I often get asked about what financial advice is and how it helps people so I thought I would start sharing a few examples of how the advice process works and yes, how it helps people...
Chris & Amy came to see me recently after being referred by some friends. Chris works full time in building and Amy works part-time as a teacher. They have three kids, are both in their mid- thirties and were wanting to see if what they had set up was doing the job.
What I love about Chris and Amy reaching out is that they are acting earlier than most. In my time as a financial adviser, the biggest bugbear has been seeing people leaving their run too late, leaving it until their mid-to-late fifties to start planning for their financial future.
However, this wasn’t the first time Chris and Amy had sought advice.
Chris’ workmate had recommended they go and have a chat to a financial adviser as the adviser was paying a referral fee of a couple of hundred dollars and this friend offered to split it with Chris. Easy money... or so it seemed!
Chris and Amy have now realised they were ‘sold’ over-the-top insurance that has been paying a commission to that adviser since it was set up and has been costing them an extra 30% a year as
a result. Don’t get me wrong... insurance is REALLY important. The question is whether insurance is being recommended in the interests of the client or the interests of the person ‘selling’ it for a commission?
Chris and Amy had both held great quality industry super funds, but their previous advice experience had resulted in their super being rolled over to a for-profit fund. We researched the running costs, returns, fees and options, which uncovered that they were now paying more than ten times as much in fees as what they would be paying had they stayed with an industry super fund and used the best options available.
It is incredibly unlikely that a portfolio costing ten times as much in fees is going to be able to perform well enough to make up the difference in fees. As I explained to Chris and Amy, as I do all my clients, it’s about controlling the things we can control, and fees most definitely falls into that category.
They were also paying a 1% advice fee each year. Now, 1% doesn’t sound like much, but when I pointed out how much that fee will grow to in dollar terms as their super and investments grow, they quickly understood why I’m against percentage-based fees... they are a commission by another name.
Chris, Amy and I delved into what it was that they were trying to achieve:
They wanted to make sure they were setting themselves up the right way for a comfortable financial future
They wanted a plan to help them be putting away money on a regular basis
They wanted to get their house paid off before retirement
They wanted to start investing for the future of their children
They wanted to make sure they had a back-up plan in place
They wanted confidence!
We modelled some scenarios to show them how they were tracking and discussed the sorts of things they could work on to get them closer and closer to financial freedom. They were able to see that there is so much they can do and that time plays a huge part in how successful they can be.
In the meantime, we rolled their super back to an ultra-low-cost portfolio within an industry super fund and replaced their expensive insurances with policies that were cheaper and without the expensive bells and whistles (and without the commissions saving an extra 30%!).
We changed their mortgage repayment strategy and negotiated a lower rate with the lender. They also know where their money is going and are building up a cash reserve so that they can then take the next strategic steps necessary when they are ready.
There were two aspects of the experience they enjoyed:
Everything was explained to them in an easy to understand way
The fees were totally transparent and easy to understand.
I’m looking forward to watching their young family grow with the knowledge they have a smart financial game plan!
Cheers, Dave
*Names have been changed for privacy reasons.