Planner? No Deal

Most of us think that a massive windfall such as an inheritance or Lotto win magically erases problems from our lives. I didn’t quite believe that prior to my win of $515,000 on a TV game show, but at least I thought it would simplify some issues.

How wrong I was. Not only can’t money buy happiness, it can’t even put a down-payment on simplicity.It is all too easy to fritter away dollars that come too easily, which is why I decided to see a financial planner. (As a windfall gain, my winnings were tax free '” though I split the $515,000 with my game show partner, Dave).

My goals were simple: To reduce my home mortgage, which had stubbornly refused to budge despite my best efforts; to kill off my credit card; and to invest for the future.

Apart from specialist consulting firms, each of us has relationships with a variety of organisations that offer financial planning services: banks and credit societies, unions and professional societies, and superannuation managers. After some homework I settled on my bank, with which I had a mortgage. All the media I had read spoke favourably of the bank’s offerings and it was my hope that the prospect of losing a substantial customer might sharpen their focus to my needs.

The warning bells should have sounded when my first call to the contact centre requesting an appointment went unreturned. Several weeks later I walked into the bank’s Collins Street, Melbourne, branch thinking it would be harder to ignore me in person. I was told the planners were extremely busy, but an appointment was made for two weeks hence. A couple of hours before the appointment a very apologetic and harried customer service officer at the bank contacted me to say my planner '” who I had yet to see '” had quit without notice the previous evening. “Could I make another appointment in a couple of weeks to see someone else?”

I arrived for my rescheduled appointment, but the planner was nowhere to be seen! The branch manager explained humbly that the planner was called away to a meeting unexpectedly and she couldn’t fit me in later in the day because she had other customers to see. “Could I come back next week?” My suspicion? The planner forgot or couldn’t be bothered; I wasn’t important enough compared to her other, wealthier customers.

Most people would have given up at this stage, but I remained in dogged pursuit, this time at a branch closer to home. The staff told me it would be at least a week before I could see a planner because he was very busy. Where had I heard that refrain before? But I was stumped by the staffer’s next statement: “Do you really need a financial planner? Would you like to just set up an investment account?” It was a great advertisement for the bank’s services.

When I finally got to see the planner, I was impressed that he spent a couple of hours with me. That was good because in preparation for the first aborted interview, I had spent a considerable amount of time drawing together my budget, based on several years of records and account statements while enunciating my objectives succinctly.

I decided to proceed, gave him my details, filled in the relevant questionnaire and submitted to the standard “risk propensity” test. This is where you are asked questions such as “How many years of negative returns in every five years would you be willing to accept?” and, “Do you prefer capital growth to income?” and so on. My investment horizon was 10 to 30 years. This is supposed to fast-track the getting-to-know-you phase.

The scores were tallied and it emerged that I was the investing equivalent of a skydiver: willing to throw my money at the winds of fortune in the hope of a big return. That surprised me '” I always felt my inclinations closer to Warren Buffett than Gordon Gecko, but there you are: the standardised test had spoken.

A week later I was presented with the financial plan known in industry parlance as a Statement of Advice: two impressive PVC folders, reams of paper, descriptive graphs with all sorts of meaningful function curves and interpreted data. It certainly seemed as though I had got my $600 worth (less $150 discount). Roughly, the first folder contained me: my assets, savings projections, superannuation, and so on. The second folder contained what I could be if only I would sign on the dotted line: staged investment plans, a home equity loan, a basket of funds, and various other product disclosures.

It was great stuff and it was obvious the planner had done a great deal of work. But I was concerned he had ignored my reservations about borrowing. He had doubled the sum and basing all the projections on this higher figure. This made me extremely uncomfortable. But what concerned me further as I went through the folders at home was that the funds just didn’t seem to be very good performers when I compared them against independent data. The planner provided summary details from Van Eyk, one of the leading specialist funds analysts, which confirmed my concerns.

Although there were two stand-out performers, five of the seven funds recommended (all from the bank’s allied financial institution) had not beaten the ASX200 Accumulation Index since they began. Each fund had management fees of 1.7–2.4%. That was on top of the 2.23% management fee applied to the wrap, a financial portal that would hold all my investments.

A wrap is supposed to make managing investments easier (especially for the planner) because it handles such things as taxes and dividends providing a collated, coherent and distilled report that shows the investor’s position at a glance. Wraps were once the province of sophisticated investors, celebrities, and “high wealth” individuals, but now they are promoted even to working slobs like me.

A wrap is really just a piece of software, or what boffins call a “hosted service”, and the thought of paying $2000 or more a year (the entry fee was an additional $2400) for an application seemed a bit extreme. Especially when there were only a handful of funds to manage '” each produced regular reports '” and I am a dab hand at spreadsheets. As I was an investor, trading would be minimal, possibly just once a year. I wouldn’t pay $350 a month to Bill Gates for Microsoft Office, which I use every day; why would I pay it to a bank for something I might use once in a blue moon and which I could emulate by hand (at least, my accountant could)?

It should be noted that the planner was painfully ethical throughout, informing me that he may earn commissions especially from bank-sponsored products recommended, outlining my rights, providing me with a statement of advice and so on. He provided ancillary advice including succession planning, insurance and other issues. He tracked my superannuation, offered some tips for dealing with my fund manager, and never tried to get me to transfer into the bank’s schemes (apart from the seven affiliated managed funds).

All fees and trailing commissions were provided and he walked me through what his take was to be should I sign. Nothing was hidden; it was all above-board. I could not have asked for better. But disclosure of itself is no protection for an investor like me.

I have a financial plan that doesn’t feel right. Like a young man wearing his father’s borrowed tux to a dance, the plan feels like it belongs to someone else and doesn’t sit well on me.

The planner points out that past performance is no guarantee of future performance, and well that might be. But failing a major change in the funds’ managers, what evidence is there that the funds will improve their outlook? And in the absence of time travel, the suspension of the Einsteinian universe or a supernatural ability to see into the future, what else is there to go on other than past performance?

I find myself drawn towards the Warren Buffett style of value investing (“always preserve capital”) and to following the philosophies of those fund managers I read in the financial media. So this may be where the cognisant dissonance emanates; I am a value square being shoved into a growth circle.

Yet the “risk test” showed me to be very much a growth investor. Far be it for me to say the psychologists who constructed the testing matrix had a bias to draw people towards a certain outcome, but obviously it was flawed in my case. For instance, where the test result indicated I was keen to take on risk because I was willing to sustain several years of negative returns every five years, I view that as willing to invest in a value company for the long-haul regardless of the price in the market. The poor planner had little hope of properly advising me when his tools were so flawed.

He also said that the “baby wrap” I was offered accessed just 45 funds out of the many thousands on the market. So the obvious question is why place me in such a vehicle? I would be better served by simply buying funds on the market. Could the $2400 entry fee (3% of funds) be a factor? Or the $900 that immediately went to the planner? Or the couple of hundred dollars a year in trailing commissions? Again, there was no attempt to hide these figures.
But I am sure that if there was no commission, or it was rebated, and the service provided on a full advice-for-fee basis that the outcome would be better, more transparent, and the inclination to drive me towards the bank’s preferred solution would be lessened. None of that is to say that the advice I received would not achieve the goals I stated at the outset; the planner seemed to be an honest, ethical man and I can only assume that if I followed his plan I would in all likelihood succeed.

And there's the rub: it was “his” plan, not mine. I am not confident that the advice is primarily in my best interests, or that I can’t do substantially better elsewhere. There are alternatives, especially for those who educate themselves. I feel my best option lies elsewhere.

Rather than the end of my quest for financial independence, I now see that going to the planner was just the start of a lifelong process. Like someone who hires a personal fitness trainer for a few sessions and then goes off on their own, the bank’s planner has spurred me to manage my own affairs; then all the gains (and losses) will be mine. I will not be going ahead with the bank's financial plan. I may not have an investing solution yet, but I am confident that I will construct one very soon that fits like a tailored Armani and which will serve solely my interests.

So although it failed its core criteria of providing investments, the $600 financial plan was money well-spent, after all.