This is an extract from my book, The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Low to Medium Income.
You might be wondering, why write a whole book about finance if you’re just going to tell me to see a financial advisor at the end anyway? Couldn’t I have skipped the book and let the professional tell me what to do?
You see, there are all sorts of problems with this industry. Consider what happened the three times I’ve received professional financial advice in my life:
On the most recent occasion the advice was good. The advisor explained how my investments would be taxed in my case, being a foreign resident, and this helped to confirm that the path I was pursuing was appropriate for my situation. However, this advisor didn’t bother recommending his usual products to me as he realized from our conversation that I was canny enough to know that my existing investments were of better quality. He wasn’t indexing, you see.
On the previous occasion, the advice I received was middling. I got some good tips about how to manage currency risk through holding international shares but also was encouraged to consider, yup, another one of those danged blessed high-fee managed funds.
The very first time I received advice it was poor indeed. The advisor recommended against paying off my student loans early, even though I was being offered a 10% discount for doing so. That is called ‘free money’ and you should seize any such opportunities – there are no other investments that offer a guaranteed 10% return! He also discouraged me from putting extra funds into superannuation, even though at that lower income level I would have been getting a matching government co-contribution for doing so. Again, never leave free money on the table.
Instead, the advisor recommended margin loans (remember, that means geared investments, or borrowing to buy shares) that would have caused me to lose everything had the stock market crashed. And this was in . . . 2006, two years before the market did just that.
If I had followed his advice I would have lost everything, and perhaps ended up in debt. My cautious nature saved me. I didn’t know much about investing at the time, but I was just clever enough to realize I didn’t really understand what he was talking about. I did some independent research and prevaricated long enough to end up taking a different path. He also recommended disability insurance that I realized I already had through a cheaper provider, and he ought to have known that.
Unfortunately, he was probably recommending these inappropriate products to me because they were in his interests, not in mine. I assume he was getting some sort of commission for each one he sold, regardless of whether they suited the customer or not.
Reading this book will empower you to get the best advice, to use that advice properly, and to recognize when someone’s taking you for a ride.
These are the common problems you are likely to encounter:
- Some advisors get a commission (basically a kickback) for referring investors to specific funds. That was probably why the advisor described above was recommending inappropriate margin loans. For example, if your advisor recommends that you put $100,000 into the high-fee, hypothetical Adamantine Investment Fund, he might score a 1% commission if you go ahead with it. That’s $1,000. Worse, this might be a trailing commission. That means he gets 1% for every year that you’re in the fund. Five years later you may have increased your AIF investment to $200,000 and that advisor from ages ago who you’ve totally forgotten about is still helping himself to $2,000 every year!
That is unfair, it is overly expensive and worst of all, it provides an incentive for your advisor to recommend AIF when another option might be better for your individual circumstances. In other words, he might consciously or unconsciously put his own financial interests ahead of your own. That’s what such incentives do. Why else would they exist?
In some cases you can cease the commission after a certain time, but many people are too financially illiterate to even realize that they are still paying.
At the time of writing, such commissions are legal in some countries and illegal in others. Even if they have been prohibited, you might run into the following problem:
- Some advisors also get commissions for referring you to specific types of insurance. Perhaps this is why my first advisor was recommending insurance that I already had. The problem is the same as above – a commission provides the advisor with an incentive to recommend insurance that you don’t need or which is inferior to what you’ve already got. Advisors sometimes also get commissions if you change policies, so they encourage you to ‘churn’ through different policies when you’d be better off sticking with the same one.
- Advisors, especially free ones who work for large institutions like banks or mutual funds, are often expected to recommend products offered by their own institution, even if these are not in your best interests.[i] For example, XYZ Bank might expect their advisors to offer customers the most appropriate product offered by . . . XYZ Bank (or its subsidiaries that go by other names). In many cases this advice is okay, but may not be the very best advice you could receive. It is likely to only be the most appropriate out of the institution’s own products. Another, outside product might be better for your circumstances, especially if it offers lower fees. Independent advisors (i.e. ones not working for a big bank or other organization) who are free to recommend the services of any institution can often find you a better deal.
- This industry also contains some downright charlatans. Of these, there are two main categories. The first are unlicensed con artists who are trying to pinch your money. The second are licensed but unscrupulous providers, some of whom work for big institutions. For example, there was a scandal at a major Australian bank some time back with advisors recommending inappropriately high-risk products to customers, and even falsifying documents to make it happen in some cases. This and other rumblings eventually led to a Royal Commission which uncovered all sorts of wrongdoing by the big banks.[ii]
How to Proceed
I’ve hopefully convinced you that it is not a good idea to wander into the office of your nearest financial advisor, turn your brain off and do whatever they say, any more than you would tell a new barber, ‘Do whatever you like!’ But now you may instead be thinking, financial planners are scary! They’ll take all my money! I’d better stay as far away from them as possible!
Relax. Some financial advisors are excellent, most are satisfactory and only a few are downright dodgy. Here is a step-by-step guide for finding a good advisor and for getting the most from their services:
End of sample.
To learn more about reaching financial freedom, buy my book:
Also available on many other platforms.
Also available on many other platforms.