Why I hate bad financial advice
My journey to becoming an ‘Authorised Financial Adviser’ in New Zealand.
You’ll note on my website the tagline, "No enemy is worse than bad advice." This sentiment is at the heart of what I love to do. I’ve heard it all, the good, the bad and the ugly of financial advice. Great financial management is difficult at the best of times so it fries my fish when I hear of people getting bad financial advice. Here’s what I’ve noted on my journey as an advisor.
The bad
It must’ve been about ten months ago when a young couple, clients and close friends of mine, met with me for a review of their insurance portfolio. We discussed the usual matters such as career, net worth, plans for children, and Kiwisaver. When it came to discussing buying their first home, I asked them if they had met with a lending adviser to discuss their mortgage options yet.
“Yes, a family member recommended an adviser,” they replied. “He advised us that since we don’t have enough savings that we should pop our Kiwisaver accounts in a growth fund for a year and then come back to see him.”
I choked on my flat white. There was so much wrong with the advice this lending adviser had given them, but, as I am a Registered Financial Adviser and not an Authorised Financial Adviser, I was unable to help them.
In 2008 the Financial Markets Authority (FMA) divided Financial Advisers into three categories, and only one category can provide comprehensive investment advice, Investment Advisers, defined as Authorised Financial Advisers. That means, QFE Advisers, such as bank salespeople, insurance wholesalers or loan wholesalers, and no Registered Financial Advisers (such as myself) can give such advice.
The ugly
Here is what was wrong with the advice. Let’s just call the advisor Fred for the purpose of this article.
- Like me, Fred was a Registered Financial Adviser, meaning that he is qualified to provide lending, insurance and cash based advice. However, he may not legally advise on any form of investment. This is including, but not limited to, managed funds, such as Kiwisaver, the share market, or alternative peer to peer investments.
- Fred’s advice was dangerously wrong.** A Kiwisaver balance is not a traditional account balance. The value of the balance reflects the current value of the assets those numbers represent.
Too vague? I’ll break that down. If you have your Kiwisaver invested in a mainstream growth fund, essentially you have your funds invested as follows.
Wildfire
Growth funds hold 63% to 89.9% in growth assets. These are generally suitable if you:
- are looking for fairly high growth over the long term, and won’t want to switch to a lower-risk fund whenever you see your account balance fall quite a lot.
- are intending to leave your money in KiwiSaver for at least ten years
Source: sorted.org.nz.
Ten years… Not one year. Here’s why. Let’s say your Kiwisaver is $100,000. Based on Sorted’s info of 89.9% this would mean that the equivalent of $89,900 of your Kiwisaver total will be invested in high risk yet high return assets.
For example, a while back, Xero shares surged in value from approximately $20 a share to $40 a share. Whilst this would have looked amazing if we applied that to your Kiwisaver fund balance when your $89k would suddenly be worth $178k, as with Xero, shares could be so volatile and the following year you would have seen your $178k drop down to $78.7k. Ouch. That’s a net loss of more than $10,000 from what you originally saw in your Kiwisaver fund.
Ultimately, if you have your Kiwisaver in a growth fund, Sorted says that you need to be in it for the long haul. If you’re planning to purchase your first home with the funds sooner rather than later, it is incredibly risky to have your balance in a growth fund as the value of your balance could drop dramatically before you have a chance to withdraw the funds.
Cash in the mattress
A cash fund is entirely different. Defensive funds hold 0% to 9.9% in growth assets. These are generally suitable if you:
Don’t want your KiwiSaver account to ever go down (although there are no guarantees), even though that means your account almost certainly won’t grow as fast, over the long term, as accounts in riskier funds
Expect to spend your KiwiSaver money in the next three years
Source: sorted.org.nz
A cash fund is similar to a term deposit, in the sense that your expected return is very low, but so is your risk of losing money. Even when interest rates are in negative, the effect is still not as freaky as a 50% drop in share value. This is why my wife and I switched my Kiwisaver fund from growth to a cash portfolio in the 12 months leading up to purchasing our first home.
Takeaways?
So, what can you take away from this?
Never accept flippant investment advice at face value.
Know what your advisor can and can’t give you advice on.
If you’re not sure, ask for an adviser’s disclosure statement, such as mine, here.
Mr Grumpy’s is hands down the best Fish and Chips on the west coast.
...The good
So, back to our friends who were given poor advice, why would they risk putting their Kiwisavers into a growth fund, when they need the money soon? The advice from the advisor was poor.
They need to meet with an Authorised Financial Adviser for insights into Kiwisaver — or any investment for that matter. If you want a testimonial, I recommend a colleague I worked with prior to setting up Rees-Thomas Financial Services. Authorised Financial Adviser, Bob Bishop, is great at his job and will see you straight. You can find Bob on LinkedIn here. I care greatly about this because, for many New Zealanders, Kiwisaver is often the only form of retirement planning they have and it is unthinkable that for many of us, it is the most neglected aspect of our financial lives.
For Lending advice, specifically first home buyers, I would recommend another former colleague, Andrew Perry, of Your Home Loan who has been running his own mortgage advice business for the past few years.
Onward and upward
This year, I’m going to complete my New Zealand Certificate in Financial Services Lvl 5 in order to provide dedicated and detailed investment advice. Along the way, I’ll share my journey with you via articles and info pieces. If you would like me to cover a specific topic, just let me know in the comments below.
At Rees-Thomas Financial Services we tailor your insurance planning to your journey and your circumstances, ensuring it is well-priced, market-leading, and well-equipped to care for you, your family, or your business.
We'd love to talk with you over coffee, so email or call for a chat: samuel@rtfs.nz, 04 384 7113
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