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20-Feb-2013

THREE LESSONS FROM DEALING WITH FINANCIAL ADVISERS

UNDER THE RADAR'S PORTFOLIO MANAGER, THE IDLE SPECULATOR RUNS THROUGH HIS PORTFOLIO'S DOUBLE DIGIT RETURNS (AFTER TALKING ABOUT THE DODGY TACTICS OF FINANCIAL ADVISORS)

Three lessons my friend learned (the hard way) from dealing with financial advisers

I was in conversation with a successful small businessman over the past few days, whose business supplies a niche product and associated services to corporate owners in the property industry.  I am always interested to talk to business owners about the dynamics of their operations.

We had a number of things in common such as an appreciation of the Internet and all that it could do for business, as well as a belief that many who design websites are often more than willing to spend a business owner’s money on frills and functionality which have more to do with the designer’s desire to express themselves through their work, than the needs of the actual business which is paying them. What the clients need are qualities such as functionality of marketing, remote operations capabilities and subscription availability.

His business does not rely upon the certainty of an annuity cash flow, like a financial advisor does from trail commissions after pushing an unsuspecting client into a managed fund. Rather, it’s more like a contractor. All his business’s jobs are priced individually and in a competitive environment. They are susceptible to cost overruns, and unforeseen circumstances can cause individual jobs to lose money.

Importantly the business is consistently profitable over any rolling quarterly or half yearly or annual period.

So his experience has been one of taking risks and benefiting from the rewards where those risks pay off, and suffering some losses when the inevitable mistakes are made.  He has been in business for 25 years, growing relatively steadily over that period to be in a position to seek work outside his home State.

Despite his general business experience and success in the marketplace he has chosen, my friend had had the most extraordinarily bad experience at the hands of brokers, financial advisers and other snake oil salesmen in the stock market.  These included a list of the most likely forms of money taking activities prevalent in the wealth management marketplace.

The first was a commission driven salesperson who pushed my friend into one that may not have been applicable to his situation, but which paid the highest upfront commission percentage.

In Australia the financial advice reforms recently enacted may go some way towards reducing the prevalence of these commission driven salespeople, but if the arrangements are historic, the new provisions do not apply.  Hence commission driven advisers can continue to collect their high rates of trail commissions indefinitely unless an investor takes control of the situation and demands a review of their financial arrangements.

Another experience my friend had was where the advice given by a financial planner was driven by the commission that he would earn on peripheral financial products such as life insurance or insurance against redundancy or personal injury and disability. The investments in which the adviser placed my friend’s money played second fiddle to his desire to sell these peripheral products.

A third and final example was selling a financial product that purported to provide annuity style income based on its underlying investments. Only on close examination of the small print of the accounting statements did my friend become aware that the product did own the instruments it had stated.

The main lesson:

In our view there is no alternative to selecting quality stocks, incrementally increasing our holdings at prices that seem reasonable and preferably that seem cheap, and holding for the long term.  Monitor their prospects and operational delivery as best you can, and if you feel that there are deficiencies in delivery against your expectations, act on your instincts.  Don’t wait for the market to prove you were right!

TO ACCESS THE PORTFOLIO SECTION INCLUDING THE PORTFOLIO SELECTION PLEASE JOIN NOW.

The Idle Speculator has delivered a healthy double-digit percentage (13 per cent - annualised 10.3 per cent) despite remaining significantly underinvested at this stage with around 36 per cent cash which allows us to sleep very comfortably, and may even allow us to increase our exposure to small caps over the next few months.

THE PORTFOLIO IS SPONSORED BY FIRST DOLLAR SOFTWARE - Your Investment Performance Counts

www.firstdollar.com.au

 

 


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Richard is the editor for
'Under the Radar Report'.