As an adviser working with clients over the last 20yrs, it still pains me to be here writing another post about bad advice. However, I feel I need to keep you; the general public informed, so you know what to look out for.
In this instance, it’s not the client’s fault; it’s the self-interest of the advisers involved that had led to bad advice and profiting in the process.
This particular client had worked hard all her life, raised kids, continued working to support her family. In a stable second relationship. An everyday Australian.
She had not sought advice until she received an inheritance, in her late 50’s. Never really had much financially, but had worked hard to be in the position she is in today. Still had a mortgage, as most would know when you have a breakup, it makes you poorer.
Nevertheless, in this case, one of her parent’s had passed away from in the last couple of years. As the parents had split some time ago, she received a large inheritance. This was the first time she had needed to seek advice from anyone as she didn’t what to do with the legacy.
In the interest’s of privacy, we are not going to delve deeply into the numbers but provide the general outline.
This client had a reasonable mortgage, a small super balance and not much else. She was happily living life, just striving to put herself in a position where she could stop work if it all got too much. She was just over the 30% tax bracket.
Here’s where it went wrong….
The first adviser this client went to see, recommended that they put the proceeds from the inheritance into a tax bond. A tax bond is a tax structure where the maximum tax rate is 30%. Therefore attractive if your marginal tax rate is greater than 30%.
However, as this client was in her late 50’s, they could have also recommended contributing the funds to super, max tax rate of 15%.
Given she had a large mortgage, the best strategy would have been for the client to contribute all the funds to their mortgage. Given the amount they received from the inheritance, they would have been able to pay the mortgage off and free up cash flow for investing or contributing to super.
What is wrong with this picture?
The adviser in question, instead of providing the right advice to the client, focused instead on selling a product where they could substantiate a fee which was not appropriate considering the goals and needs of this client. Clearly, the self-interest of the adviser was at play here rather than what was in the best interests of the client.
When I see someone experience this, it does not surprise me that you, the consumer, have doubts over the interests of financial advisers.
In this situation, the client was in need of advice and a good adviser would have been able to realise this. They would have still paid for the advice and stayed as a long term client and had been better off.
Luckily, this adviser has recently retired and no longer in the business of giving financial advice.
But this get’s worse with another adviser who is still advising clients and will for some time. They work for a banking institution which I will not name here.
I am referring to the same client, who in this instance was looking to improve their financial situation. They went along to a super seminar provided by their work to find out whether they should be doing more.
This led to a meeting with an adviser of a banking institution, and subsequently, she took advice from this adviser.
The client was advised to roll over money from their current super fund, which was a very cheap super fund and had performed pretty well, to a super fund which was a product of the banking institution. She was then moved into a transition to retirement pension.
Now, I have no problem with the strategy itself; it was the right for the client. The actual strategy was going to put the client in a better position, no doubt.
This issue I have is the product that was recommended and used. Did I mention it was a product of the banking institution the adviser was aligned with…..
The client had less than $200,000. The super fund they were with had a transition to retirement product; it was cheap, the performance was relatively good and would have suited the needs of the client very well.
Besides being placed into the banking institution’s product, they were placed in 26 different managed funds. Did I just say 26 investments, WOW….. I’m in shock. Talk about making it complex.
It’s more likely the client was bamboozled and assumed it was the right thing to do. By the way, it cost the client $30.50 to purchase each of those investments as well. That’s a total of $793. Unnecessary costs in my eyes.
Oh yeah, and the average cost of those investments was around 1% pa. But you don’t see that; it comes out before the investment return being declared.
The client would have better going into an index fund with low costs. Cheap, well diversified while gaining the appropriate investments.
Let’s talk performance. No one can predict the future, so it’s difficult to work out what’s going to happen and what investments are going to perform better than others. However, if you’re on a good thing, why change.
If the client had remained with their original super fund, which by the way has had great past performance, they would have generated an 8.2% return for the 12mths ended 30 June 2017. The new investment that the adviser had recommended returned 5% for the same period. That’s a massive 3.2% difference, on $200,000, that’s $6,400 worse off. And that’s before we take into account the fees of the product.
I call it the butcher effect. Hightower in the states came up with a great comparison between different types of advisers. The butcher and dietician. When you go into a butcher shop, you are only going to be sold one thing, meat. It’s in their best interests to sell you meat, it may not be great to eat all the time but it’s all they have, they’re not going to tell you to go down the road and buy some salmon, are they? These advisers are working under institutions selling the banks products or related products; it’s in their best interests to do so.
Whereby if you go into to see a dietician, they’re going to sit down with you, ask you a whole bunch of questions, run a few tests and tell you what’s best for you, whether it be meat, fish, veg or salad. They’re not trying to sell you a product like a butcher. They’re going to tell you what’s best for you.
If you want to have a look at the video, click here
Needless to say, investment fees were significantly higher as well.
Was the best interest’s of the client looked after here? I think not, given the client information and what they had available it would have been far better for the client to stick with their original super fund, have a transition to retirement pension started and the client would have been far better off.
Now the adviser could have had self-interest at heart, may have been thinking could not receive a fee if they did not place them in the institution product. Advice should stand alone whether a product is involved or not.
The advice was good, but the product recommendations, in my opinion appalling, complicated, expensive and made it hard for the client to understand. Keeping it simple is always best, there’s no need to overcomplicate it.
Good for me, picked up a new client, working on fixing these problems that the two advisers created. Mortgage to be paid. Frees up more funds to contribute to super (tax effective), move them back to their old super fund (suits their needs and cheaper), it’s simple and will put the client in a better position. One of the reasons I left a big institutionally owned licence.
Now, most advisers you come across out there are great advisers and are looking out for their clients best interests. God knows Australians need advice, however, it pays to be wary.
For my colleagues out there. Client’s interests come first, advice should stand on its own two feet whether a product is involved or not and don’t overcomplicate it.
Hope that’s been useful.
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Written by Glenn Doherty CFP – Financial Organiser
This information is of a general advice nature only, and has been prepared without taking into account your particular financial needs, circumstances or objectives. All information is based on Exelsuper Advice Pty Ltd’s understanding of current law as of 7th September 2017. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should seek professional advice before acting on the information contained in this publication. Taxation considerations are general and based on present taxation laws, rulings and their interpretation as at 7th September 2017. You should seek independent professional tax advice before making any decision based on this information. Exelsuper Advice Pty Ltd ACN 080 419 holds an Australian Financial Services License 428272.