Yesterday, a journalist writing for a financial magazine asked me this question:
What are the biggest ways Australians waste money when it comes to their finances?
Here’s my answer:
Every week I’m asked:
How do I check if my investment advisor has given me good advice?
How is your investment portfolio performing against the index (or average) of the markets in which you are invested?
And in my experience, the majority of people I ask tell me that they don’t know.
There are other factors that determine good investment advice besides performance. But it surprises me how many intelligent people don’t think to check the performance of their portfolio against the average market return. Especially when they’re paying an advisor a fee for investment advice.
There are biases that affect the quality of advice we get every day of our lives. And not just financial advice.
When a real estate agent shows you houses for sale, they are working for the seller, not you. This affects which properties you are shown and your ability to negotiate the best price.
(This is why buyer’s advocates have become popular. As you are paying them to find your ideal property, your advocate’s interests are aligned with yours.)
In assessing the quality of any advice, it’s worth considering which party the seller is working for: you or the owner of the product.
There are other more subtle influences on the advice we get. While the medical profession manages potential conflicts by operating under a professional code of conduct, your GP may be influenced to prescribe some brands over others, due to a relationship with the pharmaceutical company (this could be done unconsciously…see below).
Bad decisions on a $400,000 home loan can easily cost you $100,000.
If you already have a mortgage, it’s not too late to fix old mistakes (or avoid making them with your next loan).
You should review your mortgage every 2 years anyway.
Why? Because less income needed to payout your mortgage means more money for other areas of your life. Your mortgage is probably the biggest financial commitment you will make in life. It is easy to get right and just as easy to get completely wrong.
Most people are surprised to find out that a low interest rate is not the most significant factor in reducing mortgage cost and paying out a loan faster.
You won’t see lenders advertising most of the tactics available to you, as it’s not in their best interests – the longer it takes to payout your loan, the more money they make. Lenders make money by lending you as much as possible, for as long as possible and with fees as high as they can get away with.
Have you ever thought about how much you’re really paying for the advice you got from your financial planner? The direct costs are one part – and I think you should look at those closely to ensure you’re getting value – but take a look at the indirect costs.
Keeping costs down are a key to wealth – high costs put your future at risk.
Some of the most significant costs are hidden in your portfolio and are caused by product selection and your advisor’s bias towards actively managed funds.
Although most financial advisors recommend actively managed funds, in reality, the net return of active funds are consistently below most passive investments or index funds.
But apart from the underperformance and additional cost of active funds, there is another cost, which is often overlooked when investors compare active and passive (index) fund portfolios – a cost I’ll cover later in this post.
How do you know if the fees your financial planner charges are worth it?
More importantly, how can you tell if high fees are causing bad advice?
The recent Banking Bad episode on ABC’s Four Corners showcased ordinary Australians who trusted the CBA, only to find they had paid a fortune for bad advice.
“He was actually a little uncomfortable and embarrassed”.
Last week I was contacted by Ross, a lawyer in Melbourne, who was concerned he was being charged unfairly for financial advice. He told me that his planner seemed “uncomfortable and embarrassed” about the fees he was obliged to charge.
Ross used the words “fee grab” to describe his current financial planning company’s new policy to charge an asset based fee (brokerage) for switching managed funds.
Financial planners need to charge for their advice and service. But in Ross’s eyes, this fee seemed to be excessive and incidental to the service.
But this fee is not what gets me worked up.
Ross‘s financial planner seemed to think this fee was disproportional to the value his company was providing for this transaction.
It’s hard not to conclude that this financial planner is putting the interests of his employer, and in turn his own interests, before his client’s.
Failing to use a mortgage broker who will refund commission is one of the biggest mistakes people make when they choose a loan.
Commission refunds are probably the easiest way to put $10,000’s back into your pocket over the life of your loan – reducing your loan term by years, if you use the cash to make additional payments.
It’s the strategy that’s possibly the most effective and least utilised, as not many people know about it, or how to use it properly.
Investors in Australia have lost about 45% of their returns in management fees over the last 5 years, according to research published last month (check out this article in the Sydney Morning Herald).
To many people, commission is a dirty word. It is synonymous with a back hander or under-the-table payment.
And for good reason.