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The biggest mistake made by outsiders or critics of financial planning is the view that the chief job of an adviser is about selecting the investments. This has led to a fiery debate between supporters of industry super funds and funds largely run by financial institutions.
Another point of comparison should also be with self-managed super funds, which are growing at a rate of knots and the Australian Tax Office is increasingly getting interested in busting wide open.
Kicks for free
Generally, its thought that advisers select financial institution funds over industry funds, which too many do because these funds reward them generously. These rewards come in the form of commissions, fees and even so-called ‘soft-dollar’ rewards.
This might be a nice cruise on an ocean-going liner between a couple of exotic ports, which comes with a few education programs and lots of booze.
Read between the lines
There is a perception that industry super funds outperform financial institution funds – and they seem to when you look at the comparison tables – but some of the difference can reflect the cheaper fees that go with industry funds.
Some non-industry funds can outperform, but they might come with some gearing, which can both amplify gains as well as losses.
In for the long haul
For those who want a rule of thumb, a very good industry fund can have 10-year returns of around 12%, others do 10%, which I think is pretty good.
(We’re always told that past returns are no guide for the future, but a good long-term performance can say something about the investment philosophy of a fund.)
Weighing up the cost
Most financial planners would be happy to be able to tell their clients that they have averaged 12% but it is possible to do better. However, I don’t think it’s much better without building up the risks.
These can be done relatively safely or stupidly and that’s where a good, honest adviser can be really valuable. And this is the point: financial planning is not just about the returns, though these are important.
Playing by the rules
However, planners create plans for clients so goals can match outcomes, they come up with strategies that can both cash in on knowing the rules and by working out what is tax-effective or not.
Let it grow
I reckon millions of Australians end up poorer, not poor, because they don’t access good financial and accounting advice as early as possible. While some people get lucky with investments and others invest wisely, most have gone for sensible investments and have added time, which allows compound interest to kick in. This is like a snowball effect and the more time you have, the bigger is your snowball.
Doing the legwork
For example, we have had clients where the question was: should we pay off our house early or pump up our super? Or would we be better off investing into an investment property?
A good planner can run financial projections and arrive at an answer that supports one option over another. This can mean saving tens to hundreds of thousands of dollars over various lengths of time.
Put your best foot forward
There is an increasing realisation in our community, and I think it is a good thing, that many of us turning to experts for help where they have weakness.
A Yank called Marcus Buckingham who wrote Go Put Your Strengths to Work talks about the ‘strengths movement’ in the US where the mantra is: “Play to your strengths and make your weaknesses irrelevant.”
Yes, coach
Smart and successful people are turning to life, business and even diet coaches as well as personal trainers to get help where weakness is holding them back. The use of experts means you can get on with what you are good at and then you can go for it knowing the weak spots have been shored up.
That’s the value of a trusted financial planner.
Turn the beat around
Can you do financial planning yourself? Sure you can, but you have to be prepared to do a lot of work. Of course you could do a second-rate job, which still might be better than doing precious little at all.
For those starting out in a do-it-yourself way, start with the idea that you have to change you. We often live our life in chaos and we hope the money thing will look after itself. It can work out if you play it simply, but as you add complexity, it often brings risk.
Risky business
Another problem of DIY is that you add opportunity to net some great returns, but you don’t have objective eyes asking you to consider the risk.
It’s funny, by law, planners have to understand a client’s risk profile and match that to the investments recommended. Get this wrong and a planner could get sued. However, leave someone to their own devices and they often ignore their own risk profile.
In good company

And that probably underlines a good, trustworthy planner’s value – they can be an objective set of eyes. Finally, if they’re good at their job, they can be giants upon whose shoulders you see things you might never have seen. 

Published on: Thursday, July 24, 2008

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