Be wary of advisers from Donald Trump down

"JUST copy exactly what I've done and get rich," says super-spruiker Donald Trump in an ad for his Trump University.

Donald Trump Apprentice

"JUST copy exactly what I've done and get rich," says super-spruiker Donald Trump in an ad for his Trump University (an invisible institution peddling expensive and largely useless get-rich-quick property courses).

Taken literally, here's how you would copy Donald's strategy: be the son of Fred Trump, a real estate tycoon. Lose all your money. Shave your noggin (except for the right hand side, which you should grow really long). Apply fake tan liberally. Tell everyone you're a billionaire. Fire people on a television show.

This week the New York Attorney-General announced he was suing Trump University for $40 million, claiming the organisation engaged in "persistent, fraudulent, illegal and deceptive conduct".

Apparently about 5000 students signed up for a three-day seminar - at $US1495 ($1675) a pop - that promised to teach them all they needed to know about becoming a successful real estate investor.

So, what did they get for fifteen hundred bucks? Well, they got up-sold.

Trump's course borrowed a strategy from Robert Kiyosaki's Rich Dad Poor Dad coaching program.

Students were instructed during the class to call their credit card companies and request an increase in their credit limits.

Trump's instructors even provided written scripts for students to use in their phone calls, which allegedly encouraged them to fib about their current income, so they could borrow more.

Students were told that the reason they were doing this was because property is all about leverage - using other people's money to do deals - and that learning to creatively finance was the way to get rich in property.

However, after they'd successfully hoodwinked the banks into increasing their credit card limits, the hard sell began. They were hit up for Trump Elite Mentoring - which cost anywhere between $US10,000 and $US35,000.

For that money people thought they'd at least get to meet the comb-over king - but instead all they got was their picture taken in front of a life-size cardboard cut-out of Donald (which you could argue has just as much substance).

At the end of the day though, should punters really be surprised? Kiyosaki and Trump did, after all, co-author the book We Want You to Be Rich. In their footnote they warned: "A word of caution: if you believe that working hard, saving money and investing for the long term in mutual funds and diversifying is good advice then this book may not be for you."

There endeth the lesson.

Question of the Week: Where have you been all my life?

Hello Scott,

I sincerely wish I had known about you a long time ago. I started reading your column three weeks ago and the penny has finally dropped!

My situation is this: I'm in my early 40s, I have $80K left on my mortgage, about the same in super, two kids at university and one in secondary college.

Eight years ago my financial adviser recommended I invest $15,000 into something called an OM-IP fund. He had years of experience with these types of funds and stated it was common to double your money.

But it's done nothing. I'm now wondering whether I should open up two First Home Saver Accounts for my kids, unless you have any other ideas?

Thanks,

CJ

Hi CJ,

First, your financial adviser was a rolled-gold moron.

Any financial adviser who sells you on a short-term strategy that's "common to double your money" has about as much credibility as those doctors who appear in ads selling rugs to bald blokes. Yeah, yeah.

I looked into the OM-IP funds, and hit three red flags:

First, they run a bunch of expensive hedge funds that invest in alternative assets. The guy who manages the money goes by the title of "Chief Scientist", and he uses a lot of acronyms. Most of them I didn't understand.

Second, they offer a capital guarantee. That's always a bad sign. Why? Because it means: (a) you're being sold something risky; (b) they've designed the product to appeal to unsophisticated investors; or (c) all of the above.

Whenever you're offered a capital guarantee (in the real estate world it's called a rental guarantee), make no mistake - you're paying for it, generally in the form of lower returns.

Third, they're charging roughly 2 per cent a year to manage your investment, which doesn't sound like much. But think of it this way: If the market goes up 10 per cent a year, you've just kissed 20 per cent of your return goodbye.

And they also whack you with a 20 per cent "outperformance fee" if they manage to outperform the benchmark index they've chosen.

Bottom line: I wouldn't let my mother-in-law invest with this mob.

I know it sounds very old-fashioned, but I've learned over the years that the key to making money - and sleeping well at night - is to work with people who have your best interests at heart. And I can tell you that's not your financial adviser, or your current fund manager.

So here's my advice:

Open a couple of First Home Saver Accounts for your older sons. Explain to them that this is the first step towards them owning their own home. It's a teachable moment (and an effective insurance policy against them living at home with you when they're 30).

Second, simplify your financial situation. Think of pouring all your money into one of three buckets: a blow bucket (for living expenses, and debt repayments), a mojo bucket (for short-term savings goals and security), and finally a grow bucket (for long-term security, including superannuation).

And when it comes to my grow bucket: at the core of my portfolio are holdings in the Australian Foundation Investment Company, and Warren Buffett's Berkshire Hathaway.

Both investments have been around decades, charge rock-bottom fees, and are run by people with integrity - who treat their investors as "partners".

Contact Scott Pape at barefootinvestor.com or [e-mail]