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Financial Planning - When self-interest and bad advice collide

Financial Planning: When self-interest and bad advice collide

Several years ago I toyed with the idea of turning my interest in financial planning into a career as a financial planner.

There were two main drivers behind my interest in financial planning.

Firstly I wanted to peek behind the curtain, learn what it is the professionals are taught.

  • What do they know?
  • Does it actually work?
  • And if so, where are all the rich financial planners? If they practised what they preached, and it worked, then there should be thousands of them!

Secondly I observed folks all around me who earned plenty money, yet never seemed to have enough. Invariably this was because of their own poor choices, made out of a variable combination of apathy, greed, ignorance, and stupidity.

Book learning for fun and profit

I spent a couple of years completing the formal training required, receiving a shiny Graduate Diploma in Financial Planning and Investment for my trouble.

By the end of my studies I had learned that the financial planning industry had no secret sauce for financial success. Most planners are comfortable, but few are more financially secure or successful than the average white collar professional.

When the time came to change career directions and make the leap into the world of financial planning, I blinked.

I couldn’t reconcile the fundamental conflict of interest that existed.

Misaligned commercial interests

The basics of successful personal finance are both simple and well documented. Earn more, spend less, invest the difference in low-cost diversified investments, and then leave them alone. Rinse and repeat, until the magic of compounding makes you wealthy.

Earn more, spend less, invest the difference in low-cost diversified investments, and then leave them alone. Rinse and repeat, until the magic of compounding makes you wealthy.

The problem with that approach is that a financial planner can’t make a decent living from it.   

The path to financial success for a planner is paved with activity and commissionable churn… and/or fees, lots and lots of fees.

  • Trading commissions.
  • Trailing commissions.
  • Platform fees.
  • Product placement fees.
  • Account keeping fees.
  • Administration fees.
  • Referral fees to other financial services professions who are actually qualified to provide more fee-based accounting, insurance, legal, mortgage, tax and wealth management advice.

You get the idea.

This creates an inherent conflict: what is good for the advisor is unlikely to produce an optimal outcome for the customer.

Fees... lots and lots of fees.

Fees… lots and lots of fees.

I made my peace with my decision, applied the relevant lessons learned to my own financial planning approach, and moved on.

Price gouging pensioners for a living

Recently while helping my father put his affairs in order I had cause to validate my decision.

I was stunned to discover the total fees and commissions he had been charged over the preceding year exceeded the median annual household disposable income!

the total fees and commissions he had been charged over the preceding year exceeded the median annual household disposable income!

Digging into the figures further, there was no single item that was outrageous. Instead on top of the eye-watering platform and account keeping fees, every one of the (many) planner initiated buy, sell or rebalance activities on the account came with a hefty fee attached.

I challenged my father on the vast size of the fees. He protested that his fees were lower than those being paid by his peers. Over the next few days I met several of his friends, and was alarmed to discover my father was correct.

These old guys happily competed amongst one another to see who could get the best deal, but all of them had blindly accepted the premise that high fees were the cost of doing business.

When self-interest and bad advice collide

Another thing that alarmed me was the prevalence of “vertical integration” within the financial planning firms. Client funds were directed towards investment vehicles owned and operated by the financial planning firms, rather than lower cost options like Vanguard or Fidelity.

Instead of listed low cost index trackers, these pensioners were being talked into investing material portions of their wealth into exotic unlisted funds that operated in asset classes such as wind farms, film financing, or directly held international residential real estate.

Financial Planners love pensions

The other gripe I had about financial planners was their fondness for pensions.

I can see the allure, it is an easy sell.

Tax-deferred.

The lure of “free money” in the form of employer matches for pension contribution.

However the thing that financial planners love most about pensions are the age restrictions! These make it difficult, expensive, or impossible (depending on the rules applicable in your locale) to access for years… or decades depending on how old the customer is.

This creates a dangerous “out of sight, out of mind” mentality for many customers, making them less inclined to challenge the cancerous high management and transactions fees that are eroding their nest eggs.

Pensions are optional

My own view on pensions is likely to be a tad controversial.

As a child, I rejected the notion that everyone had to work until they dropped, or were too old to enjoy many of the fun things in life.

As an adult, I worked to replace my earned income with a collection of diversified passive income streams.

Once those passive income streams reliably exceeded my living costs I was financially free to control how I chose to invest my time.

You may have noticed pensions do not feature prominently in my simple financial plan.

I wanted to get off the hamster wheel at an age much younger than the typical pensioner. Having a material portion of my assets locked away inside age restricted pension wrappers wasn’t going to help me achieve that goal.

Here is the thing. If you have done it right, the perpetually sustainable passive income generating machine you assembled to reliably support you prior to reaching pension ages will continue to reliably do so after pension age.

This being the case, having ready access to deploy my funds advantageously becomes very important.

Pension wrappers offer a promise of tax deferment… which may (or may not) be honoured at the whim of future governments. However this promise often comes at the price of restrictions about which asset classes pension funds can be invested in, and whether those assets can be geared or borrowed against, and so on. Again these restrictions vary greatly by locality, so do your own homework.

Conclusion

Good financial planning advice is worth listening to, but only when the commercial interests of the planner and client are aligned.

As always: “trust, but verify“.

Critically assess and validate whether the advice you receive is going to help you achieve your goals, at a reasonable price. This is particularly true for folks interested in retiring earlier than the traditional retirement age, as this will take them off the standard financial planning script and require a different set of approaches.

Pensions are a useful financial planning tool with many desirable features. However they are not the only tool, nor are they always the right tool for the job.

Next Steps

  • Are the fees and commissions you are being charged fair and reasonable?
  • If not, do something about it!
  • If you liked this post then please share it with your friends.
Disclaimer: I may receive a (very) small commission from any purchase you make via links on this website.
{ 3 comments… add one }
  • The Rhino 10 April 2018, 09:58

    I agree on the pensions front, but wouldn’t write them off completely
    I think they have a place, just by no means 100% of the place when it comes to financial planning
    They do allow you to do some pretty outrageous tax and NIC avoidance if managed correctly
    I’m still pretty smug about using a pension as a means of engineering my net pay to be greater than my gross pay.

    • Slow Dad 10 April 2018, 12:25

      Agreed Rhino. Pensions are one of the last remaining legitimate tax rorts, particularly for freelancers.

      You should write a guest post describing how you managed to pick the tax man’s pocket, net > gross income would provide a warm fuzzy feeling indeed!

  • The Rhino 10 April 2018, 13:19

    Doesn’t really warrant a post. I did run the no.s through on MV a while back to give a concrete example of what can be done.
    Its nothing more complicated than ensuring you salary sacrifice into your SIPP down to a level where the employers NICs are greater than the amount of income tax and NICs you pay. So when I say net-pay I mean net-pay plus pension contribution. That may or may not be misleading, I think it depends largely on how much tax you end up paying as a pensioner.. (my gut feeling is that I prob won’t pay that much)
    So two things have to happen:
    1. You have to convince your employer to give you the employer NICs they’re saving from the salary sacrifice.
    2. You have to be in a position where you can drive your salary down to minimum wage type levels, i.e. you’re pretty frugal and have some FU funds tucked about the place

    I aim to approximately match income to expenditure on an annual basis. You can’t get it spot on, but if you know whats what and have a good few years of accounts under the belt you can get it to within a few k

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