In this episode I'm joined by Vince Scully as we delved into the world of financial advice. When should you start to seek it, how much it should cost and a crucial discussion about the difference between "financial advice" and "investment advice". These two are often conflated but they serve different purposes.
We spoke about the value of advice and how it helps to achieve financial independence and your life goals. But we did have a couple of questions about the costs touted by Money Smart at this link: Financial advice costs - Moneysmart.gov.au
Vince questioned whether financial literacy is actually a good thing quoting this book: Pound Foolish: Exposing the Dark Side of the Personal Finance Industry: Olen, Helaine: 9781591846796: Amazon.com: Books
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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EPISODE TRANSCRIPT
Chloe (1s):
Shares for Beginners, Phil, Muscatello and Finpods are authorized reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.
Vince (12s):
One of the most important aspects in choosing The advisor is to find an advisor that looks after people like you. So if you are a 20 something looking to get into your first home, you don't want to be going to an advisor that specializes in aged care or retirement planning because there's so much to keep on top of that, you want someone who's looking after people like you.
Phil (35s):
G'day And. welcome back to Shares for Beginners. I'm Phil Muscatello. Now I'm a firm believer that we all could do with some financial advice. Most of our lives are too busy to be bothered with the administrivia involved in tracking and maximizing our major investments like super and retirement planning. Joining me today is Vince Scully from Life Sherpa G'day. Vince.
Vince (55s):
G'day Phil. It's great to be here.
Phil (56s):
Yeah, great to be here in the Mojo Dojo, Kaza House of Life sherpa. That's right. And that'll be the last Barbie reference at all. Okay. Except I do have a Ken story I wanted to share with
Vince (1m 5s):
You. Oh, you can get going then.
Phil (1m 6s):
That's right. So I wanted to have a quick look and a, a discussion about financial advice in general because you know, there's a lot of people who, many Australians that need financial advice. We've got a shortage of financial advisors, which we've covered on the podcast before. But let's go back to the very beginnings. At what stage in life should people start thinking about Seeking some sort of financial advice? Well,
Vince (1m 29s):
Everybody needs financial advice. The question really comes down to, can I get the advice I need at the price I'm able or willing to pay for?
Phil (1m 41s):
Because it is a bit expensive, isn't it? It
Vince (1m 43s):
Can be expensive. And that's partly due to regulation. It's partly due to the fact that you need qualified humans to do it generally, which means that traditionally most people have waited till they either inherit some money or are ready to retire. And two thirds of all financial advice clients in Australia today are retirees, or over 55, not necessarily be retirees, but they're certainly thinking about it. And challenges in industry is how do we make it available to everyone? Ultimately, there's six big financial decisions that you need to make. you know, where you live, what you drive, how you prepare for the unexpected, how you provide for your retirement, how you make a living, and who you marry.
Vince (2m 28s):
And all of those decisions, except potentially choosing a partner, could benefit from financial advice. And the challenge has been that it's been expensive. And if you can't get it professionally, where do you get it from? you know, we may, many of us get it from our parents. And of course the thing that got our parents here is not what's gonna get us there. And so are our parents equipped to give us advice that works today. And if we're not getting it from our parents, we're getting it from the internet, whether it's social media or Google. And that's got a whole bunch of other challenges.
Vince (3m 9s):
A whole
Phil (3m 9s):
Different levels of quality That's right. In that advice situation. Yeah.
Vince (3m 12s):
And, you know, being able to assess its reliability and possibly more importantly, it's applicability to your specific circumstances. So I would say that everyone should have it. The question is how do we get it affordably? And at the risk of blowing sp spooking my own book here. No, please. That was the whole point of creating Life Sherpa It, was to make it affordable. And you know, there are lots and lots of people who aren't prepared or able to pay 3, 4, 5, $6,000 a year for advice. But at $547, it's available to a lot more because
Phil (3m 48s):
There's a big difference between the kinds of advice people need. Most people when they're starting out or going through their accumulation phase, basically needed investment advice. But there's financial advisors, planners, I'm not sure even what to call them. Yep. Who will cover the whole range of someone's financial life. I mean, I'm thinking actually the very first guest I had on the podcast was a fantastic financial advisor who is also a qualified lawyer, qualified accountant, and he could really package up advice. But these are for people who are high net worth individuals in their fifties who are looking to work out how they're gonna move on to the next stage in life. This is completely different to what someone in their twenties or thirties might be looking for, isn't it?
Vince (4m 31s):
Absolutely. And and this whole conflation of financial advice with investment advice, I think does most people a disservice. And when most people think about financial advice, they think about investment advice. And that's actually a relatively small part. So if you look at the total fees and commissions paid in, in the industry, only 14% of that relates to non-retirement investment. And that you need to sort of separate at the investment advice piece, which today with you know, ETFs and managed funds and all those sort of things is a much easier exercise. And the real challenge is, how do I link that to the life goal I'm trying to solve?
Vince (5m 15s):
And the implementation of the investment piece is actually the smaller part of the actual advice. And to some extent it's becoming a little bit of a commodity. So if you look at, you know, all of those pieces of advices, I used to joke in my previous business that there was the two best pieces of advice I could give anyone was to pay off their home and buy their wife flowers. And I couldn't get paid for either of them. And, you know, it's a bit flippant, but it There Is a germ of truth in there in the sense that the things that make a difference in a 20 year old or 30 year old with a 40 year old or life are much different to the difference you can make to a 60 year old or 70 year old, or an 80 year old.
Vince (6m 1s):
That's not to say they're any less challenging or any less technical, but they're different. So for a 20 something, you know, getting your super in the right place, getting started on the journey towards saving for your first home, getting your spending behavior under control, and getting the right insurance before any of those health risks start to play out. So it's much easier to get insurance before you get sick than after you get sick. So early twenties, perfect time to get those things sorted. So, you know, they're the big things. So the things that we'd work with 20, 20 somethings on, it's about, you know, paying off your debts, building an emergency stash, getting your budget under control insurance, putting your super in the right place.
Vince (6m 47s):
Hmm. So although spending your super might be 40 years away, there's a few things that you can do now that don't cost you very much, but will pay off in spades later. Whereas if I was dealing with a 60 year old or a 70 year old, there are things I can do today that will make a massive difference. Today, you know, about how you start, how you structure your, the income from your super. Oh,
Phil (7m 9s):
Because that's so complex, isn't it? Getting the,
Vince (7m 11s):
Getting the, you know, right amount of age pension,
Phil (7m 14s):
Just going from that stage where you've been a pay as you go Yep. Employee your whole life. And then just suddenly you go, oh, what do I do now? That's, you really need to advice
Vince (7m 23s):
And that's need. And that's I think why we see that two thirds of financial vice clients being over 55. 'cause that really concentrates the mind that when you get to, I don't say too much at life show, but previously, you know, you see a lot of people get to the mid fifties kids off their hands, or at least out of education, stop paying school fees and now have some money. And they realize, oh, actually retirement's potentially less than a decade away am I prepared for it. What am I gonna do? What does retirement look like? And there's that last minute sprint. But if you start crawling in your twenties, that last minute sprint becomes much less stressful.
Phil (8m 1s):
I might push back on that a little bit about the, not learning from your parents, but I've noticed that people who have learned from a very early age to look after their money, often do have a better attitude to money than other people whose parents might leave them be.
Vince (8m 14s):
Oh, I think I distinguish between behavior and knowledge. Yes. That absolutely we learn our behavior from our parents, even if it's not conscious. So that's, I would distinguish that's different to the traditional imperatives in, in financial life. So if you are started to, if you were adulting in the seventies or eighties, buying the biggest house you could afford, or even one that you couldn't quite afford, made a huge amount of sense because inflation was 15%. And so inflation would fix the problem. If you do that today, inflation's gonna take a long time to fix the problem. So you're gonna be under stress for a long time.
Vince (8m 56s):
So those sort of what I call myths and half truths, you know, rent money is dead, money never borrowed to buy a car, never use credit, put aside 15% of your income for retirement. All of those rules of thumb that might've made sense in the high inflationary seventies or the, the go-go years of the sixties don't really make sense today. But absolutely. Behavior agree all along there. Yeah. Yeah. And people often react against their parents. So if you have particularly frugal parents Mm. People often become spin rifs. Yep. So how those behaviors play through and where you fit in the family order. So middle children are often much more willing to spend than first or third children.
Vince (9m 40s):
So you see all those sort of family things play out. So mindset's critical. Yeah. Behavior's critical. But I don't think we should be expecting parents or schools to deliver the knowledge piece of that equation. In fact, there's now a lot of evidence that suggests that people who do get school-based financial education actually make worse decisions. Hmm. Than that's interesting.
Phil (10m 6s):
Who didn't? Because there's a lot of people calling for more education, financial education and literacy for,
Vince (10m 11s):
You know, so if school
Phil (10m 12s):
Aged students,
Vince (10m 13s):
If anyone is interested, there's a book called Pound Foolish written by an Americans. I'm not quite sure why she calls it pound foolish, not dollar foolish. Maybe you could put a link to it in the, in the show notes. Yeah. But she talks through this whole financial literacy, which is a word I hate.
Phil (10m 32s):
It is, it's awful, isn't it? Yeah.
Vince (10m 33s):
Financial education at schools does improve financial knowledge. So if you go and test people a few years later, they do know more than their peers where it doesn't actually flow through though, to better financial decisions. And the only real way to get better financial decisions is to be able to have the right advice delivered at the point of making the decision. And of course, that's horrendously expensive for many people, and that's not a place that the government can really play. Can you imagine having the, the government financial advisor that you had to talk to 'em before?
Phil (11m 7s):
Oh, we've be talking about that. So we're talking about that very soon. So,
Vince (11m 11s):
So that's the challenge. And, you know, more knowledge does not equate to better decisions. And the key thing is here is better decisions. Hang
Phil (11m 19s):
On, hang on. Wasn't it Warren Buffet who said the best investment is your investment in your own knowledge, I think was, yeah, it's one of those nostrums we are hearing. Yeah. And I'm in this financial world.
Vince (11m 30s):
I mean, if knowledge was was success then, you know, we'd all have six packs. This is not a knowledge problem. This
Phil (11m 38s):
You're bringing Ken up. Again,
Vince (11m 41s):
This is not a knowledge problem. This is a behavior and action problem that's not about maths, that's not about the technicalities of how a fund is
Phil (11m 51s):
Structured. No, no.
Vince (11m 53s):
It's about how do I align my life goals with my spending. So goals and value, personality, values and goals are far more important than the intricacies of what MER or an ICR or a tax rate is. That I think is a bit, that gets missed in a lot of this debate.
Phil (12m 9s):
Okay. So the first step when you go and see a financial advisor is to have a risk assessment. That's a very first, isn't it?
Vince (12m 16s):
Well, it's often the first step in the process. Yes. 'cause that does drive a lot of the relevance of the advice, but I must, I think I sort of stepped back a bit before that. Oh, okay. So how do I choose an advisor and what question should I ask?
Phil (12m 31s):
Oh, okay. Yep. Some questions. Yeah.
Vince (12m 32s):
So one of the most important aspects in choosing an advisor is to find an advisor that looks after people like you. So if you are a 20 something looking to get into your first home, you don't want to be going to an advisor that specializes in aged care or retirement planning because there's so much to keep on top of that. You want someone who's looking after people like you. So that's step number one. And possibly the worst question you could ask is, how much are you gonna make me on my money? That's a bit of a red flag, both for the person asking the question and for the likely answer you're going to get. Because anyone who tells you that my portfolio will do better than anyone else's, or my fund is better than that fund is either ignorant or delusional that the market will deliver the returns.
Vince (13m 21s):
The job of an advisor is to make sure that those returns end up in your pocket. And how do they do that? They do that by focusing on the things that matters. Sure. There's some mechanical things have to be done about, you know, Asset allocation, rebalancing and keeping track of fund changes, regulatory changes, tax changes, all those things. They're relatively mechanical to some extent that the real smarts is about how they're gonna help you improve the quality of your decisions and the consistency of your behavior against those decisions. And making sure that whatever it is that you invest in aligns with your goals. Time horizon. And of course, risk profile.
Vince (14m 2s):
So they're the, they're the sort of the two big ones. Then of course, you should be looking at how they're licensed. you know, are they licensed through a, so everyone who gives financial advice needs to be licensed and they will be on the Financial Advisor register. And you can check both of those readily. Yep.
Phil (14m 20s):
And advisor ratings as well as website that you can go to to get some information.
Vince (14m 24s):
Now, bear in mind that advisor ratings is a paid service.
Phil (14m 26s):
Yes.
Vince (14m 27s):
And that the advisors with the bigger profiles are probably paying for it. That doesn't necessarily make it bad. No.
Phil (14m 34s):
It's a bit of a beauty contest, isn't it? Yeah.
Vince (14m 36s):
But who they're licensed through so many advisors, it's sort of falling a little now. But if you go back 10 years, well over half the advisors in the country were licensed through a few of the big fund managers, And, you know, AMP and I, what do they call Insignia? So between the two of those, they license probably more than a quarter of the advisors, maybe not more than a quarter, but a goodly chunk. And then you add in some of the bigger groups. So those groups where they also manufacture the products. So they're either an insurance company or a fund manager or a superannuation provider. That's not illegal, but it should give you calls to think, am I being recommended a Tied, A Tied product that, and is that necessarily in my best interests?
Vince (15m 26s):
Mm. And so that's how they're licensed. The next question is, how do they make money? And of course, this is a costly exercise, so it's not gonna be free, but how it's charged, I think is, is relevant. So are they gonna charge you a fixed fee? Are they gonna charge you a percentage of assets under management? There's no commissions on products, there are no commissions on commissions, on products, on investment or superannuation products. They've been gone for 10 years. And yet I see this on the internet day in, day out. Typical Australian consumer still believes they exist and they haven't existed for a decade. There were some that were grandfathered in, but they're all gone now too. So if you walk into a financial advisor, they cannot get a commission on investment or super products.
Vince (16m 12s):
But, you know, is a a payment as a percentage of assets materially different? Well, it's materially different because firstly you agree to it and you can always stop it at any point. Yep. And it's usually independent of the product. It's usually collected through the product, but it's independent of the product. I dislike Asset based fees for a few reasons. Firstly, it ties the value of the advice to the size of the pot. And whilst it does cost a bit more to manage twice as much money, it doesn't cost twice as much. Mm. you know, there are risks that rise with volume. There are costs that rise with volume. So professional indemnity insurance goes up with the volume of funds that you manage.
Vince (16m 53s):
So There Is an extra cost in managing 2 million compared to 1 million, but it's not twice as much. and it can be easy to get confused that, you know, 0.25% as a fee. What does actually mean in dollar terms, if you've got a million dollars, that's $2,500 I think, or 25, that's 2,500. Yeah. Whereas if you got a hundred thousand dollars, it's $250 and $250 doesn't buy you an hour of someone's time. So you do need to look at it in dollar terms and say, what value am I getting for that? And the ongoing benefit is a critical part of it.
Vince (17m 33s):
So financial advice is not an event, it's a process. And so getting it right today doesn't mean it's right tomorrow. And the challenge for most people is to say, well, what's changed between today and yesterday? The things about yourself, you know, so, you know, if you got married or divorced or had a kid or had a kid made home or finished high school and you stopped paying school fees, or you've got sick and you can't work, or you've got a new job, you've got a promotion, you've got more pay. All of those things you can keep a, an eye on yourself, And, you know, they're happening to you. Yeah. The things you don't know, well, what's happening in the re regulatory world, what's happening to my fund?
Vince (18m 13s):
What's happening to taxes, what's happening in the economy? Now, you don't necessarily wanna be reacting to today's news cycle, but some of these are pretty critical. So,
Phil (18m 25s):
Well, especially if legislation changes, see, know, it can, it can affect,
Vince (18m 28s):
Yeah. One really good example of that is during Covid, the minimum withdrawal from super was reduced from 4% to 2%. So, and
Phil (18m 36s):
Then that's to take a pension.
Vince (18m 38s):
So if you had a pension to get tax free pension, there's a minimum manual withdrawal period withdrawal amount. And during covid, the government halved it. So if you weren't on top of that as a retiree, you may very well have taken more out of super than you really needed to giving up some future tax benefits. So being on top of that could make thousands of dollars of difference to your future. And it's unreasonable to expect people to be right on top of this day in, day out. Mm. And so those are the sort of things where ongoing advice makes a, a big difference. So that you've got someone who's constantly on top of this, what they do day in, day out, they read the new PDSs, they get the bulletins on what happens in the parliament.
Vince (19m 27s):
Yeah. And tweak strategies to,
Phil (19m 30s):
They get the emails from the dealer groups, or often the dealer groups looking after the backend and saying, this is what's happening now today. But
Vince (19m 35s):
To treat it, you know, the number of people who most, well us among most advisors, people will walk in the door and they go, I just need help choosing a, a portfolio today. I look after it myself. And the challenge with that is, if you don't have the skills, experience, or knowledge to choose it today, which presumably is why you're Seeking advice, I mean this, this person obviously concluded that I can't do this myself today. I need some professional help. So if you can't do it today, why do you think you can do it tomorrow? And that's not being derogatory, it's just that that's not what people focus on day in, day out. Yeah, that's
Phil (20m 14s):
Right. And so, no, unless you've got a passion for, and you forget investing, you know, there's people who, people who have got a passion for investing, they love doing it, and they wanna do it, and they'll be going over whatever they're looking at, whether it's charts or company reports, you know, they, they'll just eat that stuff. Yeah, exactly. But if you're not like that, it's best just to be a bit more passive or let someone else help you with that. Yeah. So, and understand that difference as well.
Vince (20m 36s):
And so there, you know, if there's value in taking advice today, there's value in having an ongoing relationship, which brings us back to the cost. So many people would make that statement thinking it's gonna cost me a lot of money to manage it ongoing. And that's where, you know, the industry I think needs to get its act together. And it's why exists.
Phil (20m 60s):
I just wanna get back to, 'cause many Sun bronze Aussies go to the Money Smart website Yep. To find out information. And there's a page there, which is, they have a study where Rhett, this is our fictional character,
Vince (21m 13s):
Not to be confused with the barrister from Brisbane.
Phil (21m 16s):
Is there a barrister from I? know this one? Okay. We won't watch out for any defamation.
Vince (21m 23s):
We won't mention him by now.
Phil (21m 24s):
Okay. Now Rhett has $400,000 to invest and it will cost him, according to this, when they break down all the costs and gonna see a financial advisor, this actually says that it will cost him $13,660 in the first year and $8,000 each year thereafter. And this is on the Money Smart website. Does that sound a rather inflated
Vince (21m 46s):
Figure? It does, and I think it conflates a few things. I actually had a look at this day when you, you said that you were gonna come in and so it breaks down the, the fees across a number of areas. Yeah.
Phil (21m 58s):
There's some insurance in there, I know, but that, that's a huge amount. Yeah. So
Vince (22m 1s):
Let's just start. So start off with the upfront fees. So the case study says Rhett will pay three and a half thousand dollars for a a, a plan and $1,500 for an implementation fee for a $5,000. That's marginally above the average according to advisor ratings. But not materially obviously depends on what's in there. I assume this is talking about a fully comprehensive fee rather than purely investment. But that's, you know, there or thereabouts, whether it's value or not for rent, that's a separate question. But that's probably not a million miles from the typical price.
Chloe (22m 38s):
Super is one of the most important investments you'll ever make. But how do you know if you are in the best fund for your situation? Head to life Sherpa dot com au to find out more life Sherpa Australia's most affordable online financial advice.
Phil (22m 56s):
If you just go to the MoneySmart website Yeah. And look for Rhet or Yep. Finding a financial advisor, I think is the section. You can find
Vince (23m 3s):
This MoneySmart Rhett will actually get you there in Google. Oh, okay.
Phil (23m 7s):
R h e double t. That's
Vince (23m 8s):
Right. So upfront, you know, whether that's value for him, not the question, but that's probably not a million miles away from the average for a full suite of plans. When we come to the ongoing fee, this is where it starts going a bit off the rails. So they talk about a 50 a 0.5% ongoing advice fee. That's probably not too far from, and
Phil (23m 30s):
But that's assets under management, that's
Vince (23m 31s):
0.5% of Asset management. So re's case, that's
Phil (23m 34s):
2000 not a fixed cost. Yeah, yeah.
Vince (23m 36s):
$2,000 a year. So, you know, if he's gonna get six hours work from his advisor, yeah. Six, six times $350 is $2,000. That's probably not a million miles from the average. And then we start getting onto product costs. And the first one they talk about is a platform administration fee. Hmm. And they use 0.75% or $3,000 for red. That's probably a bit out of date. It is. The cost of platforms has come down radically. It has. Yeah. He probably should be paying closer to a thousand dollars, maybe 1200. Which brings me onto to the point about, this is a quite a controversial one about platforms, and I think it's important to understand what they actually do and what you need one.
Vince (24m 20s):
Mm
Phil (24m 21s):
Well, it's a legal structure within which investments are held.
Vince (24m 24s):
Is that the case? Well, the main, the main purpose of a platform, and it's a word that gets bandied around a bit. So that could be as simple as a brokerage account with s right. That's a brokerage platform if you need one to get access to the stock market. So if you wanna buy an ETF or an LIC or a share, you need one of these things. Yep. That's said it's very simplest. Now when you step up from that, you need some tax reporting. Right. So in order for you to make useful decisions around should I change that investment for that investment, you need to know what's the tax implication of making that decision. And so you need a tool to track all that.
Vince (25m 6s):
And that could be a platform or it could be a piece of software like Sharesight. So Sharesight's gonna cost you $19.97 a month, I think for the one that's got the Yeah. CGT reporting. So $20 a month, $240 a year on a hundred thousand dollars, that's 0.24%. So that's the absolute minimum. The next thing a platform can do for you is give you access to managed funds without meeting the individual minimum investment limit. So we use a a, a small cap small company fund in our portfolios, which has a minimum investment of $20,000.
Vince (25m 47s):
Yep. And so if you're gonna allocate maybe 5% of your money to this particular fund, it means you need to be investing
Phil (25m 55s):
Five 40,000, 40 $400,000 Yeah.
Vince (25m 59s):
To be able to meet, which Rhett's got to be, which Rhett has to make the minimum. Yeah. And a platform can allow you to access that without meeting that threshold. And then the third thing is it does, is gives your advisor oversight on what you are invested in. And so if I'm working with a a client, I need to be able to see what you've, what you hold, what it's worth, what your tax components are, and that visibility, you're now narrowing down the number of products that will give you that. And then the final bit it gives you is the administration of that. So having your advisor, having got insight to what you've got or visibility in what you've got, they, the software will then allow them to generate the recommended trades and the documentation to go and seek your consent to do that.
Vince (26m 52s):
And so all of that has a cost associated with it. And traditionally that probably was in the 0.75% range. Yeah.
Phil (26m 60s):
Yeah.
Vince (27m 0s):
Today it's more likely to be at re's balance, maybe 0.25, 0.35. But you need a piece of software to do this if you're going to use it and advise it.
Phil (27m 13s):
And is this what's often called a wrap?
Vince (27m 15s):
Yep. A wrap
Phil (27m 16s):
Platform? Because you hear that where, yeah.
Vince (27m 17s):
So there are a few variations on this. There are traditional wrap platforms or I D P S, Investor directed portfolio of services is technically how they're legislated or colloquially A wrap account. Yeah. And that usually has a custodian associate with it. The, the underlying funds are held by a custodian. So if you buy a Macquarie wrap it, your assets will be held by Bond Street custodians, which should lower transaction costs. And it's one of the ways you get round these minimum investments. and it certainly makes the administration much more sim much simpler.
Vince (27m 57s):
There are now some products that are non-custodial. The one that we use is a non-custodial product where you hold it on your own HIN. But this software is all working in the background that delivers everything A wrap does as far as you and your advisor concerned. But it's still your
Phil (28m 16s):
Hin. So some brokerage platforms will often champion the idea they've got HINS and that they're chess sponsored. So you actually own something. And then the others are custodial ones. The ones where you can get fractional Shares or fractional investments, for example, are custodial. Yeah.
Vince (28m 31s):
I mean could the rest of the world operates other, the rest of
Phil (28m 33s):
The world is custodial, isn't it? Yeah.
Vince (28m 35s):
And to some extent, the HIN is really just a record in an ASX system. Yeah. That says you own this and the real record is the registry. What you are seeing is an extract. Yeah. So it's largely a beat up by, probably shouldn't mention the broker. No,
Phil (28m 54s):
We won't say the names, but Yeah.
Vince (28m 55s):
But a number of discount brokers who were looking at a way of differentiating themselves from the newer, cheaper kids on the block. Yeah. Yeah. But for most people, this is a academic nicety and comes at a cost.
Phil (29m 11s):
So let's just summarize I know you wanna go on and talk about, or do you wanna finish off of about
Vince (29m 15s):
No, I'm just gonna finish off the wrap. Okay. Let, let's talk about, so, so on the wrap point, yeah. That $3,000 that Money Smart rec rent should be paying is probably closer to a thousand to 50. But you need a platform in order to track your taxes, make meaningful decisions, and get guidance from your advisor. Yeah. You just can't do without it.
Phil (29m 35s):
And just, just on that point about the cost of it, I mean, I have personal experience of a rep, particular rep platform and it's a Macquarie platform and I think the fund's under management's around about $190,000 and it's $700 a year. Yeah. So that's like such a small Yeah.
Vince (29m 51s):
And typically they have
Phil (29m 52s):
Fee compared to that. Yeah.
Vince (29m 53s):
And typically they have a flat fee or a minimum fee usually around those sort of three to $500 range. Yeah. Yeah. And then a percentage. So at Brett's level, if you use the platform that we use, you'd be paying 400 probably. Mm mm. 500 maybe.
Phil (30m 9s):
And these are things worthwhile talking to an advisor they about as well. They aren't they? Yeah.
Vince (30m 12s):
And obviously because
Phil (30m 13s):
Most people don't even understand what these fees are or what, what they're getting for them, you know,
Vince (30m 18s):
And, you know, it's not an incremental cost because if it didn't exist, your advisor would have to do a huge amount of administration work. So if you didn't pay $500 or a thousand dollars to Macquarie Wrap Yeah. The admin work that your advisor would've to charge you for, in fact, it's almost impossible to do the job without it. You might be able to get away with it by, you know, inviting them into your Sharesight account. But you then still have to do the work out what the trades are, get consent, send that to the broker. So all of that is admin cost that you would otherwise have to pay for. and it would be in your advice fee. And then it goes on, talk about investment management fees 0.75 as an investment management fee.
Vince (31m 2s):
you know, if you're looking at mostly index based funds, that's probably a bit on the high side. Our portfolios would range from about 0.2 to 0.5 or 0.6. Yeah. In terms of management fees.
Phil (31m 14s):
But these are the management fees of the actual investments,
Vince (31m 16s):
The underlying funds. So if you go and buy, save,
Phil (31m 19s):
Manage, you've got the financial advisor up here, then you've got the platform under there, then within that platform you've got That's right. The investments themselves. Yeah. Yeah.
Vince (31m 28s):
And so, you know, that's another thousand dollars. So there's probably two and half thousand dollars in Rhett's. Bill probably is a bit above market. And then this is where it really goes off the rail. It starts talking about insurance premiums. Now I know how old RTT is, but a thousand dollars insurance premium is a, a very small insurance premium. Well, sorry if that's the 66% commission, his insurance premium might be $1,500. I don't know. Too many people with accumulation funds are $400,000 who are young enough to get away with a $1,500 insurance premium. So a comprehensive insurance package for most people in the accumulation stage of that.
Vince (32m 8s):
So people in the workforce should expect to pay between two and 5% of their income for a fully comprehensive insurance premium. So say if you're making a hundred thousand dollars, that's somewhere between two and $5,000. If you do a, if you're a bit older, you smoke, you do a blue collar job, you'll be at the upper end of that range. If you are a white collar, younger, healthy professional that doesn't smoke, you'll be at the lower end of the range. And so if we take someone earning a hundred thousand dollars, $2,000 premium built into that is a commission payment. Mm. Which is 0.6% in the first year and 0.2% in subsequent use.
Vince (32m 49s):
And so if you take a $2,000 premium that's $1,200 upfront, so many hours worked as $1,200 by you, not a lot. And this article talks about The advisor charging this commission. That's not actually how it works. There Is a commission built into the product. It's not charged by The advisor, it's in the premium and it's paid by the insurance company out of your premium. It is possible to do what they call, dial it down. So you The advisor can say to the insurance company, please do not pay me commissions on this. And they will reduce the premium to the customer by about 20%. Mm. But you now have to write a check to pay for the advice and that will end up being more than 20%.
Vince (33m 32s):
Unless you've gotta really big premium. So charge it, it's a nonsense. And since around the time of the Royal Commission, they are now standard. So every insurance company pays the same rate. So There Is, no real incentive for an advisor to choose product one product over of another. Yeah. There Is a potential incentive to sell you more insurance than you need. And that's obviously comes down to asking your advisor, well how did you come to that number? And at Life Sherpa, we cap the commission. So if the commission exceeds that cost of doing the job, we'll give it back to our members. Yeah. So that takes that one away. So it's, it's unreasonable to add that, well, if a thousand dollars is the commission, then it's unreasonable to add it in here.
Vince (34m 17s):
Might reflect income for his advisor, but Rhett's not paying that to his advisor. So that first year number should probably be seven eight maybe. But obviously, yeah. What are you buying? How much handholding do you want? How complicated are your affairs? If you've got a self-managed super fund, you've got a family trust, you run an incorporated business, it's gonna cost you more. Yep, yep. If you are a P A Y G with a relatively uncomplex affairs, then it should cost you less. But this article's got a lot of press coverage and I think it needs updating. Oh, it's has press coverage, has it? Yeah. People have been talking about, there's been a lot of coverage on this, on the various blogger spheres.
Vince (34m 60s):
Oh, okay. And most people sort of miss the point here. you know, it's not about, this is fee gauging, it's really a question for the RhetT as to what's he getting for this And, you know, I will be pretty confident that the difference between taking advice and not taking advice, and this is not about investment returns, this is about him being better off is probably worth 12 $20,000 a year. Mm. For someone like, like re it's very difficult to do a before and after. Mm. Because looking at the counterfactual is pretty hard to find. Yeah. 'cause once re's done all these things, you go, I would've done that anyway.
Vince (35m 40s):
And, but it's not about investment returns. Yeah. So the argument to say that by paying $13,000 in fees, I will earn $13,000 more on my investments is the wrong way to look at this. Yeah. It's a bad saying. Well, what is the quality of your decisions going to do to your overall life outcome? And to generate 12 to $14,000 in benefit for someone $400,000 is almost in their brainer. There's a lot of research around this from people who you might not expect to be in favor of. I mean, they, Vanguard have a study which they say advice is worth about 3% on your overall benefit.
Vince (36m 21s):
Now, you'd expect that Vanguard might be anti advice, even though they, they've got a good direct to consumer business. Russell, who you might think would've the opposite bias came up with more or less the same answer and the, and they might be biased the other way. So if you average those two out, you go well, and there's a really good study from the Institute of Long Longevity in the uk, which comes up with an even bigger answer. So There Is, no doubt in my mind, and I've seen the impact of this on people's lives, that There Is value there. Obviously if you can get it for a lower price Mm. Without sacrificing quality, that's even better. But I'm not sure that this article does anyone any favors.
Phil (37m 2s):
We'll get back to the show right after this brief message. Why am I buying, holding, or selling a share? If you can't answer that basic question, then you don't have a plan. The best investors are ruthless in executing their plans. I've been fortunate to meet many great investors on the podcast. Tony Kynaston is one of the best. He has a clear and systematic approach to investing that is honest, sensible, and methodical. It's called QAV Quality at value. Q A V now offer an excellent light plan for only $29 per month. You can follow their buy and sell recommendations and learn the ropes. And the first month is free using the promo code SFBLIGHT l go to qav podcast.com au to sign up.
Phil (37m 43s):
That's qav podcast.com au. Using the promo code SFBlight past performance is not a guarantee of future returns. Please read the Q A V F S G and consult a financial professional before investing. I'll receive a small commission for services I recommend, and I only recommend services I use myself. So rep, just put all your money into an index hanging E t F and forget about it for the next 20 years. But the
Vince (38m 6s):
Challenge is which index?
Phil (38m 8s):
Oh no, we're gonna get onto indices and indexes. Now. I've had communication, a listener got in touch with me who's started listening to the podcast and going backwards. So ha Ravi, I think it's Ravi or Ravi, I'm not sure how to pronounce it. And he says that he strongly believes in financial literacy and investing basics that should be a subject in school. But we've already covered that. Sorry about that, Ravi. But he was talking about a story where one of his friends had paid three K to an AMP financial advisor 10 years ago and he'd agreed to do a dollar cost averaging into a fund one 50 k. I'm not sure exactly how the one 50 K fits into that.
Phil (38m 49s):
10 years later, my friend found out that the financial advisor had forgotten to move the money and It was sitting in cash plus kickbacks and we're going yearly to the financial advisor. And the money kept depleting further to the story. They took it to the Ombudsman and they were awarded $1,200. Even going by conservative VA percent gains over 10 years. 150 K would've been 303 k. Anyway, there's, there's a lot of details, but the, it sounds like that there was a problem with The advisor just forgetting to do something while still charging fees and that the system failed to punish the advisors.
Vince (39m 23s):
That's does surprise me. Mm. Sorry. It doesn't surprise me that that occurred. I mean, certainly if you go back a decade, there was a lot of that store stuff. Well, not a lot that happened. Not infrequently. I wouldn't say It was rampant. Yeah. And this goes back to my point about, you know, why it costs more to manage $2 million than 1 million because if you do that, yeah, it's gonna cost you a lot more to fix it. Forgetting it just shouldn't happen. But I would've usually in those sort of events that the What's now afca, I assume by Ombudsman, he means the, the old foss, the old Financial Ombudsman service. Yeah. Which has now been morphed into Af Australian Financial Complaints Authority.
Vince (40m 7s):
They are a very consumer friendly jurisdiction, generally doesn't involve lawyers and they will usually look to keep you hold. So not having invested for a decade sounds like much more than a $1,500 problem. So I just I know the facts. But, but,
Phil (40m 27s):
But that, but I would suggest that it's a problem for the consumer that they should be checking their statements. Yeah.
Vince (40m 34s):
I mean, I
Phil (40m 34s):
Mean surely this would show up on a, a statement somewhere.
Vince (40m 37s):
You would think so. Yeah. I mean obviously this is a bit like the, she was asking for an argument that I I
Phil (40m 42s):
Know I know I know that. But you,
Vince (40m 45s):
If you're going really have to going Yes, There Is a responsibility to ask questions. And if The
Phil (40m 52s):
Advisor, I mean surely after a year you'd go, how much have I made? you know,
Vince (40m 56s):
And why is this amount sitting in cash on my statement? Mm. So, and obviously people, some people want an advisor to take care of everything and implicitly trust their advisor. But, and I think, you know, There Is a, a duty to both on The advisor to explain it and also 'cause he actually had a meeting and The advisor looked at that and went, you know, in preparing for that meeting, he would've noticed why is this all in cash? Yeah. So something terrible has gone wrong in that, in that case, There Is, no doubt that errors do occur from time to time. And most advisors are really good at, at fixing them. And certainly afca are generally very consumer friendly.
Vince (41m 40s):
And I would expect that the penalty in the case, assuming The advisor was
Phil (41m 44s):
$1,200 penalty,
Vince (41m 45s):
Was still in business. Yeah. And had professional indemnity insurance, which you should do. Yeah. Or worked for one of the big groups that that would've been bigger. So without knowing the details, it's hard to go into it. Yeah. But you know, this is a two-way street. Not excusing any particular behavior here. But you know, if you are paying someone to look after your affairs, they should be explaining to you what's going on here,
Phil (42m 11s):
At least on a yearly basis. Yeah.
Vince (42m 13s):
And, you know, one of the big things that I'm a really strong on is that if any of my clients or our members resort to the, my advisor put me into this, when asked why they did what they did, we failed in our job. Mm. So that our job as an advisor, which is part of making sure these returns end up in your pocket, is that you understand why that's the right decision for you. It's bit like buying a car. If you go camping every weekend, you probably need a four-wheel drive, which is more expensive than a two-wheel drive. You don't need to know how a four-wheel drive works, but you need to know why it's worth paying the extra for for one. Yep. And that's exactly with this with advice.
Vince (42m 52s):
Like why is this the right answer for you and why that other answer might be the right answer for Uncle Bob. If your advisor does a good enough job at explaining that to you in words that are meaningful in your life, then you'll feel more comfortable and you'll end up with a better answer. Lots to unpick there.
Phil (43m 14s):
Yep. There Is. Now just to finish up the interview, Ravi also picked you up because I mentioned to him that I'd be seeing you today and we'd be talking about this and he said in your last interview with Vince, he claimed the ASX 200 is the highest gaining index in any country. Not sure how this was measured. BSE Sensex has compounded at 13% for decades. Anyway, it's minor trivia, but he just wanted to pull you up on that point. Point oh it's
Vince (43m 40s):
A really interesting point. And whenever you are looking at returns, you've always gotta ask yourself compared to what? Hmm. So if anyone tells me my investment in X did really well Mm. I know well compared to what? Mm. So whenever you look at a return,
Phil (43m 57s):
You wanna benchmark,
Vince (43m 58s):
You need to look at what is actually measuring. So what I was talking about Mm was the real return. That is after adjusting for inflation in US dollar terms since 1900. Right. And they're not my numbers, they're Credit Suisse's numbers. Yeah, yeah. And Australia returns 6.8% real in US dollar terms. Mm. Since 1900 and it's above, I think Johannesburg is number two. Yep. Now, so a, it's in US dollar terms, not in Australian dollar terms. So to an Australian Investor that may or may not be relevant because they're gonna be spending Australian dollars.
Vince (44m 39s):
So an Australian dollar return might be more relevant to the assessment of an Australian Investor. Yep. And inflation adjusting makes a lot of sense because what you
Phil (44m 50s):
And US dollar
Vince (44m 51s):
Is worth, how much more is it done against
Phil (44m 52s):
Us? Dollar is worth 90% less, something like that. Even 99% less so in that time period.
Vince (44m 57s):
And of course in 1900 Australia was a very different place. And that includes some, you know, really bad times through the thirties, absolute boon times through the fifties and couple
Phil (45m 11s):
Of world wars.
Vince (45m 12s):
Well, I mean that's probably one of the reasons why Australia has done well, because it wasn't badly impacted by the either World War. I mean sure we lost a lot of our population in the first war, But you know, the country wasn't bombed substantially. We didn't have to divert GDP to rebuilding. We didn't spend a lot of money on armed forces. And so that will contribute to, as well as our place in the, you know, the fact that from 1900 to now the country's gone from, you know, being a British colony to being the 12th biggest economy in the world. But you know, Ravi is right to point out that the B S E EC has done particularly well since 1979.
Vince (45m 53s):
It's actually returned over 15% in nominal terms in local currency.
Phil (45m 58s):
So what is B S E Synex? Sorry,
Vince (45m 59s):
That's the top 30 or 50 share on the Indian Stock Exchange.
Phil (46m 4s):
Oh, okay. The nifty 50,
Vince (46m 6s):
Well it's, I don't think it's the actual nifty 50. Right. There's a whole bunch of different, but this is the broad based index. And in Indian rupe terms, since foundation in 1979, it's done about 15% a year, not adjusted for inflation. Yep. What that looks like in US dollar terms adjusted for inflation is probably, I don't know, nine or 10 maybe. And that's a period in Indian history where India's gone from being a relative economic backwater to being the fourth or fifth biggest economy. Yep. Well, sort of in terms of population anyway, so the exchanges that were covered in those numbers that I talked about were the 23 developed economies that are included in the M MSCI developed index, which India isn't part of.
Vince (46m 57s):
So you know, you've always gotta look at what does that statistic actually mean and is it relevant to me? Mm. So if I'm investing in a bond portfolio, comparing it to the ASX 200 makes zero sense. Mm. If I'm investing in a global basket of Shares, I probably should be looking at that in Australian dollar terms, whereas the, the various indices may be reported in US dollar terms. So gotta understand the numbers, you gotta understand the period an active fund managers are horribly guilty of picking the period and sometimes, you know, you pick a July one date compared to a June 30 date can give you significant a massive difference.
Vince (47m 41s):
Yeah, difference.
Phil (47m 42s):
Yes. Yeah.
Vince (47m 42s):
So, you know, make sure you're comparing like with like Yeah. And make sure that you're comparing it against something that actually matters to the outcome that you are trying to achieve. So well done Ravi.
Phil (47m 53s):
Thanks very much Ravi and Vince. Scully, thank you very much for inviting me into your studio so I could invite you onto my podcast Shares for Beginners. It's been great chatting with you again.
Vince (48m 1s):
It's been great. Thanks.
Chloe (48m 3s):
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