Household cash flow management, when combined with accelerated debt reduction and salary sacrificing, can deliver retirement outcomes never previously thought possible. Mark Story explains.
When flagrantly inappropriate financial advice is delivered to those who don’t know any better – by so-called “experts” entrusted to help in “good faith” – the consequences can be devastating. Much to their shock, Kim White and husband Richard, from country Victoria, found themselves in this predicament following misadventures earlier this year with one of their bank’s financial advisers. Both in their mid-to-late 50s, with a $354,000 mortgage, modest incomes and no savings beyond personal super, the Whites instinctively knew they should be doing more to prepare for retirement. So when someone from their bank called out of the blue offering advice, they naturally listened. Using high-pressure selling tactics, the bank’s financial adviser convinced them that the best way to prepare for retirement was to cancel their existing insurance and commit $628 a month for $268,000 worth of life cover, $50,000 of TPD, and $50,000 of trauma insurance.
“Despite never feeling comfortable about signing off on this insurance, the bank’s adviser managed to persuade us that everything would eventually fall into place,” recalls Kim. “We felt that the adviser wasn’t interested in providing us with a wealth creation strategy once she realised we were ‘low-worth’ investors.” Four months later, with no cash flow left to live on – after shedding $2330 in upfront and ongoing adviser fees, plus $2510 in insurance premiums – the Whites’ tranquil lifestyle amongst the natural flora and fauna of Ballarat had become unbearable. Out of sheer desperation, Kim finally cancelled all their life, TPD and trauma insurance; but after feeling vulnerable with no insurance at all, she hastily organised direct cover for $413 a month. While Kim and Richard were $215 a month better off with direct insurance cover, the events of the previous few months had left them around $5000 lighter in the hip-pocket, and in greater need of remedial financial advice.
LEAP OF FAITH When a work colleague explained how her Melbourne-based professional planner Sean Birch had helped get her finances into order, Kim felt it was time to get him to do the same for them. “After our former dealings with the bank’s adviser, we felt we’d taken a big step backwards, and had no reason to trust anyone ever again,” recalls Kim. “But on the strength of my colleague’s referral, and assurances by Sean that the first meeting was obligation-free, we felt we had nothing to lose, and potentially everything to gain.” Like many Australians, Birch says the Whites had placed their faith in a big bank. And in this instance, they had proceeded without really knowing what they were signing up for or the likely impact on their lifestyle. The advice document provided to the Whites was ambiguous, confusing and lacking in clear solutions, Birch says. ”Instead of addressing their requests, much of the advice only provided a case to request compensation of fees and premiums already paid,” says Birch. “Adding to months of extreme confusion and uncertainty, Kim and Richard‘s adviser left the bank’s employ four weeks after signing them up – leaving them with no point of contact to express their concerns.”
BACK TO BASICS Following four initial meetings, the Whites felt sufficiently confident for Birch to proceed with a statement of advice and recommendations. Underscoring his advice – especially given their recent encounters with the bank’s adviser – was a “back-to-basics” strategy around better money management, debt reduction and accelerated savings into super. To their credit, Kim and Richard’s loosely constructed retirement strategy – around accelerated mortgage payments and plans to downsize their home – was a good one. However, while they had sufficient income – with combined salaries of $100,000 – Birch says this strategy had been compromised by poorly implemented cash flow management. Based on their current cash flow, and time left to retirement, what the Whites needed most, adds Birch, was a robust retirement strategy that provided badly needed direction. While they also recognised the need for insurance, he says the Whites were unaware of the amount they needed, how long they needed it for, and how much they should be paying.
“What Kim and Richard wanted most was an assurance that if all the recommended strategies and time frames were followed, they’d be able to meet their financial needs now and in retirement,” advises Birch. In his initial dealings with the Whites, Birch spent a lot of time gaining a true understanding of their current financial position. As the Whites were by no means experienced in either insurance or investing, he says the next step was to recommend easy-to-comprehend solutions that would further simplify their lifestyle and minimise risk. Recommending and implementing strategy was one thing; but Birch also needed to ensure that Kim and Richard were being educated during the process. Part of that education process, he explains, meant shedding light on what he was recommending, why, and the expected outcomes from doing so – while highlighting any potential roadblocks. CASH MANAGEMENT Based on the Whites’ strong case for compensation, Birch drafted a letter to Kim and Richard’s bank outlining the deficiencies within their former adviser’s recommendations. Within three weeks of Birch’s request, the bank provided the Whites with a 100 per cent refund of the advice fees and premiums they’d paid.
“Kim and Richard had written these funds off to a bad experience and were over the moon to see this money recovered. They were also amazed at how quick the bank ‘made good’ on its previous bad advice,” says Birch. Having concluded that a misunderstanding of cash flow control was contributing to their financial uncertainty, Birch asked the Whites to complete a detailed annual cash flow budget. He expected the exercise to identify areas where they could free up funds and/or provide additional funds for a tax-free transition to retirement strategy – and get them back into a cash-flow-positive position. “By regaining control of their cash flow, it allowed us to address Kim and Richard’s longer-term concern of preparing for, funding and protecting their retirement,” Birch says.
