Stuff Financial Advisers Say: Part BPosted on October 30, 2014
The ugly reality: It should never be used on individual stocks (think Netscape, Kodak, Lehman Brothers and where Nokia and Rim are heading). Also, don’t use this approach if you aren’t patient and be very careful with shorting a stock market index (i.e. don’t do it). The market can stay crazy, particularly on the upside, longer than you can stay patient. Witness the dizzy heights of the dot-com boom that rose for years and destroyed the portfolio and funds of even the most determined value based short seller by the end of 1999. At the other end, witness the failure of mean reversion on Japanese equities, which are still two-thirds below their 1990 peak…a mere 22 years later.
The grain of truth: It does cause people to invest at the bottom of the market, which is very rare.
The ugly reality: It also causes people to invest at the top of the market, usually blindly. It’s also often used to sell the most expensive investment products seen this side of the Tulip and South Sea bubble. It’s brilliant, particularly for advisers who couldn’t be bothered actually talking to their clients, yet still collecting their commission checks each month.
Net Reduction in Yield
The grain of truth: There is no good investment reason, but it’s supposed to be way to compare costs amongst products after all fees and bonuses are considered.
The ugly reality: That one piece of paper is probably the cause of more bad investment decisions made by expatriates than any other. It has numerous flaws. Firstly the calculations assume that all contributions are made for the life of the investment, exactly on time. This never happens and the vast majority of expatriates stop contributions within 5 years. Practically none make it to 10 years let alone the 25 years in the projections.
Secondly it assumes a stable consistent market return. This has never happened in the history of the world. The insidious effect is that in down market times, most plans are charges based on contribution levels, not present value, so the costs actually go up (as a percentage) in down periods. Talk about kicking you while you are down.
Lastly, and most importantly it ignores a host of fees. Fund management, and fund switching fees are excluded. Any cost from the adviser is excluded and often, if you look closely half the product fees as well. It’s not a bottom-line figure – in fact it’s anything but that. It’s probably the most misleading sales document ever invented.
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About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area. This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China. Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business. Owen's interests are tennis, running and his wife and two children. He speaks fluent Chinese, first arriving in China in 1997.
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