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

[trading_rookie]

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.

 

[Stan 101]

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,

 

[trading_rookie]

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.

 

[GumbyLearner]

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!

 

[Julia]

- 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.

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!

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.

 

[Temjin]

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!

 

[Sir Osisofliver]

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

 

[Sir Osisofliver]

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

 

[Bushman]

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?

 

[Sir Osisofliver]

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

 

[Julia]

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?

 

[Sir Osisofliver]

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

 

[Judd]

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.

 

[Bushman]

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

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.

 

[Sir Osisofliver]

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

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

 

[Buffy99]

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

 

[Sir Osisofliver]

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

 

[Julia]

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.

 

[Buffy99]

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.

 

[Sir Osisofliver]

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