Here's a dirtly little secret for you. 

We are a financial planning firm, however:

• We don't think we have any ability to pick shares that will perform any better than average.
• We can't identify fund managers for you who will provide better than average returns.
• We can't tell you whether Australian shares, international shares, listed property or direct residential property will perform best over the next 12 months.

Why on earth would you use us as a financial planner?

What if no-one in the financial services industry could do what we know that we can't  do - aren't they just charging ridiculous fees for promising something that they can't actually do?  There is plenty of research that suggest that no-one can pick outperforming stocks, time asset classes and pick better than average fund managers (if indeed any do exist!)

Here is an interesting quote that I came across about the fees charged by the financial services industry:

'We work in the most overcompensated industry in the world'.  Patrick Gedde.  Patrick is a renegade from the top echelons of financial services. For several years he served, first as Former director of quantitative research then CFO at Morningstar, the leading US company for researching and appraising mutual funds.  (Patrick went on to establish a financial planning practice that used index funds for portfolio contstruction).

There is a huge amount of scientific research that supports our ideas - and suggests those people representing that they can do these things are wrong - and charging a fat fee to be wrong!  Working with a financial planning business, and there are others beside ourselves, who base their business on the reality of how investment markets work provides a number of benefits for clients.  These include:

• We know that fees are extremely important in getting successful financial outcomes - they have to be kept low!
• We know that asset allocation is crucial - this is the most important portfolio factor to get right.
• We know that trading has to be kept very low - keeping the portfolio tax effective.
• We know that a long term approach has to be taken and will, in time, yield a good result.
• We can build realistic expectations for clients, who will understand the need to stick to a long term plan to get good results
• We know that STRATEGY is more important to a client than investments - we have to get that right!

I wrote an article published in yesterday's Alan Kohler Eureka Report.  The article is here. 

It highlites the most under-reported and powerful aspect of the coming superannuation changes - that is the ability to take a tax free retirement income stream if you are over the age of 60, while salary sacrificing your further superannuation contributions.  You should effectively be paying a top tax rate of 15%.

If you are 55 now, or soon, you should also check out how a transition to retirement income stream works for you.

In my opinion this is one of the most significant financial planning opportunities for people in years - read the article and then tell all your friends!

Cheers

Scott

I happen to work about two blocks from my house.  Therefore I often go home for lunch.

Today I happened to go home and the Dr Phil show was on television.  The tennis was also on channel 7, and I mainly watched that, honest, but I did watch some of the Dr Phil show.

The show was about estate planning, and arguments between family members over wills and estates.  It was a pretty disturbing orgy of greed, and really showed the downside of not having estate planning details worked out.

There is, of course, more to estate planning that just keeping those people who are left behind happy.  A lot of the organisation is about structuring the transfer of assets tax effectively.  As a very simple example let us consider a wife who passes away, leaving a $300,000 estate.  This estate will produce taxable income of about $18,000.  If this is left to her husband, and assuming he is earning $45,000, the $18,000 will be taxed at a rate of 30% - meaning $6,000 of tax will be paid each year.  If the estate was left in the form of a testamentary trust, where the proceeds could be distributed to their three young children and taxed at adult tax rates, there would have been no tax payable at all.  A saving of $6,000 each year!

Keep in mind that estate planning is not about you, it is about the beneficiaries of your estate.  They are the people in this world that you care about

See a professional, pay a one off fee, get your estate planning details prepared professionally and then update them when your circumstances change (you have kids, get married, get divorced, receive an inheritance, retire etc).

The tennis was good as well.  I can't remember who won..............

One of the best books I read last year was 'Affluenza', a book written by Clive Hamilton and Richard Denniss.  It described the effect that the ever increasing desire to consumer was having on Australians.  It also talked about the powerful marketing strategies that large organisations used to get us confused about our 'wants' and 'needs'.  The big organisations benefit when we say things like, 'I need a new plasma TV', or 'I need a new car'. 

It explains why in Australia, as the wealthiest generation ever, we are reporting that we actually have a lower quality of life.  This makes it such an interesting condition to consider - if we are working hard to be welathier than ever - but wealth does not make us happy - then why are we doing it?

This link takes you to the website of Jessie O'Neil, who discusses some of the issues surrounding affleunza.  Some quotes from her website include:

"Anyone--regardless of their net worth--
who belives that they must be rich, that more is always better,
is a self-condemned prisoner of the 'golden ghetto'."
-- Jessie H. O'Neill

Affluenza:
Simply defined, Affluenza, is a dysfunctional relationship
with money/wealth, or the pursuit of it. Globally it is a back up
in the flow of money resulting in a polarization of the classes
and a loss of economic and emotional balance.

There is a fascinating story here about about the google float.  As it became apparent the company was going to float, senior management became concerned that suddenly large numbers of their staff would have enormous wealth, and would be targetted by the financial services industry.

To prepare their staff for this targetting, management organised a series of investment seminars with the greatest minds in investment and portfolio economics.  Here is what they were told:

Bill Sharpe - a nobel prize winner - said don't spend great slices of money trying to beat the market.  Just invest in a low cost index fund, which will provide guaranteed better than average managed fund performance - and concentrate on making google a better company.

Burton Malkiel - author of the famous book 'Random Walk Down Wall Street' and Yale and Princetown finance professor said don't try to beat the market, and don't believe anyone who says that they can. 

Famous investment commentator John Bogle was next.  His advice was to stay away from the 'giant fleecing machine' of high cost managed funds and financial planners.  Stick to a low cost index or passive strategy.

So there you have it.  Three great minds suggesting that the best approach to managing money is to focus on keeping costs low, your portfolio well diversified and being prepared to accept market returns.  This is the start of the philosophy that underpins out investment approach, and we develop this a little further using acadmic reseach that says small companies tend to outperform the market by about 2% and value by about 4%: so using an index fund, a small company index fund and a value company index fund infact results in above index returns - although it is still a passive strategy, just combining index style funds.

A year on there is still little joy for Westpoint investors, a point bought home in an article in last weeks Australian Financial Review.

The bottom line is that many investors are struggling to have their cases heard by the compliants scheme - FICS - because their claim is for more than $100,000.  Those with less than $500,000 find the cost of litigation too expensive, and find that they have little place to go.

The Australian Financial Review quoted comments from the head of the Financial Services Complaints Scheme (FICS) that said she had noticed financial planners who had recommended Westpoint simply closing their practice and moving to work as an authorised representative of another financial planning practice.

The stories of investors that have been burnt through Westpoint, which we hear about through the press, seem to have been advised by grossly incompetent financial planners who should never be allowed to practice again.  This includes:

• Financial planners ignoring the basic rules of risk and return, and suggesting a high return scheme like Westpoint could be low risk.
• Financial planners encouraging investors to borrow against property to invest and still calling it a low risk scheme.  Borrowing to invest intentionally increases the risk and return of a portfolio.
• Investors having most of their assets in the one investment company (Westpoint) and the one asset class (mezzanine finance).  This ignores the fact that they key tool investors have in reducing portfolio risk is diversification across asset classes.

Of course, some financial planners used Westpoint as 5 -10% of a clients portfolio, which is a much more reasonable approach - and one that has left clients much better off.

Cheers and best wishes for a great 2007 (expect to those disgraceful financial planners who filled up client portfolio with high commission paying Westpoint investments!).

Scott Francis

'Tis the season of Financial Pornography.  By financial pornography I mean the short of highly speculative, highly exciting, short term financial predictions that dominate the media at this time of the year.  It is important to understand that predictions simply don't work.  To demonstrate the folly of trying to make short term predictions, and invest according to these predictions, I have included evidence from four different sources.

Exhibit A: ABC Midday News Forecasts.  The ABC had a number of experts make predictions for the Australian stock exchange for the year of 2006.  The predictions for the ending value of the Australian stock exchange ranged from 4,400 points to 5,200 points.  The Australian stock market ended the year at 5,670 points (ASX 200 index).  The closest forecaster was more than 9% away from the actual result.  Hardly a forecast, more of a guess, I would suggest.

Exhibit B: Australian Financial Review.  The Australian Financial Review is Australia's pre-eminent financial newspaper, by some margin.  In June this year Tim Findlay ran an article entitled, 'Brace Yourself, the Bull Run is Over, say Technical Experts'.  The crux of the story was an interview with a 'Professional Technical Trader and Chief Executive of Market Newsletter Alter Trader'.  His forecasts were for markets to fall to 4,000 points after reaching a maximum of 5,250 in June.  Clearly he was wrong. 

Exhibit C: Australian Fund Managers Forecasting 2007.  Straight from a financial pornography article are this year's forecasts from four experts who manage money for a living.  The forecasts vary so much, that one of them is bound to be correct, with the other wrong.  The forecasts range from optimistic 'Strong 2007' to pessimistic 'Tougher Year' with a bit of moderation 'Strong 2007 with a Bit of Caution' thrown in.  Clearly there is no consensus forecast.  This also shows the problems with forecasting - get enough forecasts and someone is bound to be right just through dumb luck!

Exhibit D: The Most Famous Failed Forecast of 'The Death of Equities'.  In 1979 Business Week, a US publication, was amongst the most famous financial publications.  They made the extraordinary claim that equities (shares) were no longer a relevant investment.  Before looking at the article, let's take a peak at the ending.  Since 1979 US shares have experienced an unprecedented boom.  Even the market collapse of 1987 and 2001 could not stop this from being a period of well above average returns from the US stockmarket.  It was a great time to own US shares.  However, at the start of this period Business Week had said that share ownership was dead.  Here are some quotes from the article:

"Further, this "death of equity" can no longer be seen as something a stock market rally-

-however strong--will check.  It has persisted for

more than 10 years through market rallies, business cycles, recession,

recoveries, and booms.

 The problem is not merely that there are 7 million fewer shareholders

    than there were in 1970.  Younger investors [Baby Boomers?], in

    particular, are avoiding stocks.  Between 1970 and 1975, the number of

    investors declined in every age group but one: individuals 65 and

    older.  While the number of investors under 65 dropped by about 25%,

    the number of investors over 65 jumped by more than 30%.  Only the

    elderly who have not understood the changes in the nation's financial

    markets, or who are unable to adjust to them, are sticking with

    stocks."

The simple reality of how markets work is that we cannot forecast market movements.

Therefore this should not be part of our investment strategy.  Instead, the focus must

be on building a sensible asset allocation, exposing a portfolio to a variety of asset

classes - and stick with it in the long term.  And don't get distracted by worthless 

financial porn.

It has been a bit of a lean time on the blog of late.  The nice thing about that is people actually mention that they have noticed there is not much happening: which means there are some actual readers out there.

I have been slowly updating my website with the Eureka Report articles, and then I wanted to master audio files.  I think I have, with an audio introduction now located on the websites.

I use tailored consulting, a gold coast based internet consulting business to help with my website.  (They have not done a huge amount at this stage - so don't blame them!).  However I notice that the Executive Director, Brendon Sinclair, is now talking about the importance of having video on your website - which is a another things to be mastered.  I think that I might accept that I have a good head for audio, and stick with that for a while!

Just a quick apology that I have fallen behind with the blog - I have set myself the task over the last couple of weeks of setting up the area of my website where my Eureka Report articles are put together.  You can click here to go to that part of the site.

Cheers

Scott

Over the weekend I read some comments on why commission based financial planning fee models should, according to the author, stay in place.

I think that a fee for service fee model is superior to a commission based model for a number of reasons:

1/ You can recommend any investment in the world - not just select from those investments that pay commission.

2/ A client understands exactly how much they are paying - because the actually pay you, rather than have their fee collected by a financial services company in the form of an ongoing commission.

3/ There is no chance that a fee for service financial planner will choose a higher commission paying investment when it is not in the best interest of the client.

4/ A fee for service model mirrors the way other professionals (doctors, lawyers, accountants etc.) are paid.  A commission based model mirrors the way sales people are paid.  Clients deserve to deal with a professional, not a sales person.

5/ Charging a fee for service means that you have to work to provide value in both the areas of financial strategy for a client, and in the area of investment performance.  A commission based financial planning model sees a focus on.

A quick comment on the 'alchemy' of commissions.  A lot of financial planners say that the only way to service smaller clients is to charge them a commission.  This is such a pile of rubbish that it hardly dignifies any comment - but here goes anyway:  charging a commission is not some sort of financial alchemy that allows money to be magically created.  The client pays for the service they have received in the form of an insidious and ongoing commission payment to the financial planner.  This fee reduces FOREVER the potential ending balance of an investment or superannuation account.  Clients are better off paying a fair, once off, fee for financial planning services - and then not having their future investment returns eroded by commissions.