Seven things a financial adviser won’t tell you

Some welcome reforms were almost watered down by Finance Minister Mathias Cormann Picture: Aaron Francis

FINANCIAL advice hit the front pages this week. That’s no bad thing, because the issue is crucial for millions of Australian investors who have been ill-served by charlatans, incompetents and ­occasional fraudsters in recent times.

The fine details of the Future of Financial Advice reforms have been spelled out elsewhere. Suffice it to say some welcome reforms were almost watered down by Finance Minister Mathias Cormann — but it now looks as though they may ultimately remain intact.

However, there are certain things a financial adviser will be very reluctant to tell you, regardless of any permutations of FoFA. They won’t tell for several reasons: because they simply don’t know, because they are greedy for a bigger pay cheque or because the choice is not “on the platform”.

The platform is the list of approved products they can select from without enduring extra compliance or the risk of being sued. Here’s what you’re unlikely to hear.

You can leave it in cash

We have a remarkable banking system where there is a government guarantee on every $250,000 you have on deposit with any bank: the rates at present are low by historic standards but so is inflation.

Lesson: You can get a government guaranteed return for deposits in any bank. Advisers will make no income from money invested this way.

You don’t have to spend it all at once

Remarkably many people still approach advisers with lump sums post-retirement or in the wake of an inheritance. Dollar-cost averaging, the practice of regularly investing a regular amount over a long period of time is a proven way to reduce volatility; it is also a very good discipline.

Lesson: Dollar-cost averaging is how everyone should approach the market, but few financial advisers have the patience to wait for your fees if you take this ­approach.

You do not have to use managed funds

Managed funds are the default option for most planners for most clients, but these funds have a mixed track record. You will be offered only the funds the financial adviser has access to on the “platform” they are linked with and no others. Listed investment companies (LICs) offer a managed fund-like alternative without the fees.

Lesson: Advisers rarely mention LICs and other options because they are not “on the platform”.

There are perfectly good stocks outside the Top 100

There are many perfectly sound, strongly performing small-cap companies that operate in the sub-$200 million market capitalisation category. Their problem is that they are not “researched” by stockbroking companies so they are not recommended.

Lesson: Good small caps are worth investigating but big brokers and fund managers won’t bother looking at them because they generate insufficient fees.

The government pension is there to be accessed

Advisers discuss your money in something of a vacuum. An honest, holistic approach to the availability of the government age pension should be taken into ­account for the vast majority of people. For example, the family home is exempt from the age pension assets test and this could be central to your plans.

Lesson: Investing is all about creating income; if an income can be designed that includes some ­access to government pensions, you have a successful and legitimate strategy. Planners don’t mention it.

It’s good for the industry if you borrow ... but it may not be good for you

Your plans to build wealth for your retirement do not have to include borrowing. Remember, if you borrow, then your advisers and fund managers stand to make more because there is a bigger pool of money at hand. Many ­investors have built strong portfolios through the skilful management of cashflow.

Lesson: Be very careful if an ­adviser suggests you borrow funds before you first introduce the topic.

A home mortgage is the cheapest form of finance

Assuming you, rather than your adviser, are ready to borrow. Taking a slightly larger mortgage than you need and then using that money — borrowed at 5 per cent rather than 10 per cent or more for personal loans or margin lending — is a very smart strategy for investment purposes. Moreover, you can split mortgages — say 80 per cent fixed and 20 per cent variable. Every bank will do this but very few will advertise the fact.

Lesson: The cheapest finance out there is the mortgage ... check it out.

In the end, financial advice will always be a vexed area when the system is designed to sell products rather than genuinely advise investors. The FoFA rollback resurrects some protections in the system, but the system nevertheless remains intact.

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