WTF is Financial Advice?
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Tax22 February 2017

WTF is Financial Advice?

Being successful with money creates options for us in life. But for young professionals in particular, there are some problems that I see time and time again which stop people from getting the results they want. If you know what information you need and what resources you can draw on, you can avoid many of these problems and set up a clear and easy to follow path from where you are today to the lifestyle you want. But where do you start?

As an Adviser, I’ve must have been asked hundreds of time what we actually do and how this all works. So I started writing this post, and the words just kept a comin’! This turned into a bit of a beast blog, but I think understanding what advice is, when it can help, and how it all works is a big step towards putting your money to work for you.

So, what's the problem?

I have some really interesting conversations with people when we are first introduced or they first contact me through Pivot Wealth. Most of them start with the person saying “I’m not sure if Financial Advice is right for me, but there are these things I’ve been thinking about…”.

Young professionals often want to get more out of their money, but don’t know where to start or what sort of help is out there. Now every person’s situation is unique, but I’ve found that when it comes to money, young professionals face some common challenges:

  1. They’re overwhelmed with options and suffering information paralysis
  2. They don’t have a good system to make smart money decisions
  3. They can’t see a clear path from where they are now to the money and lifestyle outcomes they want for the future

When you’re not sure what to do, how to do it, or how to get started, you fall into the inertia trap. You just keep doing what you’ve been doing, ultimately missing a bunch of opportunities. Opportunities to save more, invest more, and move closer to the lifestyle you want. The cost of this inertia over time is huge, and should be avoided at all costs!

The cost of inertia

Consider this example:

Starting today you invest $10k each year for 10 years into an investment account returning 8% p.a. This would be a share type account, and the 8% return is slightly lower than the average long term return on Australian or International shares. Once you make the initial investments over the 10 year period, you stop investing more money and just leave the investment to grow with the income reinvested for the next 30 years (total investment timeframe of 40 years).

At the end of this period your investment would be worth $1,666,540 (not bad right?).

Now consider this alternative. The strategy is similar, same investment return, same savings amount, but instead of starting today you wait 10 years to get started. You leave the money until the end of the same 40 year period, but because you started 10 years later, your money is only growing for 20 years after the initial 10 year contribution period.

In this scenario at the end of the investment period you’d have $750,815.

We see that with both of these examples, you put in the same amount of money over the same timeframe. The difference with the first example is that you start 10 years sooner. The difference in the outcome you would receive is huge, with the first scenario giving you more than double the amount you receive in scenario two.

This is a simple example, but shows the power of getting started sooner. It also shows why you should do everything you can to set yourself up to make smart decisions and set up a good strategy now.

The issue though comes from the fact that when you’re facing the problems outlined above, it can be hard to know where or how to get started. You’re worried about making mistakes and suffering setbacks (and you should be) but this fear and confusion causes inaction and delays in getting started.

We can see the cost of delayed action through the example above, and the result is not making the money progress you want, having to work longer, and make lifestyle sacrifices now and in the future. Ultimately causing you to have to ‘settle’, my least favourite word in the dictionary.

But it doesn't have to be so hard

Young professionals want more. We want to spend more. We want to save more. We want to take steps that will set up the lifestyle they want for the future. Whether it’s travelling more, building a second source of income, or growing assets that will provide for our family or loved ones, we want results.

But it’s often hard to know what to do, what resources you can us, or who can help.

Many try to figure this out themselves, struggle through, become frustrated, suffering slow (or no) progress, and make mistakes and setbacks.

I’ve asked a number of the people I’ve worked with what stopped them from seeking out help sooner, and the common response is that they didn’t know what sort of help was possible or who might be right to help them.

And it’s no surprise why.

For most people, their experience of financial advice is either from themselves directly or someone they know trying to be flogged some product by their bank teller or pushed into a meeting with an adviser that was more interested in themselves than their client.

Let’s address the elephant in the room. Financial Advice grew up around product sales. Back in the day, Financial Advisers were the only ones that had access to the financial products like investment funds, superannuation, and life insurance. If you wanted to get one of these products you needed to speak to a financial adviser and have them help you set up the product.

If you saw an adviser and didn’t take out one of these products the adviser didn’t get paid. Sometimes this would mean your adviser would say they couldn’t help you, with the most common response I’ve heard been them telling you to “come back when you’ve got $100k to invest”. In bad cases the adviser would convince you that you needed a product that you didn’t really want or need.

Now both are bad outcomes and really grind my gears, both for different reasons. The second is obviously bad, because you end up with some crappy product that isn’t really going to help you. But, the more I think about it, the more I realise that the first is probably the most costly.

Saving $100k is no easy feat, and if you’re told to go off and do this by yourself it can mean years of slow progress. We’ve already seen the cost of delayed action above.

Part of the reason I started Pivot Wealth was because of stories like these. If you want to get better results from your money, there are a number of things you can do to make saving your first $100k easier. Whether it’s managing your cashflow better, cutting your tax bill, or setting a small regular investment plan, you have options.

Today everyone has access to virtually unlimited information online. All financial product companies offer products direct to consumers, so if you want to establish a product, you can do it yourself.

Thankfully more Advisers realise they can provide a lot of help to people in getting started. In my opinion this is a great shift, because it forces Advisers and people that work in that space to add real value through helping you figure out the strategy that sits in front of any product and how you can use the tools available to get the results you want from your money.

In current times, people looking for help with their money want, deserve, and demand more than product advice. This is a beautiful thing to watch.

So, WTF is Financial Advice?

So with all of this in mind, the way I see it, Financial Advice has one goal: To help you build a clear and easy to follow path from where you are now to the money and lifestyle outcomes you want.

The result is Financial Planning, but particularly for young professionals, this typically involves more lifestyle planning than financial planning. This is because the right financial decisions are driven by the lifestyle outcomes you want.

These days we’re a little spoilt. We want it all. We want the lifestyle. We want the freedom. We want the flexibility. We don’t want to compromise.

The good news is we don’t have to. Money won’t ‘fix’ anything but it does give you options. I see money as a tool you can use to set up the life you want to live.

So to choose the financial direction you want to take you need to consider the lifestyle you want to live. This is the only way you will end up with a strategy that excites you and gives you confidence that you will get to where you want to be.

A good Financial Adviser can help you understand where you’re at now, your key opportunities, your options and their impact, and how to choose the right combination of strategies that will give you the outcomes you want from a money and lifestyle perspective.

Unlike other professionals such as mortgage brokers, stockbrokers, or accountants, an Adviser sees all of your situation and has a complete picture of what’s important to you now, how your situation may change into the future, and what you need to do to get there.

I’ve seen many situations where some of these other professionals provide ‘good’ strategies or advice, but that still doesn’t mean it’s the best thing to do for the person they are advising. I was recently working with a client who was self employed and looking to buy property. His accountant had been telling him to structure his income in a certain way, and while the accountant’s advice did give my client with the ‘best’ tax outcome, the scope of this advice was too narrow.

You see, because my client was about to buy property and go into a bunch of debt, he wanted to keep extra cash savings aside to fund his deposit and reduce his debt levels. He was prepared to pay a little more tax in the short term to save him interest costs and have better cashflow after his property purchase. This accountant had given my client the best tax advice, but it wasn’t the best outcome when looking at the bigger picture.

Because an Adviser sits in the centre of your financial world and can see how the different elements of your strategy work together, they can help you work with professionals in other areas to ensure these other advisers are helping support your broader strategy. An Adviser will help you ‘project manage’ the support you get from your other professionals so you get the best outcomes from your strategy.

Types of Advice

Sometimes you might need to get advice for a specific area, and other times you might be looking for overall advice to get the most out of your entire situation. It’s critical to understand the difference, and to know what sort of advice you want or need before you start looking.

For example, imagine you have saved or inherited $50k and just want an adviser to help you build an investment strategy for this money and not look at the rest of your situation. This very specific need would result in ‘specific advice’, or sometimes called ‘scaled advice’.

The alternative option is broader in scope. You might have $50k that you want to do something smart with, but you want to confirm what investment strategy is best and how this fits with your broader financial strategy. This is called ‘comprehensive advice’ or ‘comprehensive planning’.

The difference between the two can sometimes seem small, but there is an enormous difference in the output. Understanding this difference is the first step in getting the outcomes you want from Financial Advice.

In the case of specific advice, your adviser is only helping you invest money. If you ask an Adviser for this type of advice, they will let you know their advice is limited to only how best to invest your money and isn’t considering any other aspect of your financial situation. What this means is your adviser isn’t advising whether investing is the very best thing to be doing with your money, they aren’t reviewing your plans to invest relative to your other goals, and your adviser isn’t exploring whether investing this money might generate risks in your life.

In the second instance, your Adviser is helping with your investment plan as part of your overall financial and lifestyle strategy. Comprehensive Advice means:

  • Your Adviser is required to gather a full understanding of your overall financial situation
  • Your Adviser will explore if investing is the very best thing to do with this money
  • Your Advice is not only limited to investing your money, but covers investing as part of your overall strategy and will help you understand the implications of your investment
  • Your Adviser is obligated to raise any issues, risks, roadblocks, or potential problems with your investment strategy in reference to your other targets or goals
  • Your Adviser will discuss any opportunities or issues in other areas of your financial situation (outside of your investment strategy) and help you understand how you can take advantage of these opportunities

To me, specific advice has it’s place. It’s best when you are 100% sure a particular strategy is the very best thing for you to be doing, but you need some help to execute.

I think the outcome of comprehensive advice should be to help you set up a clear and easy to follow plan from where you are today, to the money and lifestyle outcomes you want. Comprehensive Advice will be more detailed and need more inputs, takes a little longer to put together, and costs more, but it goes further to helping you actually achieve your money goals.

I feel comprehensive advice is more suitable for those with less financial knowledge or understanding, where they might not know what all the options are for them. If this sounds like you, I think it’s important for you to take the time to explore your options so you can decide which specific path is going to be the right one for you. This will give you more confidence in the direction you’re taking and mean you’re more likely to stick to your strategy because you know it’s the best one for you to be taking.

Your overall plan should drive the specific strategies you follow or investments you make, not the other way around.

Make sure you get clear on the type of advice you want before you start the process. This will drive the sort of Adviser or Advice firm you seek out, and will help you ask the right questions so that the Adviser you choose will be the right one to help with the things you want help with. I’ve seen a bunch of people that have gone seeking comprehensive Advice, only to be lead down the path of getting specific advice that doesn’t consider their strategy as part of the bigger picture.

When you sit down with an Adviser, if you want comprehensive Advice, tell them! Ask the question whether they will be excluding anything from your advice (sometimes called ‘scoping’) and let them know you want to explore everything that could be relevant to helping you get more out of your current financial situation.

Financial Project Management

When people consider seeking Financial Advice, they often link the value to a specific strategy or investment. In reality, Advice is much more than this. When you work with an Adviser, you can also use them as a sounding board when you’re making decisions. Because your Adviser understands what’s important to you and your broader strategy, they can help you understand options or opportunities, and how they fit into the big picture.

An Adviser will also help you by working as an accountability buddy, to keep you on track and keep you moving forward. I’ve see what a difference having someone to keep you accountable to the goals you want to target can make, and I think the value of having an accountability buddy is hugely underrated. Personally I’m a bit of a coaching junkie, and I work with a number of great people in different areas. I have business coach, a multimedia coach, a mindfulness coach, a mentor, and other specialists like my accountant and bookkeeper. One of the biggest benefits I get from working with these coaches is that I know they will keep me accountable to the goals I’ve set and the work I’m doing in these areas. I know that if I go to my business coaching session without having done the pre-work, I will be wasting my time and money by doing this. So I push forward. This helps me stay on track and maintain my focus to the things I know I need to do to get the results I want. I know also that if I don’t, I’ll be having a conversation with someone about why I’m not following the strategy I’ve set and the impact of this on the targets I have set. An Adviser will help you do the same thing with your money. They will keep you accountable and push you forward when you need it, and get you back on track if you lose your focus.

One of the other really handy things an Adviser can help with is managing other areas of your financial life. Because your Adviser sits at the centre of your financial world and is across all the different elements of your money strategy and how they all fit together, they will often be the first to identify when there is an issue that needs to be addressed in your broader money strategy.

Financial Advisers (normally) aren’t able to help you set up a mortgage or draw up a will, but because they understand how these things work they can make sure you are getting the right advice and the right outcomes in this area. They can also save a lot of your time and stress when you’re dealing with other professionals like accountants, mortgage brokers, and lawyers because they speak the language and can work with them so you don’t miss things through miscommunication.

In particular when you are working through tax issues, buying property, trying to set up wills, or launching your own business, your Adviser can help on a project management basis to get you better results. Let me illustrate this with an example.

Financial Project Management in Practice

Buying property is an area where great advice can save a lot of time, energy, and stress, and get you much better results. I was working with a client recently that was looking to buy property (I’ll call him Steve). When we started working together, we helped Steve build the perfect property strategy for him. We looked at the impact of buying at different price points, buying as an investment vs. his own home, and looked at where Steve’s risk was coming from to help him manage this and give him confidence to move forward. Steve ended up picking a path that made him comfortable he was finding the right balance between his financial and lifestyle objectives. But our work was only half done.

Once we had the strategy set, we engaged with a mortgage broker to confirm Steve was going to be ok to borrow at the levels we discussed, and made sure he had some competitive options for his mortgages. With Steve’s permission, we shared the information he had provided to us so Steve didn’t have to spending time putting this all together this again for the mortgage broker. Once we had confirmed his borrowing ability, we discussed this with Steve so he knew he was able to follow the path he wanted. We then helped Steve (via his mortgage broker) to get a pre-approval in place so he was ready to start looking at properties.

Steve didn’t know much about the property market and was time poor, so he wanted to engage a Buyer’s Agent to find him a property. He was going to spend a solid amount of money so wanted to use an expert to make sure he was getting a good deal, and also so he didn’t have to battle open houses and spend his weekends inspecting properties and attending auctions to get a feel for the market. We worked with Steve and his Buyer’s agent to set the strategy for the purchase and the boundaries for his spending. Once the Buyer’s Agent was clear on the strategy, we left him to source the property for Steve, which he did shortly after.

Once the property was found and secured, we worked again with the mortgage broker to help Steve get his loan approval in place. We helped Steve understand the options around how to structure his debt, whether to borrow as an interest only loan or as principal and interest, whether to use a fixed rate, a variable rate, or a combination. Once Steve had decided on the best borrowing strategy for him, we engaged again with the mortgage broker to execute the strategy and make sure nothing was lost in translation.

We then helped Steve get his deposit ready and paid, and restructure his banking and cashflow to cover the property costs. Financial project management in full swing. Steve not only saved a bunch of time, but got a great investment at a good price, with a solid borrow strategy that was fully aligned with his broader strategy. Because we knew what the steps were and the order they needed to happen in, we were able to reduce much of the stress that is so common when buying property. Because Steve had an Adviser to guide him through the whole process, he was fully confident of the steps he was taking.

This is the power of having an Adviser to help you project manage strategies like this. Without this help, you often need to spend more time doing it yourself and can end up stressed from having to pass on messages between all your different professionals. Not only that, but you can sometimes end up with poor financial outcomes.

Who is right for you?

Even if you know you want to use an Adviser or Coach, you need to find the right one for you. The right type of Adviser will often depend on what your personality is like. For you to get the most out of Advice, you have to be able to share everything you’re thinking about money and your lifestyle plans, so you need to find someone you connect with on a personal level and feel comfortable sharing with, and someone that understands you and has your best interests at heart.

There are many different Advisers and many different types of Advice, and it can sometimes take time to find the right sort of person and company that you feel comfortable with. When you do find that person and company, the results are worth it, so the sooner you start looking, the sooner you’ll get to the point of having complete trust in who you’re dealing with.

What else do you need to do?

Once you’ve set up this path from today to your ideal lifestyle, there is another critical step you need to take. You need to ensure you have true and complete confidence in this path and the direction you’re headed.

There are a couple of things I think are necessary to get to this point. The first is that you need to educate yourself so can understand why the path you’ve chosen is the best one for you.

Without this knowledge it’s easy to doubt yourself, get off track, and give up on your strategy. In some cases this can slow down your progress toward your goals. But in the worst cases it can mean you suffer setbacks which may cost you a bunch of money.

A good Adviser will focus on educating you about your options so you can choose your path or direction with confidence.

The second thing I think is necessary to get real confidence in your strategy, in particular if you are using an adviser, is the removal of conflict. If you get advice and you can see there is a conflict of interest, this can significantly reduce your confidence in the path you are considering. This can happen where an adviser is recommending a strategy or product solution that is going to provide them with a monetary benefit through a commission or ‘kick-back’.

I’ve seen this a number of times before. You see an Adviser, get on well, chat about what you want to do, and agree to them helping you with some advice. But, when you get to the end of the process you realise there is a strong incentive for the adviser to be recommending certain products or strategies because they‘re going to be paid more.

This puts you in a difficult situation. It might feel right. You might get along. It might sound ok. But when this conflict exists, you will always have that doubt as to whether the adviser has recommended the solution because it is actually the best thing for you to be doing, or because of the incentive they will receive.

If you end up in this situation you have two choices, neither being ideal. The first is that you can go and do a bunch of research to determine whether the advice you have received is actually right for you. I think this defeats the purpose of seeking advice in the first place! Your second option is to proceed with the strategy and hope for the best. This will not give you true confidence in the path you are taking.

In my opinion, using a fee only adviser goes a long way to removing conflict. I must confess I’m a little biased because this is the way we operate at Pivot. For many young professionals a great financial strategy may involve little or no financial products, so it doesn’t make sense to charge a fee or be paid based on any products you may or may not need.

When you engage a fee only adviser, their financial motivation for recommending any strategy or product solution is eliminated. The motivation then shifts to ensuring you are comfortable and happy with the process and the outcomes you are heading toward, doing everything they can to get you where you need to be as effectively as possible without any competing forces.

Maybe I’m weird, but to me this just makes sense.

It’s important to understand sources of conflict when you get advice so this can be managed. The biggest and most common area this conflict is created is around fees and payments, so ask your adviser about any potential conflicts at the start of the process so you can make a decision before you get too far into the process.

So how does Financial Advice actually work?

When it comes to Financial Advice, most businesses are different and approach advice in different ways. There is no one method, but at a bare minimum your adviser should cover the following steps:

  • Get crystal clear on where you’re at now and what’s important to you when it comes to money (weird question I know, but take a moment to ponder it)
  • Understand where you want to be in the future and what might change
  • Help you understand your available options and how they can help you get to where you want to be. Ideally this step will give you enough education/knowledge to make an informed decision
  • Ensure you understand the risks and downsides of any strategy or direction. This is important, because there are always benefits but also always risks/disadvantages
  • Recommend a combination of strategies to help you get what you want
  • Outline clear action steps. Often they will help you set yourself up to start working towards the outcomes you’ve planned for
  • Help you understand how these action steps are going to get the outcomes you’ve planned for

The first steps will help you build a plan. Now it depends on what you want, but the way I see it, the final point is probably the most important. Don’t get me wrong, it’s great to have a great plan. Sometimes I actually get really excited when helping my clients put their plan together. BUT, I recognise that if they could get the outcomes they wanted without the plan they’d probably rather ditch the plan and just push forward to get the outcomes.

If you want an Adviser or Coach to help you as you work toward the outcomes you’ve planned for, they should take the time to help you understand how they are going to do this and how their process is going to help you get the outcomes you really want.

No matter what your Advice process looks like, in my opinion any Advice firm or process should give you confidence in the direction you’re taking.

I wanted to share the method we follow at Pivot so you can get some insight into how Advice can work in practice. We use a three step process to take young professionals from where they are today to setting up a clear and easy to follow path to their ideal lifestyle.

The first step is all about being Conscious of your money, which means structuring your finances in a way that forces you to make conscious decisions and choose your outcomes ahead of time.

The next step is to Clarify your options. At this step you want to understand the most important areas of money and the strategies that might be suitable for you, so you decide what you’re comfortable with and what combination of options will give you the best money and lifestyle outcomes.

The final step is all about being Consistent and playing the long game. At this step you want to set targets, build a clear plan to the outcomes you want, and manage your risk. This is where you prioritise the things that are most important to you so you can go after them with laser focus.

The wrap

So many young professionals struggle through not knowing where to turn or what to do when it comes to money, letting their precious years of being able to create their ultimate lifestyle slip away. If I can leave you with one piece of advice, it’s to avoid this mistake at all costs!

Your lack of action is most likely a result of lacking confidence. And the only way to get confident in any domain is through knowledge and experience. So educate yourself, find out what types of Advice there are and which one you need. Whether you’re ready to get some help now or are still a few years away, just do whatever you need to do to move forward and stop sitting there letting confusion and uncertainty hold you back from getting your money to help you create an awesome life.

The good news is that if you’ve got plenty of time on your side, anything is possible. But only if you do something! The small things leads to the big things, so take a decisive step right now. The sooner you get a solid strategy in place, the easier it will be to hit your money targets and get to the lifestyle you want.

Don’t let your confusion, uncertainty or inertia today mean you’ll be settling for second best tomorrow.


SORT YOUR FINANCIAL SH!T OUT

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