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News Bulletin : ADA News Bulletin May 2011
35 MAY 2011 business perspectives Is there anything that keeps you awake at night (money wise)? Dentists are obviously good sleepers because most respondents indicated that nothing keeps them up at night. That's good news (although interestingly many of these survey responses were received very late at night). For those who do lose some sleep, the most common reason cited was debt and tax liability management. I doubt if most dentists really need to worry about debt and tax liability management. In my experience, the vast majority of dentists borrow responsibly and don't over extend themselves. For those that still worry, they should sit down and work out a risk management plan which might include building buffers into loans, insurance, fixed rates and so on. In most situations, any concerns can be allayed simply by demonstrating that you have a plan to deal with any changes in your circumstances. If you had an investment portfolio that generated say $200,000 of passive income which was enough to fund your lifestyle, how would that make you feel? Most respondents used words like relieved, relaxed, very comfortable, great, happy and so forth. I'll summarise my thoughts on this in question 6 below. List the top three benefits you would obtain by becoming financially free (i.e., investment income was enough to give you flexibility to do whatever you want with your time) e.g., spend more time with family, travel, only do certain types of dentistry, etc. The most common responses were spend time with family, travel, enjoy hobby/interests, choice/flexibility and work less. Question 5 and 6 cite some powerful emotional drivers. Think about the answers for a minute and how you would answer these questions. How would you feel? How would you spend your time differently to now? What surprises me is that dentists work so hard in their profession -- long hours, back-to-back appointments, regular professional development, etc., but what for? Do you have a goal? Is it measurable? Have you set a date when you want to reach that goal? Do you have a plan addressing how you will reach that goal? Do you have someone to keep you on the straight and narrow and hold you accountable for implementing that plan in a timely fashion? Achieving financial `freedom' is important to you and your family. Perhaps it's one of the most important goals in life. It is very empowering to set goals, develop a strategy and be held accountable for implementing the strategy because you can see yourself march closer to achieving your goal every day. It's far better than driving to the surgery each day and working your tail off just so you can 'pay the bills' and perhaps have some cash left over to invest. You are simply leaving too much to chance. Why would you do that with something so important? What is the number one thing a financial advisor should provide or help their clients with? The most common answer to this question was that respondents thought finance advisors should provide "honest and unbiased" advice. Secondly, they should help you develop a plan to meet your financial goals. What are your top three fears or risks with appointing (and trusting) a financial advisor? By far the biggest concern with appointing an advisor is related to the trustworthiness of the advice. That is, will the advice truly be in the client's best interest or will it be influenced by commission, kick-backs or other incentives. The second most common concern was loss of capital (original money invested) and uncertainty in respect to what investment returns the advisor will achieve. I would echo the answers to questions 7 and 8. In fact, as a financial services industry insider, if you knew what I know you would probably be even more concerned. There are a number of conflicts which exist and commissions are only one of them. Many are less obvious or invisible. For example, some financial services businesses have agreed to sell their business at an agreed date in the future on the condition that the business sells a certain amount (proportion) of a certain product(s). Therefore, a conflict exists to always recommend that product -- to maximise the business' sale price. The simple solution is to deal with an independent advisor (one that is not owned or linked to any product provider) that charges you a transparent fixed dollar fee for their service (not a percentage or commission whatsoever). You must ensure that the only revenue that your advisor will receive is the fee that you pay them. The person that does the paying is the person that ultimately gets looked after. What are the top three things that stop you from wanting to deal with a financial advisor? The most common answers included: • not believing that advisors can produce superior investment returns, • not having enough time to appoint and meet with an advisor, • not knowing if they could trust the advisor and • the level of fees and if they would be value for money. The first point I would like to discuss is the concern that advisors might not produce a superior investment return compared to you investing without an advisor. There are two components to this. Firstly, the strategy that you employ will affect your investment returns and success as it impacts on many things such as risk, cash flow, diversification, tax and so on. Strategy includes decisions in respect to when to invest, how much, what ownership structure, how much to borrow and so forth. The second component is tactics -- that is, what to invest in -- which shares, managed funds or property to buy. SO WHAT? My personal and professional philosophy when investing is to stick to time-tested, fundamentally sound, blue-chip shares and property. When it comes to managed funds, it's nearly always best to invest in passively managed investment (index funds are one type) because they will deliver a market return at the lowest cost (fees and tax). If you employ the same philosophy, arguably, you don't need a financial advisor. However, I'd argue that this is not where an advisor can add the most value. In our business we might spend 10% of our time on the 'where to invest' question. "Budgeting is not about counting every dollar or about scrimping and saving. It is simply monitoring your expenditure and knowing where your cash flow is going."
ADA News Bulletin April 2011
ADA News Bulletin June 2011