Reply: 1.1
From: Sim' Hampel
As Rolf said, Donna... get a new financial planner. It sounds as if yours is just like the vast majority of financial planners who are either just plain stupid (oooh... that was nasty - I know most of them are not stupid - but some of the comments I have heard from a couple of them lead me to believe that they were - a lot of them may not be stupid, but they ARE ignorant)... or have a complete bias towards investments which they can get a commission from selling you.
As you might have guessed, I have a fundamental problem with financial planners who are supposed to give you independent advice on what is best for you (based on YOUR situation), but are reliant on you choosing investments which pay them a commission for their earnings. This is purely and simply a conflict of interest.
I have seen numerous cases of incentives given by particular investment product managers to financial planners, such as free holidays, even new cars, to planners who place a certain amount of business with their investment product within a certain amount of time. Pick up a copy of Asset Magazine sometime and read through it - you'll start to pick up little things about how financial planners think and work.
Now, there are planners who know their stuff and will be able to give you great advice on your investments, including direct property (notice how most of the financial planners recommend you go for listed property trusts... they can get a commission for investing your money with them !). Unfortunately, you will probably have to look really hard to find one of these great financial planners.
In my opinion, "fee for service" (and full disclosure and comparison of commissions paid) is the only way to get unbiased advice - or at least you can carefully weigh the amount of bias and make an informed decision.
Now, naturally most people are enticed by the idea of getting "free" advice from a financial planner, thinking that if he gets paid a commission by the investment manager then you are not really paying them.
But the investment managers are not just going to pay these guys out of their profits now are they ? They need to recoup the costs of commissions to financial planners from the investors... what do you think the MER is ?
Management Expense Ratio... an amount charged to you based on the amount of money you have invested with the investment manager (but surely it costs just as much to administer $10,000 as it does $10,000,000 ????).
This administrative charge is taken out of YOUR investment (not just your profits... if you didn't make any money, or indeed lost money, it'll come straight off your capital (or what's left of it). The charge is to pay for the fund managers administrative expenses - which includes any commissions paid to financial planners. And it continues to get charged and the planners continue to get paid long (years !) after the interview with the financial planner occurred.
If you instruct the fund manager to cease paying your financial planner a trailing commission (as you can in some cases), it's not as if your MER is going to drop... it just means more profit for the fund manager ! You lose either way.
Now I would like to say that I do believe that there is a valuable service that financial planners have to offer pretty much all investors, and I have used their services myself, indeed not all of my money is invested in only direct property. But I beseech you to ensure that your financial planner is not doing you a disservice by giving you biased advice.
As we all know, direct property investments are a completely valid way to invest money (these wealthy people around us can't be all wrong can they ?)... so if your financial planner goes to great lengths to advise against direct property investment, shouldn't that ring alarm bells ?
While we are on the subject of trailing commissions and "free" service, some people might be wondering about services like mortgage brokers. Mortgage brokers work in a similar way to financial planners in that they generally do not charge up front fees, and they get their money from trailing commissions from the lender once you have taken out a mortgage.
So can mortgage brokers really offer unbiased advice on loans ? In my opinion, the nature of the product they sell is such that you can make a very safe and informed decision about the loan product you choose.
With investments, you are taking the advice of someone in the hope that it performs well and you make money. There are never any guarantees - and there are many things which affect investments which are beyond everyone's control. There are many unknowns, and indeed to a certain degree you are gambling with your investment money. The risks involved with investing your hard-earned capital are such that you really do want to make damned sure that it is being invested in the RIGHT place, not in the place where the financial planner gets the most return for himself.
For loans, they really are commodity items these days - they all work pretty much the same, the interest rates are very comparable, and the differences between the products are relatively subtle. What's more, before you enter into a loan product, you can fairly accurately predict exactly what is going to happen with it over the next 25-30 years. Of course an exception here are interest rates, but they affect all loan products, and make little if any difference to your broker's commissions.
So, even though my broker goes through and describes the different products to me, and gets excited over a couple of them because they pay higher commissions than others... I can still see the differences with the other products quite clearly and make my own informed decision without relying on assumptions.