Money Has People Problems

Recently we were contacted by a prospective client. On the initial contact, they briefly laid out their circumstances and where they wanted to be in the future. All good. We could certainly help with that. Then they made a specific demand of their potential adviser: their adviser was expected to show they have a high net worth to prove themselves worthy of giving advice…

Not exactly the way most advisers would choose to value their services! Working with an adviser is usually about valuing their expertise, not whether they have $1 or $1 million in their bank account.

Occasionally there will be an article in the media highlighting questions a person should ask a financial adviser. As more and more people source their information from social media, similar ad hoc lists are being devised when someone asks the crowd “what do I need to ask a financial adviser?” Stranger and stranger expectations are being inserted into these lists with “high net worth” now something an adviser must have to prove themselves!

Some people take this information seriously. And it’s a reminder, if we’re not careful, we can take on other peoples’ beliefs and ideas, making them our own. When it comes to money, that can be dangerous. There’s an old saying that people don’t have money problems, money has people problems.

Money’s usually not the problem. People are. Our choices, our decisions, our actions, the way we think, the biases we absorb from others. Money doesn’t do anything without intervention from us. That intervention can be positive or negative.

For the gentleman in question, it’s unfortunate because he was sharp enough to recognise he needed help, but was also getting in his own way and eventual success. Financial advice is a knowledge-based profession a person can use to optimise their financial position over the short and long term. It will never be an overnight path to riches for the client or adviser.

Money prompts plenty of people problems, like the one above, here are some other common ones.

Spending too much. One of the more obvious problems in the financial world is having a hole in our wallet or purse. Some people will always struggle, but for those of us with the benefit of covering the basics without too much stress, not having anything else to show for our surplus is a problem. Inevitably in some months, more will go out than comes in, but being able to build up an asset base, and grow it over time, only makes life easier and offers more choices.

And the earlier we start, the easier the later years will be. There’s less margin for error when trying to catch up in our 50’s versus pursuing a reliable saving plan since our 20’s. After the expenses, if we can nail an emergency fund, then six months living expenses, then start investing on a monthly basis, the rest of our money we should try to enjoy because there’s another issue on the other side of this equation.

Spending too little. While saving and thrift can be a virtue, it’s important that saving is accompanied by some end goals or an ongoing release valve along the way. Accumulate enough assets, so a person eventually feels comfortable spending and being able to enjoy themselves when the opportunity arises. Saving is a habit, and while useful, habits can be hard to break when they’re no longer required.

For many reasons, people can find themselves in what can be termed a “poverty mindset”, previous experiences have led them to bunker down, or they’ve become so disciplined in reaching financial goals that they’re still looking to save money at every opportunity. It’s something they must unlearn so they can relax, spend with confidence, and enjoy their life. This is where advice can be valuable beyond the numbers. Being able to reassure someone what they can comfortably spend without having to worry can be liberating.

Millionaires chasing the age pension. It’s become increasingly common to see retirees with multi-million-dollar asset bases writing into newspaper columns, like Noel Whittaker’s, asking how they can get the age pension. It is an interesting phenomenon, and, in some instances, they are blatantly looking to offload assets to children without paying tax or incurring Centrelink penalties. There are also other reasons for it, so we’ll focus on those.

They’ve spent all their lives saving money diligently, presumably with the intention of being self-sufficient and comfortable in retirement. They’ve clearly achieved this, but with retirement upon them the age pension becomes an appealing prospect. We’d guess because they are moving into an uncertain phase of life and now needing to draw on their assets. Invested properly, their assets would likely deliver them a significantly higher income than the age pension, but the alternative of a fixed amount of money landing in their account every fortnight is more certain and less stressful.

Given they’re writing into the newspaper for advice, presumably, they’ve never paid anyone to manage their affairs, nor do they want to, but this leaves them confused. If they’re borderline for benefits, they also lack the technical knowledge to structure their assets in a way that might have seen them receive a concession card and small amount of pension. Primarily they’re absent the skills or confidence to manage a portfolio through a retirement drawdown scenario.

Needing more control. Less is more when it comes to investing because returns don’t arrive in a consistent manner. We just need to sit still. Our portfolio may have averaged 8% per annum over a decade, but it’s probably seen a double digit decline in each of the ten years. Those ten years will all be different. Some will be poor, some will be flat, some will be strong. The trick is being there when it performs strongly because the poor and flat years have us questioning things and considering “maybe I should do something and make some changes…”

This can overlap with overestimating one’s abilities. We’ve seen a couple of sad cases over the years where someone with substantial assets came in to see what we could do for them, they reasoned they could do better, without the cost. The next time we heard from them they were on the age pension. In the ensuing years, instead of doing better, they did a lot worse. Spending and poor investment choices left them with the proverbial seat out of their pants. Their hands on the wheel, drove their finances into the ditch.

Dividends are free money. There are some investors on the internet who’ve made their whole identity about dividends. They’ve built websites and brands, backed by social media accounts with various names like dividend dad, dividend guy, dividend seeker, dividend dominator, dividend dave etc. These people will argue furiously with anyone who dares to suggest that solely focusing on dividends is an irrelevant pursuit and focusing on total returns has historically led to higher returns.

The misconception probably starts because some investors get quite excited about being paid for owning a stock. If we don’t have to do anything and money lands in our bank account on a quarterly basis, it would seem like we’re getting something for nothing, but dividends aren’t free money. Share prices are influenced by expected future cash flows to shareholders. If cash goes out the door as a dividend, share price and market cap generally fall ex dividend. Essentially, the money has been taken from the company’s value and placed in our pocket, but there’s no real increase in wealth. No matter how many times this is explained to them they continue to stick their fingers in their ears and scream dividends are the holy grail of investing.

When dealing with money, we all need to be humble enough to accept where our blind spots might be. Our money is innocent, there’s no need to give it unnecessary problems.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs

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