“You could be worth a fortune. We should be in business together,” a bloke with a big, bulbous nose and a sloping belt said to me. He looked like a red wine-soaked Rudolph the reindeer.
Funny thing was I’d never met him before. He just bowled straight up and began making his pitch. But that’s what often happens when you drink at the Mitre Tavern. It’s an old stockbroker’s haunt — a place where old piss-pots go to wheel and deal (and hide from their wives).
It turned out that Rudolph owned a number of financial planning businesses. And over three glasses of red wine (all consumed by him), he explained why I should be fronting a financial planning firm.
“What other industry do you know of … where you can charge someone thousands of dollars a year … and they don’t even bloody-well notice?” he said, slurping some more plonk.
At the end of every day, superannuation investment managers divide their ‘management fee’ by 365, and then multiply it by the assets in the fund. The fee is then automatically deducted.
Have I just made your brain hurt?
Excellent. That’s just what the money men are hoping for. It’s why they mostly quote their fees in percentages — because the average person can’t calculate them.
Here’s the punchline. That one little calculation makes the investment industry $50 million dollars every single day (including the weekends when they’re on the squirt at the Mitre Tavern). And that figure only counts your super: financial advisors have their percentage of assets racket going on too.
That’s the genius of the investment business.
The average Aussie pays about a $1000 in superannuation fees each year.
Yet you’ve never received a bill, have you?
You didn’t have to get on your internet banking and pay your fund manager or advisor like you do the plumber. And they didn’t have to send you a friendly reminder notice in the mail to make sure you paid them.
No, every single day they automatically turn your savings into theirs. Regardless of whether the market is up or down. Regardless of whether they’ve made you money or lost you money. And regardless of whether they do a good job or not.
That’s the real kick in the guts. Over a fifteen year period, 85 per cent of fund managers failed to beat a low-cost, no-brainer, index-tracker fund. That’s like having a hairdresser accidentally giving you a buzz cut — and then slapping you with a $400 bill.
The Good Guys? Fee-For-Service Financial Advisors
I once helped a mate’s mum with her finances.
This woman is one of the tightest people I know. She actually kept her bus tickets and tried to claim them as a work related expense. Thanks to her tightwadiness, she had saved up $800,000 in super — a real achievement, which she was rightfully proud of.
As I read through her statement, she explained that she’d ‘taken my advice’ and was seeing a financial advisor who charged her a ‘fee for service’. Yet when I looked at her statements, I saw her that fee was 1 per cent of her assets — in addition to the fees charged by her fund.When I pointed it out to her she looked at me blankly.
My mate’s mum: “So what?”
Barefoot: “How many times have you seen him in the past five years?”
My mate’s mum: “About three times, I guess, and a few phone calls.”
Barefoot: “Well, given each meeting cost you around $8000, I hope he didn’t serve you up Nescafe.”
The problem for my mate’s mum is that she’ll end up paying the bulk of her fees after she retires, because that’s when her balance is the biggest.
My advice to her — and to you — is simple: make sure your investment fees are under 1 per cent of your assets. And if you’ve got more than $100,000 to invest, never, ever pay a red-wine swilling advisor a percentage of your balance for his advice — even if they dress it up as a fee for service (as most will) — go for an hourly rate.
This week the Reserve Bank made its submission to the latest financial services inquiry chaired by ex-banker David Murray. They called for a greater focus on superannuation fees, claiming they were too high. A nice thought, but nothing will come of it.
There’s too much money at stake — and too little interest from the workers who actually pay it.
Besides, the banks are too busy pressuring the government to change the advice laws to make it easier for their tellers to flog you their financial products.
I’ve been thinking about making my own submission. It would be short, but deadly effective: Ban the automatic deductions of fees. Instead, make consumers pay them out of their own pocket, like they do any other professional. I reckon that’d clean up the industry by Christmas.