Friday Finance: my own experience with dodgy financial advice

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This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Step 9: Get Advice

No man is so wise that he can afford to wholly ignore the advice of others.

James Lendall Basford

By now you should have approximately worked out where you’d like to invest your money for the long term, based on your individual preferences and risk profile.  You’ll need to consult a financial advisor to ensure that the plan best suits your individual circumstances.  Advisors sometimes have access to financial products that you can’t access as an individual, and they can guide you on tax and other issues.  Most importantly, a good advisor will be much more expert than I am.  They have actual qualifications, you see.  So get advice.

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?

No. 

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.

Here there be tygers!

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.

Also available on many other platforms.

14 comments

  1. lemmiwinks · September 17

    I’m in a managed fund, though (somewhat embarrassingly) I confess I’m not sure what the fee structure is like. I recall paying attention at the start and that it’s a sliding scale, however it took me so long to scrape together the minimum buy in and I’m still in the bottom tier so I’m just going with it.
    I do know that my spouse and co-investor has gotten mind bogglingly enormous tax returns (like, WTF did the ATO make a mistake type thing) the last two years so I guess they’re doing something right. Or maybe not, and I’m getting reamed terribly hence the tax returns, you can never tell in Australia as the laws are so stupid (negative gearing). I figure it’s better than having my money in the bank.

    Liked by 1 person

    • Nikolai Vladivostok · September 17

      Vanguard Australia fees for shares index funds are a flat 0.18% as of late, so check it against that number as your baseline.
      This article explains how important a 0.5% difference can be:
      https://www.nerdwallet.com/blog/investing/millennial-retirement-fees-one-percent-half-million-savings-impact/
      Don’t fall into consumer inertia or sunk cost fallacy. If the product isn’t right for you, the best time to change is now.
      As for tax, see a tax advisor about that. Australian tax law is complicated esp. regarding capital gains and mere mortals like us cannot hope to puzzle it out alone.

      Liked by 2 people

      • lemmiwinks · September 17

        Holy shit, my fees are 0.64% but it’s actively managed? I don’t suppose it can do any harm to expose the fund I’m in (feel free to delete this comment if I’m not being paranoid enough)

        https://nucleuswealth.com/portfolios/

        Like

        • Nikolai Vladivostok · September 17

          That’s not very high for an actively managed fund. I was once in one with fees well over 1% which I thought was low until I read more about it.
          As I’ve written elsewhere, managed funds usually fail to outperform the index after fees. You may have an alternative reason for investing in this way, i.e. its ethical option.
          I’m not an advisor. Read up on these matters for yourself by searching ‘managed funds vs index funds/ETFs’, get advice and make your own decision. There’s no hurry.

          Liked by 1 person

          • lemmiwinks · September 17

            I don’t care about their ethical investing and I didn’t select it. I chose them because they are a group of individual bloggers who I read for some time, then they consolidated their blogs into one site. They correctly called many economic and political issues, so eventually gained my trust. Thus when they launched their investment fund (and I could afford it) I nervously let my money off the chain.

            Prior to this I had alway been a firm adherent to this take on investment:

            Like

            • Kentucky Gent · September 18

              lemmiwinks, That is a horrible fee for this day and age. Vanguard total market (VTI) or S&P500 (VOO) ETFs are way better, if available. Surely Vanguard Australia must have these available. And you will probably outperform the active managers, especially if you reinvest dividends.

              Like

              • Nikolai Vladivostok · September 18

                Vanguard offers similar funds in Australia but the fees are as I said. You’d need an advisor to figure out if/how you can invest in Vanguard US.

                Like

  2. luisman · September 17

    As I told you already, if you’re considered a high net worth individual by a big international bank, you will get advice by your portfolio manager, tailored to your needs. That doesn’t mean they don’t try to sell you what they’ve been told to sell by their management. But they recognize very quickly that if you’re not falling for it, they better come up with a sales you can do, rather than nothing (if you put your money outside the bank’s influence sphere, like Vanguard).

    There’s such an enormous number of funds out there, nobody can know all of them. Some may not be available in your location/bank or may have tax consequences you don’t like. I don’t know any adviser who doesn’t get a commission for selling you an investment. And those who don’t work on commission are imho probably stupid. It’s better to accept the fact, that someone sells you something, and that it’s you who has to negotiate the best deal or leave the table.

    All that said, you are unable to negotiate without the basic knowledge you provide in your book, and maybe some investment experience under your belt.

    Liked by 4 people

  3. Kentucky Gent · September 18

    I remember long ago, in the early nineties, when I was in my first job out of college, a coworker was talking about how his financial advisor got him into a “whole life” life insurance policy. About 3 years later, I read a book that explained how whole life insurance is a HORRIBLE idea, and laid out the case for how it is essentially just a fleecing of the customer, in favor of the company.

    I have stayed away from financial advisors ever since.

    Liked by 1 person

    • Nikolai Vladivostok · September 18

      Yeah, I need to revise the insurance chapter in the next edition to list some of the scams.
      This is my problem when writing about finance: 1. People really should get advice because their circumstances might be different. 2. A lot of advice is poor.
      I’m starting to think the average person might be better off doing his own research and just getting tax advice from an accountant. Having said that, just found out from my new accountant that my old, cheapo accountant stuffed up my tax return.
      In an age of expert failure, we have to learn to do more for ourselves.

      Liked by 1 person

      • Kentucky Gent · September 18

        That’s a good idea for your next edition. Don’t know if you talked about mutual fund loads in your first edition, but IMO they are also a scam.
        And I agree with you that people should get advice, but in most cases they should NOT pay for it, IMO. They should just follow Warren Buffett’s free advice: Unless you are willing to do your own research, and a LOT of it, Average Joe will get better results by putting his money in an S&P 500 index fund, rather than paying an advisor.
        My mother pays 5 figures annually to her financial advisor, who just puts her money in about a dozen various funds that ALSO skim their fees as well. I think her advisor just uses multiple funds to make it look complicated and difficult. If he just put all of her money in 1 fund, then the con job would be too obvious.

        Liked by 1 person

  4. Liz · September 18

    As you note about “your first”, a lot of tygers out there.
    When my spouse went into the military an organization called USPA and IRA marketed/targeted us very aggressively.
    We were dumb enough to go in for “free advice and a free dinner” (okay, I was 21, really naive).
    After that we were called constantly. They knew they only had months before we’d be too smart to fall for their 50 percent front loaded fund. If and when we changed plans to a higher savings rate, 50 percent more would be taken off the top. No getting out without extreme penalty fees.
    No internet then, but I was still a little too sharp to fall for this.
    I often wonder how they justified it to themselves, since most were prior military and they had to know they were robbing new young military people blind.
    They changed the name to First Command a few years later.

    Liked by 2 people

  5. DirtpersonSteve · September 18

    First I’ve commented but have been enjoying your site for a few months now. I like the outlook from abroad even if some things get lost in translation.

    I learned investing from my grandfather who was a self-taught, investing, factory worker that grew up during the Depression. He managed to retire early back in the 80’s when that was mostly unheard of. Unfortunately he died early, but my grandmother lived almost 30 years off his investments.

    With the wealth of information readily available now I believe investing is easier than ever. I never invest in individual stocks and when I’m researching I look at Life of Fund and 10 year returns. I want at least 10% annual returns. I don’t mind paying some extra fees to get that because the manager has proven themselves over time.

    3 years ago I hooked up with an advisor and let him manage a small piece on a probationary basis because we are constantly told to let the professional handle it. He came highly recommended. His 2% fee got me into mutual funds that also had fees and everything underperformed the S&P. After a year he was fired and I’ve taken to managing my and my wife’s IRA’s.

    My father in law uses the same guy as his father did. He was touting what His Guy had gotten him into. For a few tens of thousands he was getting a monthly check. I sat down with him and went over it. I used the day he purchased and compared it to the S&P over time. He was getting roughly 2% return while the S&P was on a tear. I said, “He just sold you a bad annuity.”

    He looked upset when I showed him the same amount in the S&P would have gotten him a 2 or 3x bigger check every month without touching the principal. Then he said, “It has life insurance for (mother in law) too” I pulled up some ads for term life on her age. The insurance was far less than 1/4 of the monthly check he was so happy about when we started.

    Then I showed him a total of how much he wasn’t getting but His Guy probably was (S&P minus his check) and he looked ill. I believe investor education is the enemy of most advisors.

    Liked by 1 person

  6. Robert Reid · 25 Days Ago

    Great post!
    I think more people should take investing into their own hands! Instead of just blindly trusting a financial advisor.

    Like

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