It’s great to plan ahead for the life you want, but even better to liberate enough cash to enable it. Let’s assume for the purposes of this chat that you have some spare cash after you’ve met your outgoings each month, that you’re cash flow positive.
If you’re not, then you have two choices: get your expenses below your income or borrow. It’s that simple.
The latter’s a furfie, since if your expenses are already more than you earn, adding an interest payment into the mix is not going to help you to get ahead. It’s back to the drawing board for you, fix that cash flow problem pronto and let’s not get into the argument about possible higher returns exceeding the cost of the borrow.
Yes, it’s possible to create wealth through the use of borrowed money, perfectly doable if you know what you’re doing. But let’s keep it simple for now.
Once on the journey of stashing your cash, you’re going to need a financial product or two or more and some advice — unless you really know your stuff. It’s just the way it is and any other route may not be entirely legal anyhow.
To help, “experts” can generally be found in financial institutions. So can numnuts. It’s true. So what can a girl do? It can be difficult to find an adviser who owns their own practice and holds their own financial services license outside the corporate environment, and it’s not always worth the hunt anyway since “independence” in the world of financial advice is subjective. The resources of the big players can sometimes provide scale benefits to you as a client too, so keep an open mind. I’m not advocating either, just for you to be smart, selective, and trust your gut when you hunt.
In the end, it comes down to whomever you trust and can develop a good relationship with. There are some really good advisers around, and the trick is to pick the smart ones who want to make money for you as well as themselves and their shareholders. In defense of the good advisers, it is an expensive operation to run an advice business, the fixed costs are substantial and clients are still largely unwilling to pay fixed fees for advice even though the government is trying to steer them that way through the Future of Financial Advice Reforms.
That said, advisers have to make a living and it is only fair to pay someone a decent wage to work hard for you; your job is to pick the one who will. It goes without saying that to offer you personal advice they must be licensed with an Australian Financial Services License. If you’re not sure, ask to see their license before you even begin.
So in order to avoid difficult situations with advisers and ending up with terrible financial products, here are a few style tips:
- Be dumb. Yes really. Most people are afraid to ask questions because they’re scared it will make them look stupid, which might in turn, create a position of disadvantage. Organising your money affairs is neither the time, nor the place for pride. The easiest way to test whether your adviser knows what they’re talking about is to keep asking really simple questions. It’s quite a disarming yet charming technique. Make “I’m sorry I don’t quite understand that, can you explain it a different way please?” your mantra until you truly get what they’re talking about. If they can’t explain, or get impatient, run in the opposite direction because their interests are certainly not aligned with yours. I’ve seen the smartest people around employ this tactic and it works, because it’s honest.
- Make sure they can spell it out, so you can do the same. Can you successfully explain the concept of how you will make money on a recommended product to both a ten-year-old child and your smartest friend? “Oh don’t worry about the mechanics dear, it’s like a TV, you don’t really need to know how it works!” does not cut it here. Yet, you may hear it. You absolutely do need to know how ‘this stuff’ works, and you need to be able to explain it to a ten-year-old child. If you can’t, walk away (from the product, not the child), it’s not for you however good it sounds.
- If it looks like a duck … and quacks like a duck, it probably is a duck. Best plucked, roasted and the bones boiled for stock. Not however, for securing your future.
- Understand counterparty risk. Who stands behind any real or perceived guarantees? Will the guarantor still be around if and when you should need to call on it? Australian banks and Financial Institutions are among the most heavily regulated in the world, but that doesn’t always protect against shonky sales practices as the Storm Financial, Great Southern Forestry and Westpoint debacles illustrated all too well. Caveat Emptor/buyer beware, trust your gut and do your homework. You know when it’s not right, listen to that still small voice.
- Know that there is always a risk. What’s yours? There used to be a defined risk free cash rate that professionals used, but the GFC has rather pulled the rug out from under anything defined as ‘risk free.’ Even established deposit accounts and government bonds are not 100% entirely risk free in the current economic environment.
- Appreciate all the drivers that could impact the anticipated outcome. What would a change in interest rates, tax law, inflation, global economic factors or an asteroid hitting the ocean do to your proposed future security?
- Recognise the commitment. Can you change your mind and get all your money back after one week, six months or two years?
- Ask the adviser’s business model. How do they get paid and what impact would your taking out this product have on their personal income? Does it make any difference to them if you make or lose money, if so how? Will they advise you on an ongoing basis and how will they be paid for that? Again, if they get coy, walk away, this is a business transaction and transparency is vital. Don’t be fobbed off by those tedious and mind boggling written documents called ‘Statement of Advice’ and ‘Financial Services Guide’ either, get your adviser to look you in the eye and explain their recommendations. Step by step.
- Note that property’s different. Property is a law unto itself, not regulated in the same way as most financial products in Australia and rarely offering the same level of consumer protection if the deal goes wrong. Beware the spruikers especially, they’re like vampires emerging from their dusty coffins every time interest rates drop, advocating borrowing chests full of bank loot to create ‘guaranteed’ wealth. We have a long way to go before this shit storm is cleaned up but our nation’s love affair with property continues nonetheless. If you’re going to buy property, trust your gut like never before or work with someone you’re certain you can trust.
- Buyer Beware. Above all, only you can make the final decision and don’t let anyone talk you into anything you don’t either feel comfortable with, or understand fully.
Have you had any great or not so great experiences with advice? What tips would you share?
Sara Lucas is an Authorised Representative of Fitzpatricks Dealer Group Pty Limited ABN 33 093 667 595 AFSL 247429
This information is of general nature only and is not intended as a personal advice. It does not take into account your particular investment objectives, financial situation and needs. Before making a financial decision you should assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. We recommend you consult a professional financial adviser who will assist you.