Financial Advisors? Why?

[matty2.0]

Okay ... who here uses financial advisors to manage their wealth??
In light of recent events e.g. Storm Financial ... can you please enlighten me on why?
No disrespect, but I have never understood why you would actually need someone to tell you where to put your money with the wealth of information out there.
Now considering that I work in the industry, I may be quite knowledgeable myself about the markets and investing compared to your average teacher, dentist, or soccer mum ... however you don't really need one ... honestly.

How the industry works
Do you guys know what they actually do? All they do is try and get access to your hard earned money, and then distribute it to fund managers for a fee ... sort of like a middle-man. With the conflict of interest at stake, I don't know how they can actually really make money for you.

Sometimes the advice and distribution they perform have ulterior motives to it because they get paid a fee (or kick back) by certain asset managers for distributing money to them, even though it's bad for you financially long term. For example, Storm Financial - they utilized gearing on your assets (in this case the mortgage) to promote/market savings via tax breaks. Often the leverage that some of these advisors ask you to take on is insane!!!
Me personally I don't think people should be leveraging beyond 20% of their net worth.

Managing your own money
If you want to manage your own money it's simple:
1. if you know something about the markets then do your own research and invest accordingly with a broker
2. if you don't know anything, or have no time, you should just put it in an index fund that has shown to perform quite well over the past and don't touch it - set and forget - a bit like your super. Index funds are very low cost and effective - like less than 1% p.a in cost.
For example the S&P 500 index - it has produced returns over the long term (10-20 years) of about 8-11%. Most index funds do better than 50-90% of fund managers out there ... and if you take into account all the fees that fund managers, financial advisors, and fund of fund advisors charge (probably like 3-5% altogether), then index funds will probably out perform 90% of the sincere "helper" strategy promoted by these advisors.

Other forms of advice
If you need tax and estate planning advice, then you should just see an accountant or a lawyer. No need for financial advisor.

So please enlighten me ... Why do you or any body use financial advisors? Is there any advantage at all?

 

[Julia]

Matty, we already have multiple threads about financial advisers, and/or the industry in general.
Maybe a moderator could merge this with one of those threads?

I'd say your message is 'preaching to the converted' for 95% of members on this site.

For the other 5%, maybe consider that financial advisers are primarily sales people and evaluate their suggestions accordingly. Always ask them how they get paid.

 

[Ato]

I dont use one, but I'm very new to all this. I havent had the time nor the inclination to learn about any of it until now. I think for many people the problem is that there is too much information out there and it becomes overwhelming. I've been doing my own study & research for about 4 months now, and I'm still feeling like I know hardly anything. Part of the problem with the glut of info out there is that it's often contradictory, so it's hard to know what to believe. For example, my current interest is in following the debate (in the US in particular) about what is likely to occur with all this QE - inflation or deflation. (Personally I'm on the side of inflation.)

Anyway, that might be one reason people use them.

A question for you, from this newb. How do you set up an index fund, as you've stated? And do the index funds really provide enough to offset inflation? I expect they go up & down, with those fluctuations and the rate, is it enough to deal with inflation? (Obviously index funds arent going to make you rich.)

 

[trainspotter]

Matty2.0. great riposte my man! Any advice is good advice if it works out. Would I trust my financial adviser to look after my life insurance and TPD. YES. And yes I would trust my financial adviser in regards to tax affairs in regards to wills etc (also would get my accountant to check) and generally they will offer the information to you for FREE. They get paid once you place your money with them. You don't have to do anything they tell you. Just listen. Many people out there are not capable at handling their own money and place it with FA's who will do their best to maximise the return. Usually they get paid more if the investment excels. Well, the way my stuff is geared it does. Better for me and him. Win win situtation.

 

[awg]

Okay ... who here uses financial advisors to manage their wealth??
I:

Dont use them anymore

Matty2.0,

please estimate the amount of hours of information gathering you have done b4 feeling you knew what you are doing regarding financial management.

time would be an issue I think, and inclination, some people dont even mow their own lawn, even though they probably need the exercise!

 

[Julia]

Matty2.0. great riposte my man! Any advice is good advice if it works out. Would I trust my financial adviser to look after my life insurance and TPD. YES. And yes I would trust my financial adviser in regards to tax affairs in regards to wills etc (also would get my accountant to check) and generally they will offer the information to you for FREE.

Only because they're getting paid by whomever they persuade you to place your business with!

They get paid once you place your money with them. You don't have to do anything they tell you. Just listen. Many people out there are not capable at handling their own money and place it with FA's who will do their best to maximise the return.

Sure they do. Maximise the return to themselves, that is.
A large amount of the problem with financial advisers (epitomised by Storm debacle) is that they will place your funds in whatever vehicle provides them with the most commission.

I'd suggest it's a major mistake to assume that a financial adviser is putting your interests ahead of his own. There will be exceptions, of course.

There's a strong impetus around at present for trail commissions and entry commissions to be abolished in favour of upfront fees. I doubt Joe Public will be too keen on paying a few grand up front though, particularly if the quality of the advice is as poor as it has been in so many instances thus far.

 

[trainspotter]

Those days are gone Julia. Nearly all of the FA's I deal with have to disclose their upfront fees, trailing comissions and percentage bonuses on a document which you will sign and get a copy of. They also have to provide you with comparisons of the other companies they represent. Not just a Prudential package. Also have to perform a wealth portfolio recommendation with a 30 day cooling off period. A strategic analysis as to WHY they are recommending these products and on what BASIS they arrived at these conclusions is usual as well. Something to do with the prefessional indemnity insurance requirements, or so I am told.

The ones I deal with are generally reputable guys that I have a hit of golf with as well. Which helps.

 

[Julia]

Those days are gone Julia. Nearly all of the FA's I deal with have to disclose their upfront fees, trailing comissions and percentage bonuses on a document which you will sign and get a copy of. They also have to provide you with comparisons of the other companies they represent. Not just a Prudential package. Also have to perform a wealth portfolio recommendation with a 30 day cooling off period. A strategic analysis as to WHY they are recommending these products and on what BASIS they arrived at these conclusions is usual as well. Something to do with the prefessional indemnity insurance requirements, or so I am told.

Well, I'm sure that wasn't the experience of the Stormers!

The ones I deal with are generally reputable guys that I have a hit of golf with as well. Which helps.

Obviously a personal relationship makes a difference. They're going to be a tad uncomfortable on the golf course with you if your investments have gone belly up. Glad to know you're happy.

 

[Mr J]

A few reasons:

1. People assume FAs know what they're doing.
2. People can't be bothered, feel they don't have the time, or assume it is beyond them to be able to manage it themselves.
3. Pressure from other occupations, such as banks or accounts referring people to FAs.
4. The general financial industry scam of encouraging other people to manage your money, be it banks, FAs, brokers, hedge funds, mutual funds etc. I say it is a scam because the vast majority of these are just happy to pick up fees/commissions, but they're more than happy to imply that it is something you should leave to the 'professionals'.

 

[Buckeroo]

Matty2.0. great riposte my man! Any advice is good advice if it works out. Would I trust my financial adviser to look after my life insurance and TPD. YES. And yes I would trust my financial adviser in regards to tax affairs in regards to wills etc (also would get my accountant to check) and generally they will offer the information to you for FREE. They get paid once you place your money with them. You don't have to do anything they tell you. Just listen. Many people out there are not capable at handling their own money and place it with FA's who will do their best to maximise the return. Usually they get paid more if the investment excels. Well, the way my stuff is geared it does. Better for me and him. Win win situtation.

Looks like your part of the 5% Transpotter

I don't use them myself but as you said, I do know people that use them because they don't have the confidence themselves. I do know also some of these people got an absolute pissling last year - they have since moved away from advisers.

Trouble with advisers, even if they see storm clouds coming, they can't do anything about it, as it means divesting money from the hand that feeds them.

Cheers

 

[trainspotter]

It never fails to surprise me at peoples greed. Despite all the warnings in regards to ridiculous % returns that are not possible people still flush their hard earned $$$ down the sh!tshute. Rule number 1 :- If it looks too good to be true ... THEN IT IS. End of discussion. If some FA promised to eat razoblades and excrete cucumbers I would be a very wary person indeed. If he calmly explained that the logic behind his recommendations is based on 100 years or so of company research then I would probably listen. YOU decide in the end whether or not to place your money with them. No one else. Chasing high yields is bordering on the movie "Wall Street" and like Gordon Gekko said "It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses."

 

[matty2.0]

A question for you, from this newb. How do you set up an index fund, as you've stated? And do the index funds really provide enough to offset inflation? I expect they go up & down, with those fluctuations and the rate, is it enough to deal with inflation? (Obviously index funds arent going to make you rich.)

An index fund is already set up by an index fund provider and all you do is just buy-in.
So for example, Vanguard, who specialize in index funds they have an Australian Equities index fund here, which mirrors the performance of the ASX300:
http://www.vanguard.com.au/personal_investors/investment/managed-funds-up-to-$500000/australian-shares/en/australian-shares.cfm

So the only thing you have to worry about is whether the market is up or down, and whether the economy is good/bad. No need to be an expert in anything at all, or even reading up on anything.
The cost is 0.75% p.a., which is relatively low. Over 50K and you're looking at a total cost of less than 0.50% p.a. in fees to manage your money ... which is really cost-effective.
Now considering you will be holding this over the long term and forgetting about it, you don't really have to worry about buy/sell spreads or taxes until you sell out and realize your capital gains.
Over the past 10 years the Vanguard Aussie-index fund has performed 6.46% p.a. Obviously the last year has been a shocker which has caused performance to fall a bit, but prior to that I think performance was like 10-13% p.a.
If you've developed any intelligence about the market at all then now is probably a good time to buy in to the index, considering how low it is, and conversely if you were smart you probably could have sold prior to the credit crunch and just hold cash and wait for the depressed prices we are seeing now ... or you could have rolled it into a money market or cash like index fund.

Vanguard have other index funds too like International Equities index funds, or property index funds.
Vanguard are not the only provider of index funds, you can also try ETFs and such from other providers like Barclays or State Street.
But the moral of the story? Getting good performance on your money is not as expensive as it seems and is NOT hard as well.

No time-consuming tasks required at all really.

 

[Mr J]

Despite all the warnings in regards to ridiculous % returns that are not possible people still flush their hard earned $$$ down the sh!tshute. Rule number 1 :- If it looks too good to be true ... THEN IT IS. End of discussion.

It's not the end of discussion, because there are exceptions to that rule. Seemingly ridiculous returns are possible, it's just unlikely that the person offering it is one of those that can actually achieve it.

No time-consuming tasks required at all really.

People assume it is time-consuming. I had somebody suggest to me that it would take too much time, despite me saying that they could spend just an hour or less a week on it if they wished. They wouldn't have any of it.

 

[trainspotter]

A few reasons:

1. People assume FAs know what they're doing.
2. People can't be bothered, feel they don't have the time, or assume it is beyond them to be able to manage it themselves.
3. Pressure from other occupations, such as banks or accounts referring people to FAs.
4. The general financial industry scam of encouraging other people to manage your money, be it banks, FAs, brokers, hedge funds, mutual funds etc. I say it is a scam because the vast majority of these are just happy to pick up fees/commissions, but they're more than happy to imply that it is something you should leave to the 'professionals'.

Too true Mr J. I note the same "professionals" carry profesional indemnity insurance. My advice is to test it.

 

[trainspotter]

It's not the end of discussion, because there are exceptions to that rule. Seemingly ridiculous returns are possible, it's just unlikely that the person offering it is one of those that can actually achieve it.

If the rate of returns were that good would you be sharing it? I think not. Those who can't do, teach. In my opinion that is.

 

[Mr J]

I would as long as it was more profitable for me to do so. I imagine people who achieve these rarely need to advertise though.

Those who can't do, teach. In my opinion that is

I would say 'sell' rather than 'teach' .

 

[MRC & Co]

hedge funds. I say it is a scam because the vast majority of these are just happy to pick up fees/commissions, but they're more than happy to imply that it is something you should leave to the 'professionals'.

Big call. May want to check out Barrons list for last financial year:

http://online.wsj.com/public/resources/documents/BA_HF100_090511.pdf

Far superior returns in comparison to the index.

Add to that, anybody who thinks an equity index tracker is going to perform anywhere near it's long-term average over the next decade or two (not to mention, thinks it entails a lower risk profile in comparison to a good hedge fund), seriously needs to do some more research.

 

[Ato]

People assume it is time-consuming. I had somebody suggest to me that it would take too much time, despite me saying that they could spend just an hour or less a week on it if they wished. They wouldn't have any of it.

It is time consuming for us newbs though, that's the thing.

Using myself as the example. I have begun to get interested in this investment stuff recently, and decided I'd like to educate myself about it before making any move. I've been doing what I can to research various things for the last 4 months, and I still had only the smallest idea of what an index fund was, and no idea how to get involved in one (hence I asked Matty above).

While it might only take an hour once you have everything setup, it's getting setup that takes the time, at least for me. I want to know exactly what is going on with what I've chosen, etc. If I dont understand it, and havent done the research first, then I end up having to follow someone's advice.

More concretely, I'm interested in ETFs, particularly gold, oil & commodities like water (or water company stocks). Thus far I've spent about one month doing research on various issues around these, and I'm still a long way off making any final decision to put money down. I want to know exactly what I'm doing. That's where the time comes into play. Once I have everything set, I'm sure the time required would be alot less.

*Caveat: I may just not be very bright

 

[matty2.0]

Big call. May want to check out Barrons list for last financial year:

http://online.wsj.com/public/resources/documents/BA_HF100_090511.pdf

Far superior returns in comparison to the index.

Add to that, anybody who thinks an equity index tracker is going to perform anywhere near it's long-term average over the next decade or two (not to mention, thinks it entails a lower risk profile in comparison to a good hedge fund), seriously needs to do some more research.

Does Barron's have a worst 100 Hedge Funds list?
I'm sure they would be far "superior" too ... wouldn't they? Some have performed 100 times better.
Maybe they did so well that they closed up shop ... lol
The best fund would probably be the Madoff fund ... so aptly called because they "made-off" with your money. =D
Another great fund would have been one of those Bear Stearns funds in late 2008, with those exotic names to confuse you; "High-Grade Structured Credit Strategies Fund" or whatever ... lol

You take the worst performers in the industry and add them to the top performers and you'll find that they'll cancel each other out to the extent that the industry, as a whole, adds almost no value at all.

Sure, an Aussie index tracker might not perform as well as it has in the past, but that shouldn't limit you. You could try emerging market index trackers or other areas that have long term growth potential. In any event, you don't need to pay exorborant fees to get good returns, which is my main point.

 

[MRC & Co]

Does Barron's have a worst 100 Hedge Funds list?
I'm sure they would be far "superior" too ... wouldn't they? Some have performed 100 times better.
Maybe they did so well that they closed up shop ... lol
The best fund would probably be the Madoff fund.

Sure, an Aussie index tracker might not perform as well as it has in the past, but that shouldn't limit you. You could try emerging market index trackers or other areas that have long term growth potential. In any event, you don't need to pay exorborant fees to get good returns, which is my main point.

That's why you look at fund history and understand how they trade and don't just jump into anyone. Or how about the Barclays Hedge Fund Average as shown as the bottom of that PDF link I already provided?

Whatever index you choose to track, you still have high risk and extremelly limited knowledge in comparison to a good hedge fund.