The windfall paradox – explains how “isolated” financial advice can be so bad for us

I am often asked what is the one thing everyone can do to improve their financial well-being and I always give the same answer……..

……..“Stop making isolated financial decisions and treat your finances as one whole, not, as most people do, as a group of unconnected once-off transactions”

Regular readers will know I am very critical of what is a biased advisory marketplace, in that most Financial Advisers are only commission remunerated sales agents of the financial institutions. However, while this extremely “biased” advice contributes considerably to the poor financial planning outcomes Irish people are suffering (remember, in 2009 a HSE means test of ALL Ireland’s over 70’s found 95% of them State dependent), “isolated” advice is causing the biggest problem.

While I have been “banging the ISOLATED drum” for some time now, in that it was a core message of my first book on this topic, The Tricks of the Rich (first published in Ireland in 2006), I am still meeting people every day who are making isolated decisions and robbing themselves and their families of large amounts of capital and income. Recently, I have discovered a new way of demonstrating the problem and have set this out below.

Windfall

Imagine for a moment that you suddenly had €50,000 in cash, let’s say it simply fell out of the sky and you can keep it with no strings attached (wouldn’t that be a great start to 2017?). If you are one of my typical readers, you are of a certain age, probably married with children, and have accumulated a number of financial products (mortgage(s), pension(s), savings account(s), personal and/or business loans…etc.) and probably dealt with a number of different advisers who SOLD you these products. Let’s pick three of them to visit with your new found €50,000.

Building Society Manager

If you take the cash into the manager who sold you your Home Loan, what is he/she likely to tell you to do? Well, you do not have to be a qualified financial adviser to guess that the advice will be to pay the cash off your home loan immediately. This will either shorten the term remaining on this loan (if you keep repayments at the current levels) or allows you to lower your monthly outlay and so enjoy some improved personal cash flow.

Pensions Broker

If, on the other hand, you take the €50,000 into your Pension’s Broker, he/she will tell you to invest it in your pension. They will explain the tax relief you will receive, plus the benefits of tax-free growth into the future and illustrate for you the long-term benefits this investment will deliver based on certain growth assumptions. There could be both immediate cash-flow benefits here, as the Revenue grant you tax relief on your personal payment, and the future will look considerably brighter when you eventually retire.

 Accountant/Auditor

Assuming you run your own business, the third person you might take the €50,000 to is your Accountant/Auditor and he/she may well tell you to invest the capital into your business. You may be told of the “prudence convention”, a system that is often applied by Accountants which assumes no future profits in the business, and that if you do invest some tax benefits will apply, if not immediate, then long-term.

The question here is “which one is right” as, where your personal circumstances are concerned, they cannot ALL be right, can they? The Building Society manager’s job is to ensure the loan is repaid and the risks to the lender are minimised. The pension’s broker’s job is to SELL pensions and your Accountant’s role is to ensure you manage your business properly & prudently and in line with the rules laid down by Statute and Precedent. In this context, THEY ARE ALL RIGHT! This is true because they are following their own professional Agenda, NOT yours, and they are doing so in line with the law.

Of course, for you, with €50,000 cash and a decision to make, these three “isolated” opinions will likely cause confusion and some stress. Worse still, in most cases of real windfalls, my experience tells me that it is the adviser you meet first who usually gets the cash and in making that decision the benefits of the others are simply not considered.

The problem for you here is that, in truth, all three actions (and many more examples could have been used) deliver a benefit to YOU, the real question that needs answering before any decision is made is: -

“What are you trying to achieve?”

Unless and until you have clearly outlined your financial goals, short, medium and long-term, the fact is that it is IMPOSSIBLE to tell you the BEST thing to do with your €50,000! Financial Goals are as diverse as the individuals involved in personal planning, but some of the more typical ones include: -

• Ensuring you have the financial wherewithal to educate your children to the highest level they can obtain.
• Accumulating adequate assets in order to be able to enjoy your retirement without a huge loss of income.
• Being debt free by the age of 60/65/70
• Buying a Holiday Home for retirement
• Providing for a daughter’s wedding
• Providing for the long-term care of elderly parents (or ourselves in the really long-term)
• Implementing a robust succession plan for the family business

Each one of these goals can be accurately priced (as can any other you might have that is not included here) and, as you can imagine, each one has a different time scale and so a different urgency for YOU. If you can create your own PERSONAL FINANCIAL PLAN, which clearly defines your goals in proper chronological order, being in possession of that Plan will make ALL financial decisions easier. It costs nothing to talk to a truly impartial Financial Planner (like me) and if anything here resonates with you may I suggest you do so immediately. I will meet anyone on a no foal, no fee basis and am available nationwide, so please feel free to contact me here on LinkedIn or you may email me at my private address which is [email protected].

 Paul A. Overy QFA, FLIA

January 2017