Financial Planning Myths

According to a 2017 Wealth Sentiment Survey 7 out of 10 Australians have not received financial advice or seen a financial planner in the prior two years. Yet the same survey participants, when asked to rate their ‘wealth satisfaction’ out of 10, gave the following responses:

Income:        4.0 / 10
Net Worth:   4.1 / 10
Lifestyle:       4.7 / 10

So how can such a paradox exist? Why don’t people seek out advice? Why don’t people improve their financial position and satisfaction by utilising a service designed specifically do do just that?

Well, to be perfectly honest, i think the financial planning industry on the whole has done a terrible job at educating Australians about what advisors actually do, and how they can help. There seems to be some incredible (but understandable) myths about what Financial Advisors do and don’t do, so i reckon its about time we put some to rest. So here goes – some of the most common Financial Planning Myths…. Busted!

1. Financial Planning is too expensive

This is the most common, and most understandable financial planning myth of all – but in many cases, the cost of inaction, or ‘going it alone’ is far greater than the cost of advice.

You see, Financial Advisors are legally bound by ‘Best Interests Duty’ – that is to say that we cannot offer you financial advice that won’t put you in a better position after the cost of advice is factored in! If advisors couldn’t provide advice that improved clients outcomes well and truly beyond the price of their fees, the whole industry would fall apart and cease to exist!

When assessing advice fees, consider the following:

  • An initial consultation is usually free!
    • Often we ‘don’t know what we don’t know’ – and this prevents us making informed decisions that can positively impact our lives. Find out what you don’t know and see what its costing you. You literally have nothing to lose!
    • This is also an opportunity for you to assess if an advisor really truly understand your needs & goals and whether you think they’re the most suitable person to help you reach them.
  • Opportunity cost – What is it costing you to not have financial advice?
    • How much excess fat could be trimmed from your expenses without impacting your lifestyle?
    • How much are you overpaying the taxman?
    • Are you earning 2% p.a on your cash at bank when you could be achieving 8%+ on other investments?
    • Is inflation eating away at your purchasing power?
    • Are your returns from ‘going it alone’ better than those you could get from managed investments?
    • Are you taking excessive risk for the returns that you’re getting?
    • Are your assets safe & protected?
  • What are the projected returns / saving net of fees?
    • Consider that a 1% improvement (or saving) on investment returns from a $150,000 super fund is $1,500 p.a. Seemingly small differences can add up to BIG savings over time, and well and truly cover the cost of advice.

2. Financial Planning is ONLY for THE RicH

This is the most awful misconception because often those with more limited financial means are the people who would benefit most from financial advice!

  • ‘Scaled advice’ means that advice can be tailored to specific areas that you require help with without the need for a comprehensive (and more expensive) advice ‘package’. It could be confined to:
    • Cashflow & saving advice
    • Debt strategies
    • Investment advice
    • Superannuation
    • A specific scenario regarding the sale and purchase of assets

Everyone can benefit from financial advice, so don’t miss out on the opportunity to see if we can improve your outcomes because you think financial planning is only for the rich!

3. Financial Planners only advise on Investments

Whilst building an investment portfolio is a pivotal part of your overall financial plan, there are a great many areas in which people can benefit from financial advice;

  • Cashflow, budgeting and saving
  • Investments
  • Superannuation
  • Insurance & asset protection
  • Estate planning
  • Debt strategies
  • Aged care

Often people will think ‘I can’t afford any investments so i don’t need a planner’. This is in fact the very reason you DO need a planner! By looking at your financial position holistically, good advisors will aim to re-structure your assets and liabilities, enhance your cashflow and create enough free cashflow for investments!

4. Superannuation IS….(INsert one of many common myths here)

Unfortunately due to a lack of understanding about what superannuation actually is, many people may have formed a negative view of super after talking with people who were severely impacted during the GFC. Some of the more common opinions and misconceptions are that:

  • Superannuation is basically a proxy for the stock market
  • Superannuation is an inherently risky
  • Superannuation is an investment asset in and of itself.
  • You have no control over your super

Well lets debunk a few myths…

Superannuation is simply a holding structure for investments that comes with some extraordinarily attractive tax benefits, and has a few rules about when you can access the investments within the structure. It is an investment vehicle – not an investment asset in and of it self.

Within the tax privileged vehicle that is super, you can control your level of risk by holding investments including cash, term deposits, shares, property, bonds, and alternative investments – in just about any proportion you like! *Hell, you can even own rare artwork, wine and whisky in your superannuation fund!

*inside a SMSF – with some strict rules that ensure these assets are for investing purposes, not impressing your house guests & getting drunk on the good stuff.

To illustrate how powerful the tax savings are within the superannuation structure, lets look at the difference between 2 ‘retirement savings plans’. Plan #1 is inside super, where cash is paid into super from our investor’s pre-tax salary, and plan #2, where our investor doesn’t believe in super, and chooses to set aside some savings from their after tax income.

Yearly Cashflow & Savings Contributions

 Inside SuperOutside Super
Salary$60,000$60,000
Salary sacrifice
into Super
$9,400$0.00
Taxable income$50,600$60,000
*Tax + Medicare$8,763$12,147
Net Income$41,837$47,853
Tax on Super contributions
(15%)
$1,410$0.00
Retirement savings
(After Tax)
$0.00$6,000
Net Contribution to
retirement Savings
$7,990$6,000
Total Taxes Paid$10,173$12,147
Free Cashflow after
retirement Savings
$41,837$41,853

* includes Low Income Tax Offset

Both plans leave the investor with almost exactly the same net income after Taxes and their contributions to the saving plan, however the outside super plan results in an extra $1,974 in taxes, and as a result, $1,990 less retirement savings per year!!!

Now lets compound that for 30 years and assume that our cash earns 3% per annum in the bank (in both inside and outside super scenarios).

Inside Super vs Outside Super - 30 Year Comparison

 Inside SuperOutside Super
Yearly (after tax) Additions$7,990$6,000
Interest Rate3%3%
Tax on interest earned15%32.50%
*Admin Fees$78.00 p.a$0.00
*Investment Fees0.64% of end of year balance$0.00
Balance after 30 years$427,188$346,193

*Admin & Investments fees are actual fees from Australian Super

Two identical investments – cash in the bank earning 3% interest – one inside super, and one outside super…. yet the difference is MASSIVE! And this is after the fees and charges of the super fund!

Now should you have a higher risk tolerance and be achieving 7% p.a return from a diversified managed fund, the differences would be even more enormous due to the difference in the super tax rate of 15%, and our outside super investor’s MTR of 32.5%.

5. Negative gearing is a good strategy because it saves tax

Please read ‘The Negative Gearing Myth’. Saving tax is indeed a wonderful thing, but it shouldn’t make or break an investment strategy – it is just the cream on top. A good investment strategy has to stand on its own merit.

6. Financial planners are stock pickers

Did you now that the vast majority of financial planners don’t even recommend ‘direct shares’ (buy / hold / sell recommendations on company stocks) Why? Well, they tend to leave it to the experts. Financial Planners are primarily strategists, big picture guys (or gals) and take a holistic approach to your financial situation that covers many different areas – not just picking stocks. Fund Managers are experts in their field, thats what they do. They research and analyse companies, they scrutinise the construction of their portfolios, they factor in risk into their portfolio decisions so every time Trump says something dumb or his mate in North Korea gets an itchy trigger finger the value of their investments don’t fluctuate wildly.

Imagine this. You’re building a new home, and you’ve gone and chosen the most stunning (and expensive) tiles for your bathroom. You have your regular Wednesday afternoon catchup with your builder and ask ‘So what day is the tiler coming to do the bathroom? I can’t wait to see how these look’. Your builder says, ‘Johnno? Nah, he’s not coming, i’m gonna do it myself’. ‘Hang on a minute, are you a qualified floor and wall tiler? ‘Nah, but she’ll be right mate – i’ve done it a few times before’. ‘But, these are super expensive tiles and if they’re not right my wife will kill me and…..’

I think you get where i’m going with this – If we don’t expect Builders to be Floor and Wall Tilers, Sparkies, Plumbers, and Plasterers, we probably shouldn’t expect Financial Advisors to be Fund Managers, Bond Traders, or Economists. When it comes to investments, a financial advisor’s primary role is to help you choose the right mix of assets (shares, property, fixed interest, cash), in the right proportions for your risk profile, that will help achieve your desired returns.

So if one of these myths has been putting you off seeing a Financial Advisor and you don’t feel happy about your current financial situation, don’t put it off any longer – Get in touch for a free chat, you literally have nothing to lose!

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