Barefoot Investor: It may be free now, but you’ll pay later

The finance industry has trained customers to expect advice to be “free”, but that’s the most expensive way to get it. Still, most Aussies would rather have it for “free”, no matter how much it costs them in the long run, writes the Barefoot Investor.

This column was supposed to be a rip-snorter.

See, Monday — when the findings of the Hayne Royal Commission were released — was like Grand Final day for me … I (almost) got more airplay than Kerri-Anne Kennerley.

Not only was it the biggest news item of the week, it was arguably the biggest finance story since the GFC.

So, earlier in the week I wrote to the Barefoot Community — literally hundreds of thousands of people — and offered to answer any questions on the royal commission, in today’s column.

I had a tin of instant coffee and toothpicks at the ready to answer the flood of questions.

KENNETH HAYNE DELIVERS FULL FINDINGS

WHAT ALL BANKING CUSTOMERS MUST NOW DO

BANKING ROYAL COMMISSION: A FIVE-MINUTE GUIDE

Here’s what came through:

One guy wanted to know if marijuana stocks would be affected (ummm, no, Smoky), another asked what aftershave I use (?), and a few wanted to know if it was a good time to buy or sell homes.

So here’s my big takeout from this week:

You don’t really give a toss about the royal commission findings, do you?

(Sure, the media banged on about it, but everyone else was like, “How about that psycho on Married At First Sight, am I right?”)

Yet there was one group who flooded my inbox: mortgage brokers — who were angrier than Alby Mangels (google him) at the Hayne-bomb’s recommendation to blow their trailing commissions to Timbuktu.

It was easy to spot them — they often wrote IN FULL CAPS.

Why were they so mad?

Well, the biggest change from the royal commission recommendations will come in two to three years’ time when you shop for a home loan.

If it all comes to pass, banks will be banned from paying both upfront and trailing commissions to brokers.

Instead, you’ll pay an upfront fee to the mortgage broker for the advice. Yet, how will that work out in the real world?

The truth is that ‘free’ is the most expensive way to get advice.

Luckily, I happen to know, because I did this last year with one of my staff, Natalie, who came to me and said she wanted to refinance her home loan.

We did three things:

First, we shopped around to see what rate online lenders like UBank and homeloans.com.au were offering.

Second, she rang her bank and used the scripts in my book to see if they would match the cheapest deal.

Third, I arranged for her to see a totally independent mortgage expert who charged an hourly fee for his unconflicted research, with absolutely no kickbacks. (This is the proposed model that will be in place in a few years.)

His fee for the research?

$4000.

Well, you could have knocked Natalie over with a feather.

“I don’t have $4000!” she cried.

The independent broker explained it would take 20 hours of research at $200 per hour, but that he would also rebate both the upfront and the trailing commissions.

In the end, Natalie ditched him and went with another broker who was recommended by her accountant.

“What did they charge you?” I asked.

“Actually, I don’t remember … but I know I didn’t have to pay anything upfront!” she said.

And there’s the problem:

The finance industry has trained customers to expect that financial advice should be “free”: free home loan advice, free insurance advice, and (back in the old days) free financial plans.

However, the truth is that “free” is the most expensive way to get advice because they’re loading up the cost of the product and generally expressing it as a percentage rather than a flat dollar cost, to obscure it further.

Still, most Aussies are like Natalie — they’d rather have “free” advice, no matter how much it costs them in the long run.

Tread Your Own Path!

 

2019 is shaping up to be an even tougher year for the property market.

Q&As

PROPERTY MARKET PREDICTION PAYS OFF

TAMMY ASKS: A few years ago I read your prediction that inner-city apartment prices would fall.

Since then I’ve been saving hard and am relieved to see property prices finally going down! I am now a few months away from having enough for a 20 per cent deposit.

Do you have any advice for first homeowners looking to buy in the next year?

BAREFOOT REPLIES: Well done for playing the long game.

(In 2015 I wrote “an open letter to the young people of Australia” where I predicted 2018 would be the year that first apartment owners would get their revenge because of an oversupply of newly built inner-city apartments.)

My first bit of advice is that there is no need to rush. In fact, 2019 is shaping up to be an even tougher year for the property market.

A NAB survey released late last month found confidence in the housing market has hit new lows (then again, NAB’s own behaviour hasn’t exactly been a confidence-builder either).

The apartment market has gone from FOMO (Fear of Missing Out) to FONGO (Fear of Not Getting Out).

Use it to your advantage. With a large (and growing) deposit, and the ability to negotiate, you’re in the box seat.

FONGO on!

Here’s hoping the new CEO of ASG cleans up their act.

AGGRESSIVE SALES TACTICS DON’T PAY OFF

JUSTINE ASKS: Thanks for warning people last week about Australian Scholarships Group (ASG). I wasn’t surprised you don’t recommend them.

My husband and I had our first baby quite young (21) and at the time went to a baby expo to check out all the latest things.

We wrote our names down for a “competition”, only to start receiving calls from ASG.

We somehow got talking and then a guy came out to my mum’s house (where we were living while saving money) to talk to us about it.

We said we could not afford it but might look into it later.

Anyway, the guy started calling me every day, then a couple of times a day. I ignored the calls, but then he called me 45 times in one hour!

I was bawling my eyes out, so my husband called the head office and told them he would call the police if we were contacted again.

It was horrible. I have told anyone who has ever mentioned them since to never go near them.

BAREFOOT REPLIES: He called you 45 times in an hour? That is intense.

He really wanted that commission.

This sales culture is why I’ve been so hard on ASG … here’s hoping the new CEO (who I interviewed for last week’s column) cleans up their act.

Being calm in the face of a disaster is what happens when you’ve got your money sorted and your plan in place. Picture: Lachie Millard

FEARLESS DESPITE TOWNSVILLE FLOODS

ANDREA WRITES: It is 3am and I am wide awake checking the river levels from a mate’s house to see if our house has gone under yet — a bloody stressful time for our town (Townsville).

Yet one thing I do not have to worry about is my important documents and my most cherished items. My “Fearless Folder” and valuables are with me in my waterproof safe.

Once this mess is all over my kids have already decided that their “give jar” will be going towards the recovery of Townsville for as long as it is needed.

That makes my heart smile as they themselves may end up losing their possessions.

These two things are giving me hope in a pretty crappy time. I thank you for that, and have no doubt there are many in Townsville doing the same.

BAREFOOT REPLIES: Your joint’s flooding and you’re emailing me?

Seriously, I love the fact that you’re so calm in the face of a disaster: that’s what happens when you’ve got your money sorted and your plan in place.

Even better, you’re turning this into a powerful life lesson that your kids will remember. You’ve Got This!

MORE BAREFOOT INVESTOR

If you have a burning money question, go to barefootinvestor.com and #askbarefoot

The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need (HarperCollins)RRP $29.99

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.