Nobel Prize-winning economist William Sharpe famously said “the hardest, nastiest problem in finance” is how to make your money last. Our relative success or failure in achieving this depends in large part on the company we keep.
A big component to the problem, he suggests, is uncertainty – both in terms of investment and morality.
We never know what the future holds for us: our health and longevity, our relationships and family, our sources of income or where we will live. Even what job we do isn’t a given. Research by McCrindle suggests Australians will have 17 different employers and five separate careers during their working life.
At its core, financial advice is about addressing and planning for the uncertainties of life and its effect on our financial wellbeing. The aim is to develop greater clarity over where you’d like to be and then implement considered, workable strategies towards achieving that goal and minimising risks.
Is tailored financial advice only for the rich?
This has to be the biggest misconception there is when it comes to money – that financial advice is only for the very wealthy. It’s not.
In fact, I would say the exact opposite is true. The less money and fewer assets you have, the less room for error you have. That means getting tailored advice to protect and build your wealth is actually more important.
Financial advice can and should cover a range of factors, which are relevant for every Australian – regardless of their net worth. This includes:
- Getting your fundamentals right: Understanding and effectively managing your household spend, maximising investments with Centrelink opportunities, planning for travel/kids/renovations, etc.
- Superannuation: Choosing appropriate investments within the fund, taking advantage of strategies, managing changes to risk along the way.
- Estate planning: Getting your will in order, deciding how your kids/grandkids/pets are looked after if something happens to you, updating those plans should your relationship change or your partner dies unexpectedly.
- Investments: Looking at how you can build wealth, invest surplus cash, which investments are suitable for your circumstances, earnings, outgoings and risk appetite.
- Right-sizing your tax: Using tax-effective strategies to your advantage, ensuring you aren’t overpaying tax or underclaiming deductions (which is more common than you think!). Ongoing financial advice is tax deductible too – which few people realise.
Finding the value
As a financial adviser, you would expect me to be in favour of professional advice. And I am. Because day in, day out in this line of work, I see the benefits clients enjoy from having received advice that is specific to them. And sadly, I see people in a crisis confess, “I wish I had come to see you sooner”.
In recent years, women over 55 have become the fastest growing demographic facing homelessness. Meanwhile, an estimated 3.6 million Australians have experienced emotional abuse – which often includes financial abuse – at the hands of a partner.
Of course, finances are complex – and you simply don’t know what you don’t know. Plus, our financial situations are as diverse as we are – there is no one-size-fits-all approach to money matters. Which is where the value of personalised financial advice lies.
Among the things you should look to get from your adviser are:
- staying up to date with constantly changing regulatory tax and economic factors
- devising current and future financial strategies – not just for retirement
- building financial independence so that you’re not left destitute in the event of your partner’s premature death, disability, divorce, etc
- ensuring you have adequate protections in place – such as insurances, risk mitigation strategies, an emergency cash fund
- getting the most out of your super and your investments.
If advice is so valuable, why don’t more people get it?
More than one in four Australians has received financial advice, according to 2019 figures from the Australian Securities and Investments Commission (ASIC). And 41 per cent intend to do so in the future.
The remainder may be put off for a number of reasons, many of which are based on preconceived ideas.
As previously discussed, the misconception that advice is only for the wealthy is a pervasive misnomer. Other factors that unwittingly cause people to forgo seeking advice include:
- a lack of understanding about what financial advice actually is
- misguided faith in advice from well-meaning but unqualified family and friends
- confusion between the roles of advisers and accountants
- having a ‘set and forget’ mindset about money
- overconfidence in their own ability to manage finances
- not knowing who to trust
- a sense of feeling inadequate in front of a professional.
Then there are structural issues, such as strict regulation of the sector driving up advisory costs beyond the reach of many.
Regardless of the reason, inadequate advice and insufficient knowledge of financial affairs lead many people to the same result: mistakes, lost opportunities, leaving it too late and less financial security.
Super advice that’s not so super
Superannuation is one of the biggest assets we have and it’s universal – every Australian of working age has (and by law should have) super. So, it’s surprising that so many Australians get it fundamentally wrong.
Super funds can only recommend their own fund. Are they giving appropriate strategic advice? For example, many people get sucked into the belief that consolidating your super is essential. But if done incorrectly, consolidating can actually cost you far more than it saves, e.g. loss of your insurances inside super; an inferior level or quality of insurance cover (and you may not realise that until you need to make a claim); knowledge of different investments available.
Another consideration to weigh up carefully is whether to create a self-managed super fund (SMSF). You may not need the complexity of substantial compliance and management costs and some may make inappropriate or non-compliant investments.
Don’t accept just any advice – get good advice
As with virtually everything in life, when it comes to financial advice, you generally get what you pay for.
A suitably qualified, experienced and reputable adviser may cost more at face value, but his or her expertise should help you make those fees back many times over in the costs you save, the additional earnings your investments make over time, the mistakes you avoid and the peace of mind gained.
Conversely, that ‘hot tip’ from your dad, friend or local barista is unlikely to deliver the windfall you hope for.
As technology advances, artificial intelligence (AI) and ‘robo-advice’ are emerging as a lower cost option – with their own benefits and drawbacks. Again, like most things, you get what you pay for.
Either way, be sure to seek financial advice from a professional source that is properly qualified to give it – such as verifying their credentials through ASIC’s MoneySmart website. And always make sure the advice you receive specifically relates to your financial goals and your particular circumstances.
That way, you’ll have a much better grip on tackling the “hardest, nastiest problem in finance” and making your money last the distance for you and your family in the days – and decades – ahead.
Helen Baker is a licensed Australian financial adviser and author of the new book, OnYour Own Two Feet: The Essential Guide to Financial Independence for all Women (Ventura Press, $32.99). She is among the 1 per cent of financial planners who hold a master’s degree in the field. Proceeds from book sales are donated to charities supporting disadvantaged women and children. Find out more at www.onyourowntwofeet.com.au
Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
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