Financial adviser’s words just bamboozle clients

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06/02/2009 BUSINESS: Scott Pape. The Barefoot Investor. HWT staff.

My husband and I are confused and overwhelmed. We have a $450,000 SMSF, which our financial adviser set up for us, but I don’t understand how it works. It’s as if my adviser speaks another language. Most of our money is invested in the wholesale option, which apparently gives a higher return and saves on tax. Does this sound right, and is it safe?

Lisa

Hi Lisa,

I have no freaking idea what you’re talking about — and I don’t think you do either. If you’re having to write to me to try to explain where your money is invested, then your adviser is a rolled-gold idiot.

The best financial advisers are like teachers: they devote time to walking you through their recommendations and explaining the reasoning behind their advice.

It’s good practice all round: if you understand what’s going on, you’ll be more likely to act on the plan — and less likely to sue them if things go pear-shaped.

Yet your adviser is treating you like a mushroom (kept in the dark and fed fertiliser), so they deserve to be mushroom risotto. You’re not stupid. Far from it. Stupid people don’t end up with $450,000 in superannuation. Just like at school, all you need is a caring teacher who’ll walk you through the steps. That’s not too much to ask, especially when you’re paying them hundreds of dollars an hour.

LOOKING TO BUY IN TO BOSS’S BUSINESS

I am an engineer, aged 29, and I’m working for a small company. I think it has a lot of potential, but it’s poorly run. The boss is 73 and will be carried out in a box before he retires. Should I wait for him to make me an offer to take over, or start a business of my own? Or maybe just get another job working for a company with less drama?

Martin

Hi Martin,

You already have an entrepreneurial mindset, but you need to apply it to your current job.

It sounds like your boss lives his business, so appeal to that. If I were in your shoes, I’d work up a proposal on how you can take on more responsibility to make the business more profitable — the kicker being that if you achieve it you get a slice of the profits you generate, paid either as a bonus or as equity in the business.

Depending on his reaction, you could negotiate an “earnout” over a number of years (where you work for equity in the business rather than full wages).

That’s got a couple of advantages: first, you don’t need to borrow a heap of money to eventually buy the business, and, second, you’ll get an in-the-trenches education in running a business. However, if he refuses to entertain the offer, I’d look to take your proposal to a more growth-minded business owner.

HELP, MY INVESTMENT PROPERTY’S A DUD

QI’m in a pickle. I’m 27 years old and I made a really bad deal on an investment property four years ago in southeast Queensland. It cost me $370k and I now have a mortgage of $318k and a vacant rental property worth somewhere between $240k and $290k. Even less perhaps! I have no equity elsewhere (or other debts) and no Mojo. I want to get out, but how? Will my lender let me, and how do I foot the shortfall? As I earn $100k I can service my debt, but I’d prefer to cut my losses and start over. Help!

Eliza

Hi Eliza,

Even though shows like The Block make it look like you only need 10 weeks to bag a $400,000 profit on a home, the reality is that property is a long-term, 10-year-plus investment.

You’d be lucky to be breaking even after a few years when you factor in stamp duty and other upfront costs.

However, to be down 35 per cent in such a short time sounds like you may have been sold a property spruiker special (which will often come loaded with upwards of $50,000 in hidden kickbacks to various salespeople). If that’s the case, no amount of time or money will turn a dud deal into a good one.

I’d talk to your bank about your options — and potentially your lawyer.

SISTER IN A REAL FIX AFTER SEPARATING

My sister, who just turned 40, recently left her de facto partner of 10 years due to domestic violence. When she left, she literally had nothing but two bags of clothes, plus $20,000 of debt (made up of unpaid mobile phone bills and various items acquired through interest-free agreements and a maxed-out $3000 credit card). Her annual income is $39,000. What can she do to pay off these debts as quickly as possible, and who can she contact for sound, free financial advice?

Cassandra

Hi Cassandra,

She could go bankrupt, and financially at least she’d probably be better off: her debts would be cleared and, her wages wouldn’t be affected, as she’s under the bankruptcy income threshold.

That being said, bankruptcy may affect her employment opportunities, and it will be listed on her credit report for seven years, and on the National Personal Insolvency Index for life.

More than that, I’m yet to see anyone go through the process unaffected. And that’s the most important factor here: your sister is probably already feeling emotionally bankrupt, so being financially bankrupt as well could really knock her self-confidence.

My thinking is this: your sister needs love and kindness, but she also needs a win. So she should definitely go and see a community-based financial counsellor (call them on 1800 007 007). I’d be pushing for the counsellor to apply for hardship variations and do deals with her unsecured creditors.

If you’ve got spare cash to help your sister, you’d be surprised how easily you can get them to write off $20,000 worth of unsecured debt with a one-off $6000 cash payment. Good luck.

Originally published as Financial adviser’s words just bamboozle clients