# Fear and Greed: What should the Financial Planning industry do?



## Sir Osisofliver (16 January 2009)

cuttlefish said:


> In my view what the financial planning industry needs to do is make these risk assessments mandatory and have standardised 'risk levels'  (e.g. minimum risk, low risk, medium risk, high risk, kamikaze) with an accepted, industry wide description of what each risk level means.  They then should get both the adviser and client to sign the risk assessment with the adviser incidating that they acknowledge the clients desired risk level and the client acknowledging they've accepted that risk level.  It should be a standard form in large bold font - a bit like some of the documents used in real estate - and include an independent witness signing it.
> 
> That way regardless of any 'rhetoric' they spout about everything being safe - when the cr*p hits the fan the client will have a document to fall back on.  Alternately if the client comes in hungry to bet it all on red but then turns around and complains about the risks they were put into the adviser also has a document to fall back on.




Above is a quote from Cuttlefish from the Storm Financial Thread.  I was going to make a response in that thread and then thought that perhaps it deserved a thread of it's own because what I'm talking about is fear and greed.

Every time the market has a big drop, there are the cowboys, the ponzi scheme operators, the incompetents, the dodgy brothers operations that all seem to fall out of the woodwork. Inevitably there are people that are hurt from this. Retiree's who will now struggle to make ends meet, people who lose their life savings, their houses, forced into bankruptcy etc, etc.

Inevitably what then seems to happen is a bit of a witch-hunt, we want someone to blame for the loss, those dodgy operators MUST PAY, and we crucify people like Alan Bond, Christopher Skase, Eddy Groves, Phil Green, Emanuel Cassimatis etc etc.

For all these people, they were lauded when the sun was shining, when it rains they are despised.  In a similar vein Financial Planners cop some of the same emotions. 

*When things are good Planners and Brokers get asked questions like...*

A mate of mine was getting 60% last year - how come I didn't?
ABC Learning Centres went from $2.00 to $8.00 - how come I don't have any of that?
Babcock and Brown floated at $8.00 and went to $30.00 - why do I have NAB/CBA/WBC/ANZ when I could have bought that one?
What's this Margin Lending I keep hearing about?
I went to this seminar on options and want to know why you don't use them to get me 3000% per annum?
But I don't want to sell my RIO at $150.00 I'll pay too much capital gain won't I?
(In January) Is this a good time to be buying more on margin?

*When things are bad they get asked questions like...*

Why didn't you predict that things would get this bad?
Why didn't you convince me not to buy BNB, CNP, ABS....? 
How could you let me get so much margin lending?
Why do I pay you fee's if you can't tell what is going to happen before it does happen?


ETC ETC

What then ends up happening after a drop is that the Government then steps forwards in the best traditions of the nanny state saying that it must protect people and makes further draconion legislation, that the brokers and planners must respond to.

20 years ago, there was no such thing as a statement of advice in it's current format.

10 years ago you'd have been lucky to get 30 pages from a planner or a broker.

5 years ago, when the legislation started coming in some SOA's blew out to +100 pages, professional indemnity insurance started to increase dramatically and a lot of quality old school planners and brokers said things along the lines of... Screw this, the amount of paperwork needed means that I'll spend 15 hours at the office instead of 10 - and a lot of talent left the industry.

I expect that cuttlefish will get his desire when the government next steps up with legislative changes, and make changes that will entitle clients to have my left nut in a vice with their hand on the lever.

What would I like to see?

Subjects on finance being taught from grade 8 so that people don't repeat the same mistakes with the same dodgy operators....

I'm not holding my breath though.

Sir O


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## prawn_86 (16 January 2009)

*Re: Fear and Greed what should the Financial Planning industry do?*



Sir Osisofliver said:


> What would I like to see?
> 
> Subjects on finance being taught from grade 8 so that people don't repeat the same mistakes with the same dodgy operators....




I totally agree and i have raised this point before in a couple different threads. I would be interested in an empirical study on the positive effects that this would have ie increased GDP per capita, increased savings, lower debt etc etc. even if it was only implemented in 1 school and then you followed those students throughout the rest of their life

For the fin lanning industry i personally think the scourge is the commissions that planners can recieve. The only way i could live with myself as a FP is if i worked for a firm that charged per hr rather than made their cash from commissions, as that way there is no conflict of interest, and they become a paid advisor rather than a salesman.


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## Bushman (16 January 2009)

Sir Osisofliver said:


> What would I like to see?
> 
> Subjects on finance being taught from grade 8 so that people don't repeat the same mistakes with the same dodgy operators....
> 
> ...




You wouldn't need a financial planning industry then. 

End of the day, FP is a volume-commission  driven business and some FP's will push products in the good time to generate fees. As you say, greed and fear. FP's are no different. 

Performance-based pay? I'd like to see that.


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## Sir Osisofliver (16 January 2009)

*Re: Fear and Greed what should the Financial Planning industry do?*



prawn_86 said:


> I totally agree and i have raised this point before in a couple different threads. I would be interested in an empirical study on the positive effects that this would have ie increased GDP per capita, increased savings, lower debt etc etc. even if it was only implemented in 1 school and then you followed those students throughout the rest of their life
> 
> For the fin lanning industry i personally think the scourge is the commissions that planners can recieve. The only way i could live with myself as a FP is if i worked for a firm that charged per hr rather than made their cash from commissions, as that way there is no conflict of interest, and they become a paid advisor rather than a salesman.




I've also commented about the commission structure in other threads Prawn, but it works like this.

Client Numbnuts (Who didn't go to that school that teaches finance subjects from grade 8) approaches two planners,

Planner A who says - Sure I'll do a plan for you, pay me a $500 deposit to get started, and your plan is going to cost between $3,000 and $5,000.

and

Planner B who says. - What!!! Planner A was going to charge you $5,000 to do a plan? What a cheek! Look I'll do the plan for nothing and just take a commission trail from the product provider ok?

Guess which one Numbnuts uses?

Guess which one costs Numbnuts the most?

Guess which approach gets used by almost all planners so they don't go out of business?

Depressing isn't it?

Sir O


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## Sir Osisofliver (16 January 2009)

Bushman said:


> You wouldn't need a financial planning industry then.
> 
> End of the day, FP is a volume-commission  driven business and some FP's will push products in the good time to generate fees. As you say, greed and fear. FP's are no different.
> 
> Performance-based pay? I'd like to see that.




Yeah you would.  How much of what you learnt at school stayed the same?  Legislation changes all the freaking time. Second time I was at uni and did tax law subject in my first year, by the time I finished my degree it was all obsolete.

As for performance based pays..... So what should I take as a performance fee? Lets say 1% a year of your portfolio - (only if it makes a profit right?)

Take a guess how much that would work out to cost you when you take the negative compounding effects into consideration?  You may as well let me take a trail - It'll cost you less.

Sir O


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## prawn_86 (16 January 2009)

*Re: Fear and Greed what should the Financial Planning industry do?*



Sir Osisofliver said:


> Depressing isn't it?




Sure is. And i agree with all you have said so far.

Perhaps gov legislation to abolish commissions to planners is the answer. It's a blatant conflict of interest.

But then you would have the problem of a lot of people not being able to access planners as they cannot afford the money up front.

I know one firm that advertises that they dont take comissions (which is stretching the truth), but essentially they take an MER of all the money the client holds with them, so it doesnt matter what fund the money is in (even if its just in cash), they will still get their MER and the client doesnt have high upfront costs. Perhaps that would work for Mr Numnuts....


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## Bushman (16 January 2009)

*Re: Fear and Greed what should the Financial Planning industry do?*



prawn_86 said:


> But then you would have the problem of a lot of people not being able to access planners as they cannot afford the money up front.
> 
> but essentially they take an MER of all the money the client holds with them, ....




Isn't it better for these retail investors to stay in cash rather than having their life savings placed in a fund that is riskier than they envisaged (say a debenture product)? As for MER, the incentive is still there to generate FUM growth? Not an easy problem. End of the day, FP's need a fee-based model to attract talented people. I would like some sort of incentive not to set a pensioner up in Westpoint and the like though; if it costs more, it costs more.  

And Sir O, I do agree with you. It is the same with brokers; when the market is up, everyone is a financial genius, when it is down, it is the brokers fault. 

Human nature - fear, greed, acceptance of praise (ego enhancing), divergence of blame (ego enhancing).


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## cuttlefish (16 January 2009)

Sir O - good idea to start another thread as it was off topic from the other one.

Just to add a bit more info from the other thread - below is a response from a Financial Adviser to my post in that thread (and my response below that).



			
				QuiteContrary said:
			
		

> The regulations already exist to cover this with the exception of the witness and, sorry for the length of post, but hopefully this example may shed some light.
> 
> Sadly the industry already has too much regulation. Don’t believe me?
> 
> ...




Cheers for the insight. 

Interestingly now that you mention it I was actually quite scared of putting everything into cash at the commencement of 2008 - even though it was a logical time to go to cash from a market cycle perspective - because I did not trust that the banks were not going to be hit by serious problems with the risk of associated bank runs. (this was before the US government started bailing out institutions and banks left right and centre, and before the Australian government decided to guarantee funds in banks). 

Had I heard of a financial adviser at that time recommending people sell everything and putting it all in cash I probably would have considered this irresponsible as well.

You've made your point well - I can see that having this sort of bureaucracy can actually severely hamper a good financial advisers ability to help their clients make adjustments based on market conditions.

One of the biggest issues for the Storm clients was probably not so much that they had their money in the wrong place - but that they were put into so much leverage. (they had their money in the wrong place as well, but the leverage amplified the losses to the levels that cause them to wipe out completely).

Does the financial planning industry have specific guidelines/regulations in relation to the amount of leverage that clients should take on?


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## Temjin (16 January 2009)

Damn, I was writing a rather long reply post and the stupid laptop crashed on me!! So I'm not going over everything again.

A short summary

- Yes, I agreed with the fixed fee structure only. It's more professional and would essentially eliminate most conflict of interests. Of course, it would take time for the industry to change, but more and more dealer/bountique firms are taking advantage of this type of fee structure to attract clients who are less "dumbnuts" when it comes to minimising their cost. I know a friend who works in a firm that not only charge a fixed fee but has a policy of rebating back all commissions earnt (including insurances) or have them donated to charity if it is not possible to return them. People just need to look for them.

- A lot of misunderstanding about the role of a financial planner. It's not just about investment planning and CERTAINLY not about market timing or helping a client to speculate their money to financial freedom. It's more about building a strategy suitable for the client and involve areas like budgeting, debt management, superannuation, pension, risk management (insurances), tax planning and estate planning. Rules for superannuation and pension changes fairly often and it's hard for an ordinary person to keep update with it and try to get the best out of it. Financial planners are there to help you to save money by utilising the best strategies that has NO RELATION to investment returns. 

- FPs are NOT ABOUT predicting market turning points. It's impossible and no one has ever done it with a 100% accuracy. Successful traders have their own strict risk management and position sizing strategies and seldom achieve a win rate of over 50% over the long term. Even Jim Rogers, who worth billions, have claimed he is the worst short term market predictor in the world. So how can people expect their FPs to tell them to cash out before the crash? What if they are wrong?


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## Sir Osisofliver (16 January 2009)

cuttlefish said:


> Sir O - good idea to start another thread as it was off topic from the other one.
> 
> Had I heard of a financial adviser at that time recommending people sell everything and putting it all in cash I probably would have considered this irresponsible as well.
> 
> ...




Cuttlefish - Short answer to your question above about leverage is...no.

Each Dealer group will have different attitudes towards the various forms of leverage and their application.  Example.

Storm model - Leverage, leverage, leverage - re value, leverage again.  Obviously we are talking about a high risk strategy right? Maybe even an Extremely high risk strategy....  now add hedging and recurring put option protection against the portfolio and what happens to the risk exposure?

Storm's model is going to give all those financial planners and brokers that do the same thing as Storm (utilising equity contained within the home), *but safely* a really bad name.  A bad apple spoiling the batch as it were.

I myself frequently use that strategy - (not for retiree's though, I generally also positively gear the stategy, and add ample reserves in place) - so people asking me about Storm now, tend to get me ranting at them about the safe use of leverage rather than the cowboy approach.

Sir O


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## Temjin (16 January 2009)

cuttlefish said:


> You've made your point well - I can see that having this sort of bureaucracy can actually severely hamper a good financial advisers ability to help their clients make adjustments based on market conditions.




Exactly right. There are simply too much restrictions on what advices financial planners can provide. With product limitations placed on them by the firm/dealer they work with, it makes the job even harder. It's not like some of the FPs don't want to recommend alternative investments or precious metals to diversity their client's portfolio further, they just can't do it and would probably get sued or fired before he/she have a chance. 



> Does the financial planning industry have specific guidelines/regulations in relation to the amount of leverage that clients should take on?




I don't think so too. 

Hedge funds may use computer models to stress test their strategies to see if they are not at risk of ruin if the model fails or the market drop. (until a black swan event gets them ;D) But I doubt financial planner firms have that sort of capability, or maybe the guides are fairly informal and highly dependant on the individual planners.


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## cuttlefish (16 January 2009)

Sir Osisofliver said:


> I myself frequently use that strategy - (not for retiree's though, I generally also positively gear the stategy, and add ample reserves in place) - so people asking me about Storm now, tend to get me ranting at them about the safe use of leverage rather than the cowboy approach.
> 
> Sir O




Actually this is a good point as well - levaraging into positively geared investments at the right time in the cycle is relatively low risk.  I've used considerable leverage to buy amply positively geared property in flat property markets and not thought of it as risky.  I do recall though at that time that it wasn't as easy to get finance from the banks for those properties, but they were happy to lend me money to buy low yielding off the plan apartments in overheated areas.  Quite ironic.


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## trading_rookie (16 January 2009)

> I know one firm that advertises that they dont take comissions (which is stretching the truth), but essentially they take an MER of all the money the client holds with them, so it doesnt matter what fund the money is in (even if its just in cash), they will still get their MER and the client doesnt have high upfront costs.




But isn't the MER an upfront cost? That is, the managed fund takes an MER from your account balance before any investing is done? That's how I understood it when reading the PDS of my superfund.

As for fee's I can't see why fee's aren't proportional to the return, as opposed to a good or bad return and we're still increasing the fee's - be it MER, Asset Management fees, Management fees, Other Management fees - which all sound complicated to the average investor and are more or less the same thing.


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## Sir Osisofliver (16 January 2009)

trading_rookie said:


> But isn't the MER an upfront cost? That is, the managed fund takes an MER from your account balance before any investing is done? That's how I understood it when reading the PDS of my superfund.




Hi Rookie,

You'd have normally stimulated my usual rant about managed funds and the rip-off merchant tactics they use with MER's.

What I _think_ Prawn is getting at is a discretionary portfolio management style of account, where the fee for service is calculated as a percentage of the portfolio on a regular basis. These types of fee's are generally paid for in arrears.  Very different to a managed fund, but most brokers who offer this style of sevice generally reuire you to have enough dough to make it worth their while. 



> As for fee's I can't see why fee's aren't proportional to the return, as opposed to a good or bad return and we're still increasing the fee's - be it MER, Asset Management fees, Management fees, Other Management fees - which all sound complicated to the average investor and are more or less the same thing.




You've been with Macquarie haven't you?  You forgot the "What'choo lookin' at pal?" fee.  *insert cracking knuckle sounds*

Fee's aren't propotional because, *return is something that happens in the future.* I'd like my money now please so I can eat this month, rather than at some nebulous point in the future with Numbnuts saying, "No sorry I'm not happy with my return of 15%, Bob down the road got 17.5% so I'm not paying your fee.

Reminds me when I rang up a guy to ask him to sell a stock I'd placed him into at 60 cents and which was now worth over $5.00 and he cheerfully said. "No I sold those already through Commsec, they only charged me $30.00!! So what should I put the money into?" 
_Well what you do is bend over......_

Sir O


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## Stan 101 (16 January 2009)

How about a bit more responsibility on the customer? Let's say a permit is required for different levels of trading.

The customer, before employing a FP must pass a test of basic and fundamental financial terms. Reasonable scenarios of outcomes from gearing should be outlined in a basic way.

If one wishes to trade on the ASX as a personal trader / investor one must display mastery of basic share trading concepts before the ability to purchase shares is granted.

Extend this concept to warrants and options and on and on.

It is terribly concerning that the government will allow people to gamble, yes GAMBLE with their life savings when they don't have a clue on what they are doing. It is equally disturbing that people are willing to put their life savings (plus money they don't have) in the hands of people they do not know, without understanding what it is they are actually getting into and simply trust what they are saying. 

Playing with your financial future is not a simple game. People here on this forum who have more than just a basic understanding of fundamentals and technicals have been burnt in the last 18 months. How do you reckon Joe Average who got the hot tip on Zinc from the local cab driver in May 2008 is going?

There was a sob story in December 2008 in the Townsville Bulletin about some local "celebrity" who had been burnt by Storm Financial. After reading the item it was apparent she was very happy to be geared to the max in the preceding "good times" of the stockmarket and reaping the dividends and capital growth. Suddenly it was all Storm's fault when she was hit with a call. 
She was a moron, plain and simple. Clearly she did not understand the ramifications of margin loan *she signed* for. The above test would have weeded out this woman and saved nest egg from her own personal greed.

Put the responsibility back onto the individual. 

cheers,


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## Sir Osisofliver (16 January 2009)

Stan 101 said:


> How about a bit more responsibility on the customer? Let's say a permit is required for different levels of trading.
> 
> The customer, before employing a FP must pass a test of basic and fundamental financial terms. Reasonable scenarios of outcomes from gearing should be outlined in a basic way.
> 
> ...




Permits? Mastery of basic concepts?  Governments _allow_ people to gamble with their life savings?  

Ok Stan 101 just look to the left and cough for me will you? I'm just installing your bad decision making finance inhibitor. It'll activate every time you make a wrong decision in regards to your personal finances, and squeeze your testicles in mind numbing agony until you stop thinking about it.  Mind you we still haven't figured out how to stop it working retro-actively so you'd better hope the market doesn't crash or you won't be having sex every again.  

Rather than more control over the morons and idiots Stan 101, wouldn't some education so they aren't so idiotic or moronic be better?

I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.

Sir O


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## Jifromoz (16 January 2009)

Maybe there should be a compulsory course that all invetsors go to prior to them being able to take their hard earned and getting taken to the cleaners. I would suggest local TAFE or High schools in the evening with an overview of the main risks and scams. Financial Planners would not be able to talk to these people until they had their certificates of completion.

I know you can't teach everyone but it could reduce the numbers of uninformed.

A couple of Basic Lessons would be :

- Read ALL documentation closely. If you don't understand....Ask someone. Don't just sign something because the advisor says it's OK.
- Remember the rule - High return generally means high risk
- If you're at retirement age - Be conservative. No high risks

Cheers


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## cuttlefish (16 January 2009)

Sir Osisofliver said:


> I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.
> 
> Sir O




I agree with this and with the suggestions to include basic finance education in schools.


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## Stan 101 (16 January 2009)

Sir Osisofliver said:


> I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.
> 
> Sir O




To show mastery in basic concepts, wouldn't one need some education in the field? 

I certainly agree education is the key, whether it be self education or formalised. I never denied that. So starting in year 8 and assuming curriculum could be organised for next year's school start would have kids entering the financial markets in about a decade give or take. What about the mean time? 

Holding on to my testicles could well be something you'd enjoy but it does seem a little extreme compared to simply having the customer prove they understand the terms of the contracts they are entering.

To stop someone handing over all their money and more, being given a financial plan they do not understand, sign a document stating they understand the previous documents they don't understand may help make a nanny state, but for once I'd be happy to live in one.


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## Sir Osisofliver (16 January 2009)

Still think permits are a bad idea... What about blind bertha, or stupid sam, or immigrant isolese - they don't get to invest because of their mental illness/ disability /color /race /religion 

And then of course more of our hard earned dollars will go towards the government department that, monitors, enforces and otherwise probes us financial planners to ensure we are doing the right thing.

It just opens up a can o' worms the size of skyscrapers don't you think?

Me I think I'd prefer to use my tax dollars on teaching kids something that would actually be *useful*. I would applaud it in fact.

I've done a couple of talks at my daughters school (to a bunch of ten year olds) and had parents and even _teachers_ go "Wow I never knew that" - it's not like I was trying to explain exotic option strategies to them, this was BASIC stuff that ten year olds could understand.

Sir O


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## trading_rookie (16 January 2009)

Hey Sir O,



> What I think Prawn is getting at is a discretionary portfolio management style of account, where the fee for service is calculated as a percentage of the portfolio on a regular basis. These types of fee's are generally paid for in arrears. Very different to a managed fund, but most brokers who offer this style of sevice generally reuire you to have enough dough to make it worth their while.




Well that's exactly what my FA and every plain vanilla managed fund I speak to all state. The MER is calculated on a regular basis be it quarterly or monthly. Yet when one receives their annual super statement for example they find a column titled ‘Other Management Costs’ which is calculated as:

*OMC = portfolio x (MER+Asset Management fee)* 

As an example, OMC=$10K x (0.5% + 1.0%) - that's using the Minister for Superannuation Nick Sherry's research that on average most fund fee's are around 1.5% and is claiming he'd like to see that figure come down to 1% - I like to continually mention that to my FA - it irritates him as it means reduced trailing commissions 

OMC in the example above equals $1500 and this confirms exactly what the PDS state – the fee to manage the fund is deducted before any investing, and contradicts what I'm being told.  

To me this is more double speak from the funds...kinda like nominated beneficiaries...how many ppl know the difference b/w a binding and non-binding one?



> You've been with Macquarie haven't you? You forgot the "What'choo lookin' at pal?" fee. *insert cracking knuckle sounds*




No I consolidated everything into a corporate fund nearly a decade ago…carrot was the ‘up to 4% off entry fee’ being waived on all my previous funds I had accumulated over the years, as well as life/disability insurance incentives.



> Fee's aren't propotional because, return is something that happens in the future. I'd like my money now please so I can eat this month, rather than at some nebulous point in the future with Numbnuts saying, "No sorry I'm not happy with my return of 15%, Bob down the road got 17.5% so I'm not paying your fee.




I’ll hand it to you Sir O, that was explained a lot better than my FA who rattled on about fees being the same whether return is up or down, when in reality that isn’t the case ;-)

You’re correct, returns do happen in the future but it could also be argued managed funds tempt you with their products based on what they project will be future returns of the multiple products they offer – every fund will show you what it’s targets are for 1, 3, and 5 years. 

If that's the case then if I get the return they 'promised'  I pay the fee as promised ;-)  I'll gladly pay more if they return more than they delivery 

If they 'break' their promise, well I pay less ;-)

Kinda like you get all of your bonus when you meet your targets/objectives...fail some and you only get some of your bonus.

It should be clear to you, I'm not a favourite of my FA or superfund 



> Reminds me when I rang up a guy to ask him to sell a stock I'd placed him into at 60 cents and which was now worth over $5.00 and he cheerfully said. "No I sold those already through Commsec, they only charged me $30.00!! So what should I put the money into?"  Well that’s obviously an exterme case ;-)
> Well what you do is bend over....




Hehehehe…that’s gotta be one in a million, surely most of your clients aren’t that ‘cheap’ to pay up their obligatory fees. Heck, if can regularly pick 0.60c stock that will return $5…where do I sign up!?! And I’d be more than happy to send you a few bottles of Bollinger and a couple of cases (or as your Melbournians say – slabs) of  Karlovacko pivo every year ‘round Christmas time ;-)


As for education, an old acquaintance was leaving teaching to make more money in another field and decided that instead of teaching the standard curriculum to his class of 'sweathogs', he'd teach 'em property investment. He said he never had so many attentive, question asking students.


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## Stan 101 (16 January 2009)

Sir Osisofliver said:


> Still think permits are a bad idea... What about blind bertha, or stupid sam, or immigrant isolese - they don't get to invest because of their mental illness/ disability /color /race /religion



Could you elaborate on this, please. If the person has the ability to use the net or communicate with a FP to trade, they could do an online test.



> And then of course more of our hard earned dollars will go towards the government department that, monitors, enforces and otherwise probes us financial planners to ensure we are doing the right thing.




As opposed to now giving social security to people who have now lost everything and need to be housed due to their inability to understand fundamental concepts. Wouldn't all these payments also come from hard earned cash? Again, you've lost me there.



> It just opens up a can o' worms the size of skyscrapers don't you think?




No I don't agree. I would not have posted anything if I agreed with you on this subject. So if doing a half hour standard test online is a bit too complex to organise, how will it be humanly possible to settle on financial curriculum and implementation into nationwide schools?




> Me I think I'd prefer to use my tax dollars on teaching kids something that would actually be *useful*. I would applaud it in fact.



Couldn't agree more. What I don't understand is why you would not want to have people go out of their way to learn the basics themeselves until there is a nationwide curriculum and those taught are well into their working lives. 




> I've done a couple of talks at my daughters school (to a bunch of ten year olds) and had parents and even _teachers_ go "Wow I never knew that" - it's not like I was trying to explain exotic option strategies to them, this was BASIC stuff that ten year olds could understand.




Kudos to you. The kids must have loved it. I remember when the commonwealth bank came around to my primary school and gave a talk on money. Thanks for reminding me.

So you say this stuff you mentioned was simple enough for a 10 year old to comprehend. Clearly then an adult could wander into a bookshop and read a simple book by an author such as Noel Whittaker. The exam could simply prove the adult understood the concepts of gearing, compounding, capital gains and losses etc.


'nuff said by me on this now, though. I've said my piece and am happy for you to disagree.

cheers,


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## trading_rookie (16 January 2009)

I understand that the government is looking into SMF'ers proving they can manage their own super investments by passing a test. It appear the number of ppl not understanding the rules of super, trusts etc and being heavily penalised by the ATO is the reasoning behind it.


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## GumbyLearner (16 January 2009)

Bushman said:


> You wouldn't need a financial planning industry then.
> 
> End of the day, FP is a volume-commission  driven business and some FP's will push products in the good time to generate fees. As you say, greed and fear. FP's are no different.
> 
> Performance-based pay? I'd like to see that.




Yes! I agree!


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## Julia (16 January 2009)

Temjin said:


> - A lot of misunderstanding about the role of a financial planner. It's not just about investment planning and CERTAINLY not about market timing or helping a client to speculate their money to financial freedom. It's more about building a strategy suitable for the client and involve areas like budgeting, debt management, superannuation, pension, risk management (insurances), tax planning and estate planning. Rules for superannuation and pension changes fairly often and it's hard for an ordinary person to keep update with it and try to get the best out of it. Financial planners are there to help you to save money by utilising the best strategies that has NO RELATION to investment returns.



This was my understanding of the role of a FP also.  A good FP can be invaluable in advising on structuring of assets etc if they know what they're talking about.  Perhaps best of all is the accountant who has FP training as well.





Sir Osisofliver said:


> Rather than more control over the morons and idiots Stan 101, wouldn't some education so they aren't so idiotic or moronic be better?
> 
> I think I'd prefer education rather than more nanny state sponsored interference in my consumptiona nd spending patterns.
> 
> Sir O



Isn't there already plenty of education available for anyone who seeks it?
Many people just can't be bothered educating themselves.  I have several friends whose investments have halved over the last year or so.  They steadfastly refused any suggestion of taking some profits when the downturn started, returned unread books I gave them, and now are feeling sorry for themselves.

And re education in the schools on finance, yes, of course it's a great idea.
The problem is, though, that the education system is failing now because teachers and students either have too much in the curriculum or have lost the capacity to work hard.  I don't like the chances of yet another subject being successfully taught.  And first you'd have to educate the teachers!





cuttlefish said:


> I agree with this and with the suggestions to include basic finance education in schools.



As above.  Along with good sex education, guidance on social skills and interpersonal relationships, etc etc.

  Let's not expect parents to do any of this.  Maybe if the public education system were to employ a whole new batch of teachers, themselves educated properly in all the above, and we extended the school day to begin at 7am and finish at 5pm, then we could fit it all in.


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## Temjin (17 January 2009)

Julia said:


> As above.  Along with good sex education, guidance on social skills and interpersonal relationships, etc etc.
> 
> Let's not expect parents to do any of this.  Maybe if the public education system were to employ a whole new batch of teachers, themselves educated properly in all the above, and we extended the school day to begin at 7am and finish at 5pm, then we could fit it all in.




That's exactly why being "street smart" is far more important than "school smart". The person can be the top of the class and achieve honor class in university study, but that does not guarantee "success" (can be anything) in their life if they fail to recognise the importance of the above. (financial education, emotional intelligence, social skills, sex education..maybe, etc) 

Why aren't these taught in high school as standard subjects? Robert Kiyosaki has long recommended school to teach basic financial skills such as budgeting and debt management. But they aren't taught at all and you have school expressed outright rejection on such teaching because of "incompatibility" with their academic studies. Why? I don't know, but if I were to use a conspiracy theory to explain this, it could be that the "people in power" DO NOT want the general population to be financially smart. Being a debt slave is in their own interest. They want to teach them to be a great employee and to act more dependent on their "system". 

Of course, it could be just that the governments fail to act on it and do not place a high enough priority on it. And like Julia said, the teachers aren't properly educated in the first place!


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## Sir Osisofliver (19 January 2009)

trading_rookie said:


> Hey Sir O,
> 
> 
> 
> Snipped stuff about funds..




You're trying to trigger the rant aren't you Rookie?

I loathe and despise managed funds.  Words cannot express my distaste for such an instrument.   Here is an example

A referred client came to me in March 2008.
They had been advised by their previous FA to invest in a wrap account and then through several different managed funds in April 2003.
The amount was 800,000.  remember this figure it's important
During the period of time from April '03 to March '08 the previous FA had taken $92,000 in fee's.

In April 2003 the ALL ORDS was just shy of 2900 points. In December 07 it topped out above 6700 points... an increase of 230+%

If the client had received a _market_ level of performance you would anticipate that the invested figure would be... roughly 1.85 million in December 07 and about 25% less than that when they saw me in March 08.

Now the reason why you pay managed funds fees is for an exposure to a certain asset class or sector of the market, presumably so that you can _outperform the market_, so the minimum expectation for this client should have been roughly 1.85M in December '07, so maybe 1.3M by the time they had come to see me if they were getting a market level of performance.

Care to guess how much the portfolio was worth?   They were $50,000.00 *worse off* worth $750,000.  That's right they had gone BACKWARDS in one of the strongest periods in the australian market I've seen.

GAH hate Managed Funds. 







> No I consolidated everything into a corporate fund nearly a decade ago…carrot was the ‘up to 4% off entry fee’ being waived on all my previous funds I had accumulated over the years, as well as life/disability insurance incentives.



 Die evil zombie managed fund sucking 4% entry fee. Feel my chainsaw!!! :chainsaw: 







> I’ll hand it to you Sir O, that was explained a lot better than my FA who rattled on about fees being the same whether return is up or down, when in reality that isn’t the case ;-)
> 
> You’re correct, returns do happen in the future but it could also be argued managed funds tempt you with their products based on what they project will be future returns of the multiple products they offer – every fund will show you what it’s targets are for 1, 3, and 5 years.



 Yeah but every one of them will say something along the lines of "past performance is no guarantee of future performance, do not rely upon projections as an accurate guide to your performance, we take no legal responsibility blah blah".  It's so they don't get screwed over by lawyers when the market goes pear shaped.







> If that's the case then if I get the return they 'promised'  I pay the fee as promised ;-)  I'll gladly pay more if they return more than they delivery
> 
> If they 'break' their promise, well I pay less ;-)
> 
> Kinda like you get all of your bonus when you meet your targets/objectives...fail some and you only get some of your bonus.



 Sorry Rookie, performanced based fee's also bring in a huge range of factors that we can't plan for. 9/11 eg. What happens when your FA is walking the kokoda trail when the next bomb goes off? Should he be penalized because a terrorist decides to blow himself to bit's?   - especially when he's gotta live on something while he builds up his business.  Client bases don't appear overnight. 







> It should be clear to you, I'm not a favourite of my FA or superfund



 So change 







> Hehehehe…that’s gotta be one in a million, surely most of your clients aren’t that ‘cheap’ to pay up their obligatory fees. Heck, if can regularly pick 0.60c stock that will return $5…where do I sign up!?! And I’d be more than happy to send you a few bottles of Bollinger and a couple of cases (or as your Melbournians say – slabs) of  Karlovacko pivo every year ‘round Christmas time ;-)



 Rookie, I had a VERY rich man (my definition of very rich is half a bill) who sent me something by express post and when it didn't arrive the next day (as it is guaranteed to do between capital cities) he made me POST the envelope back to him so he could take it to the post office and get three free envelopes for not arriving the next day. Hand on my heart..true story.  Some rich people will screw you over....and enjoy doing it to.







> As for education, an old acquaintance was leaving teaching to make more money in another field and decided that instead of teaching the standard curriculum to his class of 'sweathogs', he'd teach 'em property investment. He said he never had so many attentive, question asking students.




I think that's because even kids get the concept that having _MORE_ money by being smart with it is a good thing.

Sir O


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## Sir Osisofliver (19 January 2009)

Julia said:


> Isn't there already plenty of education available for anyone who seeks it?
> Many people just can't be bothered educating themselves.  I have several friends whose investments have halved over the last year or so.  They steadfastly refused any suggestion of taking some profits when the downturn started, returned unread books I gave them, and now are feeling sorry for themselves.
> 
> And re education in the schools on finance, yes, of course it's a great idea.
> The problem is, though, that the education system is failing now because teachers and students either have too much in the curriculum or have lost the capacity to work hard.  I don't like the chances of yet another subject being successfully taught.  And first you'd have to educate the teachers!



 No need to tell me Julia, my wife is a maths teacher. She complains to me ALL THE TIME about how the curriculum is being dumbed down for the kids so they don't have emotional scars from failing. She's not ALLOWED to fail anyone...it's ridiculous.  She's a MATHS teacher and she's been told that so long as a student *attempts* a question even if it's totally incorrect - they get at least part of a mark.

Being a parent I cringe when I think of my very gifted daughter being held back by the mentality of the education department.  When she started school she was pushed forwards two grades - straight into grade 2 - and then forwarded again because she was bored and her teacher recommended it - because she could read, write, do maths, socialize, play two muscial instruments etc etc. 

I suppose like educating anyone...the things that stay with you the longest is the lessons that were begun early on. 







> Let's not expect parents to do any of this.  Maybe if the public education system were to employ a whole new batch of teachers, themselves educated properly in all the above, and we extended the school day to begin at 7am and finish at 5pm, then we could fit it all in.




Parents can't teach what they don't know. My wife and I can teach our young'uns lots of skills, but I couldn't build a table if my life depended upon it.

Sir O


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## Bushman (19 January 2009)

Sir Osisofliver said:


> GAH hate Managed Funds.  Die evil zombie managed fund sucking 4% entry fee. Feel my chainsaw!!! :chainsaw:
> 
> Sir O




Err the entry fee is usually passed on to the Financial Planner as his/her commision?  Do you hate the planner too? 

As for your example, there are numerous shares worth plenty 10-years ago that are now worth zilch (Centro anyone?). That's investing - sometimes you lose. 

As with everything (including your Managed Fund RE), diversification is the key. 

Not defending Managed Funds per se - some are hacks, some are good. And yes, for the fees they charge, they should be outperforming their benchmark. Otherwise why use one?


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## Sir Osisofliver (20 January 2009)

Bushman said:


> Err the entry fee is usually passed on to the Financial Planner as his/her commision?  Do you hate the planner too?



That's an interesting question Bushman. I hate the instrument and the culture it seems to have created in the financial planning industry. Client rocks up with a wad of cash, do some simple structure, whack them in to a managed fund, taking 4% off the top and a trail, forget about client and move on to the next guy with a wad of cash.

The managed fund seems to have created a culture that _encourages_ brokers and planners to push volume and push their incomes higher.  It's greed pure and simple. Planning businesses have learnt that when you push volume in this way you can take 40-50% of what you planner can push through and therefore encourages them to sell this crap. FFS this is a *service* industry, and the system is designed to make the "service" that most planners provide a sales job. I really don't want to be compared to a used car salesman - or told I'm a worthless parasite that preys on the uneducated and easily led.

So when a planner who is forced into selling a certain product because of the company that they work for.  I feel pity for them - because they are just trying to make a living. When someone does it and they know that what they are doing is damaging and don't give a rats?  I'm not kindly disposed towards them.



> As for your example, there are numerous shares worth plenty 10-years ago that are now worth zilch (Centro anyone?). That's investing - sometimes you lose.



 Yeah but when the client has a $100k in Basis yield fund (that specialises in Securitised lending product transactions) as their FA you'd REALLY think he'd be professional enough to at least _try_ and get them out before the fund went into liquidation right? And if the average morningstar rating of the funds you've placed your client into is 1 star... Well perhaps you should consider moving the funds around rather than forgetting they exist and sitting back taking your trail like nothing is wrong. {end rant} 







> As with everything (including your Managed Fund RE), diversification is the key.
> 
> Not defending Managed Funds per se - some are hacks, some are good. And yes, for the fees they charge, they should be outperforming their benchmark. Otherwise why use one?




So Bushman - Here's your challenge should you choose to accept it.  Go find me a fund (I'll limit you to the Australian Market) and if you can find one that has consistantly outperformed the market after fees for 20 years (that isn't a freaking ponzi scheme like Madoff), I will deposit $50 to the charity of your choice, scan the receipt and post it here.  Managed Funds SHOULD outperform the market...problem is...they don't, for a whole host of reasons.  I'm willing to back that statement up with cash.

P.S. If you do decide to take up the offer - let us also know how many different funds you looked through before you gave up in disgust.


Sir O


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## Julia (20 January 2009)

Sir O, could you comment on FP's professional indemnity insurance?

Re Storm Financial, would this be likely to be enough to cover clients' losses?

If Storm's advice is considered negligent, would that be an 'out' for the insurer, or is negligence considered an OK reason to pay out?


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## Sir Osisofliver (21 January 2009)

Julia said:


> Sir O, could you comment on FP's professional indemnity insurance?
> 
> Re Storm Financial, would this be likely to be enough to cover clients' losses?
> 
> If Storm's advice is considered negligent, would that be an 'out' for the insurer, or is negligence considered an OK reason to pay out?




Julia I've largely stayed away from the Storm thread because I really don't think that the victims have much chance in seeing any money from litigation. If it boils down to what has been written down, the Storm FA's would have documentation to say the client agrees with the strategy they implemented.  For those that relied upon what was _said_ by their advisor rather than the paper in front of them it boils down to a he said she said, which is notoriously difficult to win against. 

For Storms advice (or more correctly the advice of the FA employed by Storm) - to be considered negligent would require something a bit more blatant and documented to be effective - (which is why class actions tend to work better in these circumstances because it's no longer he said she said, it's he said and this whole group of people disagree). But should their advice be considered negligent I would _think_ that it would qualify to meet PI insurance criteria.

Sometimes Professional Indemnity insurance is paid for by the firm, sometimes by the individual FA.  The size of the payout figure can vary dramatically depending upon the insurances paid.  It's also going to depend on how many clients that the FA has and what the average loss per client is, if 50 clients of one FA front up all with say $200,000 in losses, win and want paying out by the Professional Indemnity insurance, that's $10m. How much insurance do you expect the advisers to have?

Sir O


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## Judd (21 January 2009)

I can understand the dislike for managed funds, while admitting that we now only invest outside of superannuation through Listed Investment Companies or EFT's.  No SMSF by the way; now with a public offer fund to remove the temptation which resulted in the outcome as described in the following paragraph.

We used to use unlisted managed funds on the advice of the FP we then had.  However, it was when I called them in to discharge a margin loan which I blew up (all my own fault so I suppose I am not a victim.  Dang it, how I want some of that victim angst), I realised how much of a con that they actually were.

Started off by 24 months of regular investments and reinvesting distributions.  All the reports showed that they were returning say 14% to 15% per year which looked reasonably good.  However, when redeemed after a 6 year period all they had returned was about $1,000 in gains each.  The only reason the 14% - 15% looked good was because of the reinvestment of distributions otherwise their unit price from the beginning to the end was virtually static.  Thing which really p*ssed us off is that we paid tax on those reinvested distributions so the real performance after tax was trash.  And for that they were taking 1.75% to 2% in fees.

And, yes, I agree that FP's are no over regulated.  Funny thing is that there is a big flaw in the legislation in my opinion.  While an FP is required to provide a statement of advice, there is nothing in the legislation which requires me to accept it.  Be interesting to see what the lawyers would come up with if I signed a waiver absolving the FP of any responsibility for the outcomes of my decisions - and they are always my decisions as an FP can only provide advice or recommendations - just so I can use the FP, for a reasonable fee of course, as a mentor to bounce investment ideas around.


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## Bushman (21 January 2009)

Sir Osisofliver said:


> So Bushman - Here's your challenge should you choose to accept it.  Go find me a fund (I'll limit you to the Australian Market) and if you can find one that has consistantly outperformed the market after fees for 20 years (that isn't a freaking ponzi scheme like Madoff), I will deposit $50 to the charity of your choice, scan the receipt and post it here.  Managed Funds SHOULD outperform the market...problem is...they don't, for a whole host of reasons.  I'm willing to back that statement up with cash.
> 
> P.S. If you do decide to take up the offer - let us also know how many different funds you looked through before you gave up in disgust.
> 
> ...





A worthy challenge Sir O ... I am assuming you are looking at performance after-fees (tongue-in-cheek)? That is my bug bear - the reporting of performance before fees? What's with that. Also, don't forget to add on those wrap fees. Anyway an aside.  

I would not expect the population of Funds that have been around for twenty-years would be that large. But the time needed for this task might be beyond me given I still cling to a job in this parlous economy. I will keep my eyes peeled, however, and report on an exception basis.


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## Sir Osisofliver (21 January 2009)

Sir Osisofliver said:


> So Bushman - Here's your challenge should you choose to accept it.  Go find me a fund (I'll limit you to the Australian Market) and if you can find one that has consistantly outperformed the market *after fees *for 20 years (that isn't a freaking ponzi scheme like Madoff), I will deposit $50 to the charity of your choice, scan the receipt and post it here.  Managed Funds SHOULD outperform the market...problem is...they don't, for a whole host of reasons.  I'm willing to back that statement up with cash.
> 
> P.S. If you do decide to take up the offer - let us also know how many different funds you looked through before you gave up in disgust.
> 
> ...




Yup Bushman - AFTER FEES - I've got a nice new crisp $50.00 stuck to my whiteboard next to the desk just waiting for the charity of your choice if you can find it.

Sir O


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## Buffy99 (21 January 2009)

Try the following Link:


http://www.primevalue.com.au/factsheets/Growth Fund.pdf


Not 20 years, but they have managed it over the past 10 years.


Cheers


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## Sir Osisofliver (21 January 2009)

Nice Buffy...lets have a look... hey nice flashy marketing sheet.. what can we see?

Hmm Ok first thing I notice is that the figures are all given as Class A direct units - no calculation is given for class B units. With a minimum of $40,000 initial investment for a class A unit, most FA's would be using some kind of wrap account to gain access and be investing in class b units which attract both entry fee's of up to 3%, exit fee's of 2% (if within 12 months) (yes that's right they want to _encourage you to be a long term investor_.)  I'm not even going to bother calculating this one out, if you have 3% of your initial investment taken as an entry fee, and compound this negativity over 20 years, adding additional fees along the way for the wrap product..... there is no way you are doing better than market.  Over that period of time you are looking at huge negative compounding figures. If I can be bothered later I'll show you but I have stuff to do this arvo so don't have a huge amount of time to do an assessment.


Ok so lets say you can stump up the $40k necessary to invest directly and not have to go through a FA so you are not paying an entry fee, and agree to have your returns re-invested in the fund.

Alright I'll do a compartive - but not now as I have stuff to do and can't stick around the forum all day.

Buffy would you do me a favour and find a link for the full PDS please?

Sir O


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## Julia (21 January 2009)

Sir Osisofliver said:


> Sometimes Professional Indemnity insurance is paid for by the firm, sometimes by the individual FA.  The size of the payout figure can vary dramatically depending upon the insurances paid.  It's also going to depend on how many clients that the FA has and what the average loss per client is, if 50 clients of one FA front up all with say $200,000 in losses, win and want paying out by the Professional Indemnity insurance, that's $10m. How much insurance do you expect the advisers to have?
> 
> Sir O



I had no expectations, Sir O.  Don't know anything about it which is why I asked.   Your response is much appreciated.  Also explains the lawyers' focus on the banks.


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## Buffy99 (21 January 2009)

No problem,


http://www.primevalue.com.au/documents/Prime_Value_PDS_2007.pdf


An option that is better than most.

Happy to hold cash if not comfortable with valuations.


Cheers.


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## Sir Osisofliver (23 January 2009)

Thank-you Buffy,

I know I said I'd do a comparative (and I will) - I want my $50.00 to stay on my wall, unfortunately I've got a tonne of work to do by the end of the month and with a public holiday, one staff on holiday, and another getting surgery for a self inflicted injury - I just can't spare the time at present.


I'll come to this next month when I'm not quite so under the pump.

Just in case I can't be stuffed doing the comparative however - what's your charity?

Sir O


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## Trevor_S (23 January 2009)

There is already too much legislation.  While I am not in the FP industry, I am in business that keeps getting swamped by more and more legislation and I have had enough and am slowly selling part of it off and getting out.

More legislation is inevitable but will only add to the problem not help.  No amount of legislation will protect against shoddy operators in any industry nor against the gullible, greedy or stupid.

http://www.aifa.com.au/

If I was to use an FP, it would be a hourly rate, much the same as my doctor or dentist etc. 

http://travismorien.com/invest_FAQ/content/view/240/70/


> If, like me, you have concluded that the financial planning industry is mostly populated by salesmen that charge too much


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## Dezza (23 January 2009)

I was a Paraplanner at one of the Big 4 banks, and the amount of courses and accreditations we had to do was phenomenal. Not only that, when I first started, Statement of Advices (SoAs) use to be about 50 pages max, including appendices and product profiles. By the time I left late last year, they were up to 80 pages on average, with some more complex SoAs reaching 120+ pages.

Although ASIC released a sample SoA to outline what was needed and required by AFSL holders, the Business itself was scared of being sued for inappropriate advice if not all issues were addressed in the document. They were so scared that the "Advantages and Disadvantages" of implementing the advice were repeated 3 times in the SoA just to be sure it held up in Court. 

I'm not saying it's a bad thing as it has saved their Customer Relations Department (i.e. complaints department) a bit of time and money, and also gave me a decent paying job, but sometimes we were just wondering how far it would have to go? 

I also use to sit in the presentations to the clients as well with the FP, and 8 out of 10 times the FP would flick the page to the Fees section to show how much they're charging, and then flick over to the investment strategy flowchart outlining where their money is going, and that'll be it. The client would then sign away and probably file away the SoA until a time when their investments have soured and try to find a reason why.


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