personal super fund I hear you ask.  This would be equivalent to having around $350,000 - $400,000 in a personal super fund which means there are no real cost savings to have an SMSF for less than $400,000 but of course, there is that control factor.  If you are disgruntled with your super fund return and you think an SMSF is the answer (just like my neighbour), just make sure you know what you are getting yourself into.... and consider how much your time is worth as well.

P.S.  The Sydney Morning Herald article states "since 2007 that DIY funds could borrow to buy residential property. More recently, the ATO clarified that DIY funds could "value add" and increase the worth of a property through renovation..".   As detailed in our News Update post in December, borrowed funds cannot be used for property improvements in an SMSF but can be used for repairs and maintenance.  An SMSF can however use its own funds (not borrowed funds) for improvements.

Image: Salvatore Vuono / FreeDigitalPhotos.net

News Update

As another year draws to a close, we thought it might be useful to sign off for 2011 with a summary of some key announcements that we can all look forward to in 2012, or not, as the case may be.
The Legislative Amendment Bill to increase Superannuation Guarantee (SG) contributions passed the lower house on 23rd November.  This bill also abolished the upper age limit (currently age 70) applying to SG obligations on employers.  The increases to the SG rate are as follows:

• 1 July 2013 to 30 June 2014  9.25%
• 1 July 2014 to 30 June 2015  9.50%
• Then an increase of 0.50% each financial year
• From 1 July 2019  12.0%
  

The current 25% pension drawdown relief for minimum payments from account-based, allocated and market-linked (term allocated) pensions will continue for the 2012/13 financial year.

The superannuation concessional contribution limit of $50,000 for people aged 50 and over will be halved to $25,000 for 2012/13 under current legislation, though the Government is considering legislative change to retain the current (2011/12) $50,000 limit.  Under 50's will continue with the current $25,000 limit for concessional contributions and this won't be indexed until 2014/15 when it is expected to rise to $30,000.

The maximum government co-contribution will be halved to $500 from 1 July 2012.  People with incomes up to $31,920 will be eligible for the maximum with the amount phasing down for incomes up to $46,920.

The tax concessions available on employment termination payments (ETP), as well as the ability to direct all or part of the payment to a superannuation fund under transitional arrangements, will cease on 30 June 2012.   From 1 July 2012, all ETP's will be taxed at the standard rate with no ability to direct these amounts to superannuation.

The Australian Tax Office (ATO) has recently released a draft ruling (SMSFR 2011/D1) defining key concepts that relate to self managed super funds borrowing to invest. This draft ruling clarifies the meaning of a 'single acquirable asset' and confirms that borrowing can be used for repairs and maintenance on the acquired asset but cannot be used to pay for improvements.

Revised impairment tables have been introduced from 1 January 2012 for the assessment of new claims for the Disability Support Pension (DSP) and for current DSP recipients undergoing a medical review.  As a result of this change, it will be potentially more difficult to gain or retain a DSP from 1 January 2012.financial advice
So that's it from us for 2011 and we'll see you back here early next year.  From everyone here at The Trusted Adviser, we wish you the most wonderful Christmas and prosperous 2012! 

Superannuation is NOT an investment!

If we had a Twitter ‘follower’ for every time someone said "super is a bad investment" we'd be as popular as Ashton Kutcher. Seriously, it's frustrating to hear this line at the BBQ's, in the cab and over the Christmas turkey because super is not an investment and none of these social opportunities give us enough time to set the record straight.

Super is a structure, a vehicle within which you can invest, and there are many compelling reasons to do so.

So why are so many Australians disengaged from their super?  Perhaps it's a symptom of the super rules being so complex (this is a common reason), or perhaps it's a feeling of "no control"? I think we'd have to be honest here and throw apathy in the mix and the very unfortunate and too familiar attitude of "I can't have it now - so I’ll worry about it later".

Let's see if we can redirect your thinking.

Whilst super on its own won’t drive your investment returns, it definitely has the potential to improve them.  Your returns will be driven by the investments you choose, more specifically the asset classes you invest in like cash, property or shares.  Fees and taxes also matter and we will be talking more about these in future blog posts.

So superannuation is a structure, just like a Company or a trust is a structure, and each of these structures have their own rules and offer different tax outcomes.

Take Barry for example, his marginal tax rate is 38.5% (incl. medicare levy). He has $10,000 pre-tax income available for investment and he wants to invest defensively, targeting 6%pa.  He can choose to do this inside or outside of super.

If he pays tax first and invests outside of super in his own name, he has $6,150 to invest on day 1.  However if he salary sacrifices the $10,000 into superannuation, he has $8,500 to invest from day 1.  Remember, he is investing in the same assets – targeting 6%pa.  This means his super asset gets a head-start of more than 38% over his non-super asset and this advantage compounds over time.

Just last month, the current Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten MP, addressed Financial Planning Professionals in Brisbane and discussed the impact of compulsory super savings in Australia.  He said

 “Superannuation savings in Australia are in excess of 1.3 trillion dollars, the size of our Gross Domestic Product.  If the American economy had made the same decisions that we made, they would have had 12-13 trillion dollars in savings! The most recent turmoil in North America, I suggest to you, would have been far less drastic, their economic recovery far quicker, the problems they’ve had far more shallow, if they had that pool of national savings.”

We Australians are so fortunate.

These are compelling arguments and when you couple this with our Government about to step-up the compulsory contribution level from 9%pa to 12%a, we must invite all Australians to re-connect with their super.  IT IS our future.

Image: Salvatore Vuono / FreeDigitalPhotos.net

I forgot my parachute!

"That is amazing" .... "I just can't believe this" ....

The tears in his eyes welled up but I could see he was trying hard to not let them start rolling down his face.  This was a 40-something man in my office and his real-life story goes like this:
I took an appointment that sounded like it was going to be fairly standard. A man calls the office concerned about his financial position and he wants to talk.  The appointment rolls around and we chatted for about 15 minutes during which he tells me that he and his wife and are under some financial pressure.  His wife may need to go back to work and the prospect was making him very unhappy.

I asked him why he was unhappy about his wife returning to work.  He tells me that three years ago she was diagnosed with non-Hodgkin's lymphoma, the treatment has been hell and it was amazing she survived and came through it at all.
He goes on to explain that he probably feels this way because he was so close to losing her and since then they have been living beyond their means - taking lots of holidays, saying yes to the kids more than they should and they are now feeling pressure to pay down the mortgage and start saving for their retirement.
As he continues telling me about his wife's traumatic treatment plan and recovery, I am flicking through their insurance documents.  He owns a trauma policy on his wife which covers, amonst other things, a range of cancers, heart attack and stroke.  Non-Hodgkin's lymphoma is a cancer of the lymphatic system.  There was $110,000 worth of cover, just sitting there, waiting to be claimed to help them manage the costs of treatment and recovery.

I said to him "you know you have this trauma policy - why haven't you claimed on it?"  After a brief pause, he quietly says "to be honest, I didn't even think about it".  I contact the insurer, process the claim and within four weeks I am handing them the cheque for $110,000.  And yes, I'm pleased to report that they have made the most of it - significantly paying down their mortgage and leaving enough to make some great family memories on their next "guilt-free" holiday.

This story has a happy ending but of course this isn't always the case.  Not everyone recovers and not everyone seeks the financial safety of insurance. Given the likelihood of being diagnosed with cancer (some statistics below), let alone any other major medical trauma, take this as a timely reminder to think about your own real-life story.

The Trusted Adviser. 

	Lifetime Risk
Cancer Type	45 year old Male	45 year old Female
All Cancers	1 in 3	1 in 4
Breast Cancer	-	1 in 11
Prostate Cancer	1 in 11	-
Colorectal Cancer	1 in 17	1 in 26
Melanoma	1 in 25	1 in 35
Lung Cancer	1 in 22	1 in 45
Non-Hodgkins Lymphoma	1 in 66	1 in 88
Cancer of the Uterus	-	1 in 75
Cancer of the Kidney	1 in 76	1 in 143

Statistical data provided by IRESS: Risk Researcher 2011

Image: Michelle Meiklejohn / FreeDigitalPhotos.net

Trick or Treat?

Did you have children knocking on your door for Halloween on October 31st?   It seems to have become quite popular in our neighbourhood over the last few years and again this year we had a few groups of kids knocking on our door, bags at the ready.  I never say "Trick" because I don't fancy washing eggs off the front windows of my house.  So we had our stock of treats in preparation for the hungry hordes and by treats I mean chocolate and lollies, not a piece of fruit, fresh or dried thankyou very much.  I understand the whole "healthy snack" principle but if I am a kid, I'm not getting all dressed up and running around looking for fruit!

Anyway, in the spirit of Halloween, The Trusted Adviser will make a habit each year around October 31st of asking a "Trick or Treat" question about investing.  

This year, we are going to talk about a certain type of "property educator" that promotes investing in property, often, but not always, through "wealth-creation seminars".  I will kick off by quoting directly from one of these "investment mentors":

"Our earnings come through property developers.  This means we can offer our advice and support free to clients.  We are not here to "sell you a property" - we are here to help you build a property portfolio and achieve financial independence."
OK, so how much do they receive from property developers for finding you "the best investment property": 4% - 6% of the property sale price.  That doesn't sound like "advice and support free to clients" does it. You don't have to be Einstein to work out that this is all about selling a property and it is being dressed up as financial advice ....... and it certainly isn't free!  

These property investment gurus sell these development properties for a commission and their sales angle is emphasize the tax benefits.  Principally, they show the "magic" of claiming depreciation allowances to reduce your personal income tax bill.

My advice to you if ever you find yourself getting the hard sell from one of these "property educators" - remember these three things:

1. More than half of the purchase price of these development properties can be attributed to the building and yet we know that the building depreciates.  When buying investment property, you want to be putting most of your money into the land component because it is the land on which the house is built that goes up in value over time.
2. The building depreciation allowance that is being used to promote these properties is deducted from the purchase cost (i.e. cost base) when it comes time to sell, resulting in a higher capital gains tax assessment.
3. When the tax benefits of an investment are being heavily promoted, think twice about the quality of the investment.

So next time you are invited to a seminar selling development property and you are offered advice for "free", I would suggest that you give it a miss or at least take some eggs with you!  

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Image:  A Jack o' Lantern made for the Holywell Manor Halloween celebrations in 2003.  Photograph by Toby Ord on 31 October 2003.

Word of the year?

If I asked you to name the top word for each of the last five years, what would you say?  I’m guessing that you are thinking along the lines of Global Financial Crisis (GFC), or perhaps the gravity-defying rise and rise of Apple (contrary to Newton's law), or even the Social media phenomenon.  If this is where your mind was taking you, then you would be right – at least according to the American Dialect Society (ADS).

For the record, the ADS chose the following over the last four years:

2007:  Sub-prime

2008:  Bailout

2009:  Tweet

2010:  APP  (and surely an honourable mention must go to “Vuvuzela”)

My guess for a front-runner in 2011:  Austerity

In essence, “austerity” means lower spending and at the moment, its utterance is so closely connected with the word “Greece” that the two could almost be hyphenated.  But the Greeks don’t have this urge to over-spend all to themselves do they.  And I’m not just talking about other governments.  It has become part of the human condition.  And at the very heart of the problem – spending on credit!  Which brings me to my point.

Cash is King and managing your cash-flow is paramount to financial success.

If you want to make smart choices with your money, then you need a cash-flow plan just as all successful businesses do.  You need to know what's coming in, what's going out and have a plan for the surplus. If you don't have a surplus, more work needs to be done on the first step to ensure you don't live beyond your means.

People that need credit cards, do so because of poor money management - they've had something unexpected come up and don't have emergency funds, or they are constantly spending more than they have available and keep thinking they'll clear it next month!

Or the marketing con of frequent flyer points has won them over – paying a surcharge of 1-3% (or even 10% in the case of taxi fares) for the privilege of using credit. There is your free flight each year, if you weren't using credit.  And then there are the higher annual credit card fees if attached to a frequent flyer program.  We know, because we see it all the time.  People managing cash-flow on credit cards spend more than they planned to each month and end up paying more than it would have cost for the trips that they are earning for "free".  It’s a false sense of benefit!

The convenience argument is now gone, as debit cards provide the same convenience and you are spending your own money.

The emotional impact is known – you will always think a little longer if you are paying in cash, versus whacking it on the credit card.

Avoid your own taste of “austerity” by making a smart financial decision – develop a cash-flow plan that works without credit.financial advice

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.