Big Problem – Wrong Solution

The Productivity Commission has finally released its recommendations for the superannuation system.  And not before time – there is nearly 3 trillion dollars in the system, and billions of dollars of fees are deducted each year from the retirement savings of the average Australian.  Despite the 40,000 superannuation products out there, it remains one of the least competitive industries in Australia.  In a nutshell, this means you are probably paying higher fees than you need to.  And that your standard of living in retirement will be lower than it should be.

Who is responsible for this lack of competitiveness?

There are a few causes of this:

  1. Most members (yes, that probably includes you!) don’t exercise their right to select their super fund. They end up in what is known as a “default fund” which is chosen by their employer or by legislation in employment contracts.  You wouldn’t let your employer or the government choose where you eat, where you shop, what clothes you wear, where you live or what car you drive.  So why do you let them choose how one of your largest assets is managed and invested?
  2. Switching super funds can take a lot of time (or at least it was until Plenty provided free advice around which super fund you should be in and can help you implement the changes). So, members tend to stick with the same old fund they were in before.  Once again, I hold the members responsible here.
  3. Once a super fund has been selected as the default it is happy days for them because they have a guaranteed supply of new members. So, there is no need to innovate or perform.  You can’t blame the super funds here, it is the system that drives this behaviour.

What has the Productivity Commission Recommended?

The good news is that the Productivity Commission has recommended a solution to these problems.  The bad news is that it won’t help you.

The recommendation helps new entrants into the superannuation system, ie people entering the workforce for the first time and immigrants.  Instead of default super funds being selected by legislation and employers, entrants into the system will be able to make a choice between 10 independently selected top-performing funds.  This is great for the new entrants.  But it doesn’t do much for people already in the system.

To be fair – the Productivity Commission also recommended that when you change jobs your new employer will no longer put your contributions into a new fund but rather into your existing fund. This will encourage consolidation of your existing super funds.  This will avoid the estimated $2.6bn issue of having multiple super accounts arising from multiple employers.

But What if Your Existing Super Fund Doesn’t Cut the Mustard?

Yes, that’s a problem isn’t it.  And the Productivity Commission hasn’t proposed a solution to this problem.  Ultimately, they are saying “Caveat Emptor”.  Let the buyer beware.  Or to put it differently, if you don’t take the steps you need to take to get yourself into a better super fund, then nobody else is going to do it for you.

So, are you going to take the required steps?  Or retire in poverty?  If you are looking for an easy and low-cost way to get advice about the right super fund for you then Plenty could be your answer.

Greg Einfeld

Greg is the co-founder of Plenty. He has been a financial adviser for the last 7 years. Priory to that, Greg ran the life insurance division of life insurer MLC.

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.

Who Can You Trust?

Is it no one?

Recent events are leading me closer to that answer.

I grew up in a world where you could trust people.  You could trust institutions.  If someone said they had done something, you could rely on them.  You could shake hands and know you had a deal.  You could look someone in the eye and have confidence that what they were saying was true.

The events of the past few months have thrown all of this into question.

It Started With a Business Dealing

My trust began eroding as I was trying to sell an asset.  Someone made an offer and we shook hands on the deal.  As a result, I advised the other interested party that the asset had been sold, and they understandably moved on.  Then the person who made the original offer changed their mind.  I was left carrying the can.

Then It Was Social Media

One of the big selling points of social media was that you rely on friends and the crowd, rather than say a journalist who has a biased view.  First we saw that these “friends” and the “crowd” may have been nothing more than bot accounts pumping the network with “fake news”. Now there are questions about how private our data is, despite Zuckerberg’s assurances in the past.

Then It Was Sport

Cricket has always been the ultimate sport of gentlemen and fair play.  Until the recent series between Australia and South Africa.  We saw sledging, violence and then blatant cheating.

Now It’s Our Most Trusted Institutions

There was a front-page story that the NAB chief of staff was getting kickbacks (or you might call them bribes) from suppliers in return for recommending those suppliers and allowing them to overcharge for their services.

Next we can turn to the Royal Commission.  It started with stories of NAB employees getting kickbacks (what is it with NAB and kickbacks?) in order to get their home loans approved.  Then we heard about mortgage brokers recommending larger loans than were warranted so they could earn higher commissions.  Then we heard about CBA planners charging decade long dead people for financial advice.

The most serious findings of all are that executives of AMP have deliberately lied to the regulator numerous times in order to protect themselves, their employer and no doubt their careers.  The CEO of AMP was forced to resign immediately once this was revealed.  So much for protecting your career…

Is There an Answer?

So what is world coming to?  Can you trust social media?  Can you trust financial institutions?  Sporting heroes?  Can you trust anyone at all?  If not, what does this mean for society as we know it?  And what can we do to reverse this trend?

I wish I had the answer.  I don’t.  In fact if I told you I had the answer then I would be lying myself.  So let’s come back to the Royal Commission for a moment.  Many of the findings to date are horrific.  Australians have been treated unfairly.  They have been ripped off.  They have been lied to.  The institutions have clearly put profits before their customers.

What About Financial Advice?

One of the real challenges with financial advice is that you don’t know who to trust.  And that was before the Royal Commission.  You can’t even rely on your friends’ recommendations because they probably don’t know how to judge a good adviser from a bad one.

At Plenty, we recognise that at this stage you probably don’t trust us any more than you trust someone who was recommended by your taxi driver.  However, there are 3 important points we would like you to consider.

  1. Most financial advisers will charge you thousands of dollars just to get started. We offer our advice for free.  If it turns out that you don’t like our advice (we would be surprised if this is the case) and choose not to take in on board, you haven’t lost anything.
  2. Because our advice is based off algorithms, it is 100% objective. We can point to the rules that sit behind our advice.  Nowhere in those rules does Plenty’s personal benefit come into play.  The thinking behind the advice provided by human advisers may not be as transparent and objective.
  3. If we were really trying to rip you off, we wouldn’t be providing advice for free. And we would be charging much higher fees for implementation and for consultations with a financial adviser.

So what have you got to lose?  Get a free financial roadmap now and start getting on top of your finances.  You might just find that Plenty is bucking the trend!

Greg Einfeld

Greg is the co-founder of Plenty. He has been a financial adviser for the last 7 years. Priory to that, Greg ran the life insurance division of life insurer MLC.

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.

What Happened to Cryptocurrencies in January?

Last month we wrote an article about the basics of Bitcoin – since then cryptocurrencies have faced severe volatility – in January alone the price of bitcoin fluctuated more than 40%. This has resulted in bitcoin and blockchain more prevalent than ever in the press. Here is a list of some of the more interesting articles to keep you up to date.

Price

https://www.coindesk.com/three-possible-reasons-the-crypto-markets-tanked-this-week/

In the middle of January, over a 36-hour period, $300 billion of value was lost in the cryptocurrency market.  The article discusses 3 main reasons for this:

  • South Korean regulators bearing down on the crypto market
  • Use of complex market tools (i.e futures) impacting prices and;
  • Strain on market infrastructure as more people look to buy crypto

Volatility.

https://www.lifehacker.com.au/2018/01/why-bitcoins-price-is-so-volatile/

The volatility of bitcoin is severe – this article discussed the reasons for this volatility and boils it down to two main reasons:

  • Ownership is very concentrated – 95% of bitcoin is owned by just 4% of people with bitcoin
  • Lack of government regulation

The Experts

https://www.marketwatch.com/story/bitcoin-and-cryptocurrency-on-twitter-the-most-important-people-to-follow-2017-12-04

There are a lot of so called crypto “experts” out there – this article lists the real experts to follow on twitter including founders of coins, bitcoin analysts and famous investors and miners.

The Bulls

https://www.coindesk.com/wall-street-veterans-raise-50-million-crypto-fund-funds/

Wall street is also excited about the opportunities in cryptocurrencies – there are now over 175 crypto hedge funds including the one discussed in this article.

The Bears

https://www.coindesk.com/roubini-doubles-crypto-criticism-calls-blockchain-overhyped/

Not everyone is buying into the hype with some seriously smart people not onboard the blockchain bandwagon. This article touches on Nouriel Roubini’s (former Clinton administration economist who predicted the 2008 financial crisis) and George Soros’s bearish views.

The Blockchain

https://hackernoon.com/wtf-is-the-blockchain-1da89ba19348

This article isn’t new but it is the “The ultimate 3500-word guide in plain English to understand Blockchain.” It may not help you make millions trading cryptocurrencies but it will definitely give you a greater understanding of the technology that sits behind it.

A Bit of A Laugh

http://www.betootaadvocate.com/uncategorized/bloke-didnt-buy-bitcoin-year-ago-says-nearly-bought-bitcoin-year-ago/

A good article to show that friend of yours who keeps telling you how he almost got rich off bitcoin.

What’s clear is that cryptocurrencies are far from being a stable place to put your money, if you have long term financial goals then better to go with a sure bet.  Get a free financial roadmap covering every aspect of your financial life from Plenty.

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.

Bitcoin For Dummies

You would have to be living under a rock if you haven’t heard of Bitcoin by now.  The second steepest graph I have ever seen is the bitcoin price.  The steepest is the number of people who are talking about it.

My last 3 Uber Drivers have talked about the merits of bitcoin, as has my Hairdresser and the Matchmaker who shares her office with me.

While the rank and file seem to be in love with the cryptocurrency, many so-called experts are predicting its demise – Jamie Dimon, the CEO  of one of the world’s largest investment bank, called people who buy bitcoin stupid.  So who is right?  The plebs or the elite?

In order to answer that question, let’ take a look at what Bitcoin is, and how it works.

The blockchain

To understand Bitcoin, we need to first understand another concept known as the blockchain. Usually, when an asset is transferred from one owner to another, there will be a central register which records who owns the asset.

For example, BHP keeps a register of who owns its shares.  If you own 1,000 BHP shares, it will be recorded in BHP’s share register.  If you buy another 500 shares then BHP will record that you now own 1,500.

Property is another example.  In NSW, the Land Registry Services office records who owns every property in the state.  Similar property registries exist in other states.  Other examples include bank accounts, cars, managed funds, superannuation, frequent flyer points.  The list goes on.

You may ask “What is wrong with a register?” Well – there are 3 issues:

  1. These registers are VERY expensive to maintain and ultimately you pay the cost
  2. The register can make a mistake
  3. Registers can be prone to fraud either internally or externally (i.e hacked)

Without getting too technical, a blockchain resolves these issues by having a network of computers which synchronise the tracking of ownership of each asset.   Each computer in the network is known as a miner.  The miners record every transaction (a block) in the list of historical transactions (the chain).  As long as 51% or more of the miners agree on the list of transactions, that list becomes the truth.  So it would take more than 50% of miners to collude in order to manipulate the system.  This creates a high level of security.

The problem with money

We use money for 2 reasons:  As a store of value and as a means of exchange.  Both of these are becoming increasingly problematic.

During the GFC, the global financial system nearly collapsed.  Governments were able to coordinate globally to rescue the system.  Their solution was to create more money.  As a result, anyone who had money has seen their share of the world’s wealth deteriorate.  And who wins out of this?  Governments, because they are the ones who created the extra money.  It’s a bit like trying to win a game of monopoly when your opponent pulls more money out of the bank every time you blink.

Have you ever wondered why you keep getting priced out of the property market?  You can thank the central banks.  Although, as an aside, if you would like to buy property then Plenty can probably help you get there.

Another problem with money is the transaction costs involved in making payments.  For example, it is expensive to convert from one currency to another.  In a world that is becoming increasingly global, the cost of converting currencies is creating larger and larger inefficiencies.  If you don’t believe me, try this:  Walk into a bank, give them $100 and ask them to swap into $US.  They will give you around $US71. Then hand them the $US71 and ask them to swap it back to Australian dollars.  How much do you think you will get back?  Probably less than $90.  Why do you think the banks make so much money?  Even when you pay by credit card the banks keep around 2% of the amount you pay.  You might not realise it, but ultimately the retailer is passing this cost onto you and other customers through higher prices.

If everyone used Bitcoin instead of our existing currencies and payment methods, it would solve both of these problems.

How Bitcoin works

You can think of Bitcoin as a new currency, however it isn’t issued by a government.  Therefore, no-one has the power to unilaterally issue more coins and de-value the currency in the process.  One of the strengths of Bitcoin is that there are a finite number of coins, and a strict set of rules on when and how new coins can be created.

As you have probably guessed by now, Bitcoin is based on the blockchain.  Every transaction is recorded by miners all around the world. There are no physical coins – everything is recorded digitally.

Why can’t you spend Bitcoin?

It is early days for Bitcoin (and other cryptocurrencies).  While the concept has been around for about a decade, most people still don’t own Bitcoins and most stores won’t accept them.  This is a chicken-and-egg situation.  Consumers don’t have a need to own coins until businesses will accept those coins.  Businesses won’t invest in the infrastructure to accept coins until Bitcoin is more widely adopted.

Like with any innovation, there will be early adopters and over time Bitcoin will become more generally accepted.

How mainstream will Bitcoin become?

This is the big unknown.

At one end of the spectrum, Bitcoin could become a mainstream method of payment across the world.  It probably won’t completely replace existing currencies because central banks won’t want to lose control of their monetary systems.

At the other end of the spectrum, governments could outlaw the use of Bitcoin and other crypto-currencies.  This is unlikely because crypto-currencies will still exist, they will just will go underground where governments have no visibility at all.

Only time will tell exactly how prevalent Bitcoin becomes.

Are there enough Bitcoins out there for it to become mainstream?

There are currently around 16.7m Bitcoins in circulation.  At a price of $16,000 each, that represents a total capitalisation of $267 billion.  While that sounds like a lot of money, Bitcoin would need a much larger capitalisation (in the trillions) in order to become a mainstream global method of payment.  With a finite number of coins, there is only one way for the capitalisation to grow, and that is for the price to increase.

To put really clearly:  If Bitcoin becomes a mainstream global method of payment then its price needs to increase significantly from where it is today, on top of the very large returns that have already been achieved.

So does that mean Bitcoin is guaranteed to increase further?

No, it doesn’t.  If it was guaranteed to go up further then I would sell my house and invest the proceeds in Bitcoin.  And I haven’t done that yet.

The above statement was predicated on a big IF.  Bitcoin may never become mainstream.  Whether it does or not is very hard to predict. In a decade, Bitcoin will either be mainstream (in which case the price will increase further), or it won’t (in which case the price will have crashed).

There is another important element to all of this.  While Bitcoin is all the rage, there are hundreds of other cryptocurrencies out there too.  Some are aiming for global domination while others are designed to be used for specific purposes.  It is possible that the ultimate globally adopted cryptocurrency hasn’t even been invented yet.

So what will happen to the Bitcoin price?

In the long term, it will depend on whether Bitcoin becomes widely adopted.  Don’t be surprised if this is the case.  But there are no guarantees.

It wasn’t my intention to provide a short term prediction for Bitcoin in this article.  And you should never base investment decisions based on past performance alone, in particular recent performance.  However, just this once, lets look at the 1 week Bitcoin chart:

1 Week Bitcoin Chart
1 Week Bitcoin Chart

If we now look at the 1 week Ethereum chart (another cryptocurrency)

Etherium 1 Week Chart
Etherium – 1 Week Chart

Based on these 2 charts alone, Bitcoin seems to have peaked whereas the momentum seems to have swung to Etherium and other cryptocurrencies.  The moral of the story is that if you buy Bitcoin today, you could be buying at a peak.  And whether you buy Bitcoin, Etherium or any other cryptocurrency, then only invest what you can afford to lose.

But rather than speculate on cryptocurrencies, go with a sure bet.  Get a free financial roadmap covering every aspect of your financial life from Plenty.

Greg Einfeld

Greg is the co-founder of Plenty. He has been a financial adviser for the last 7 years. Priory to that, Greg ran the life insurance division of life insurer MLC.

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.

Is There An Amazon of Financial Services in Australia?

In case you hadn’t noticed – Amazon has arrived in Australia. While some retailers are shaking in their boots – others don’t see it as much of a threat.

Whatever your view is, buyers the world over turn to Amazon for retail. There are 6 things that make it so successful:

  • The convenience of shopping from anywhere, any time
  • Low cost of purchase
  • A broad range of retail sub-categories eg shoes, clothes, electrical, food, cosmetics, jewellery, toys etc.
  • An even broader range of products within each category
  • Personalised recommendations based on other information that Amazon knows about you
  • Implementation, allowing you to complete your purchase with the click of a few buttons

Given the timing – we thought it is a perfect time to ask the question – Is There an Amazon of Financial Services in Australia? Here are some of the contenders:

Comparison Sites

Sites such as finder.com.au allow you compare lots of products online.  Looking at our criteria:

  • Convenience – Yes!  Being an online service, comparison sites are always available.  We give them 5 out of 5.
  • Cost – You can compare fees and then select the most affordable.  5 out of 5.
  • Broad range of categories –   These sites typically cover loans and insurance.  They often don’t cover superannuation or investments.  3 out of 5.
  • A broad range of products within each category – You certainly can’t fault the range of products that comparison sites cover.  5 out of 5.
  • Personalised Recommendations – Comparison sites are just that.  They compare things.  Don’t ask them for any recommendations.  1 out of 5.
  • Online Fulfilment – Comparison sites will direct you to a financial institution.  From there you are on your own.  1 out of 5.

Total:  20 out of 30.

Financial GPS

Financial GPS is a new a breed of Financial Services allowing you to get holistic wealth advice digitally, Plenty is an example of this type of service:

  • Convenience – Plenty is always there, 24 x 7.  5 out of 5.
  • Cost – Plenty itself is free, and will recommend the lowest cost option that meets your needs.  5 out of 5.
  • Broad range of categories –  Plenty covers loans, insurance, super and investments.  5 out of 5.
  • A broad range of products within each category – While Plenty will only provide one recommendation in each category, it will be the one most suited to you  And Plenty will have considered all the available products in making the recommendation.  3 out of 5.
  • Personalised Recommendations – Every recommendation is tailored to your situation.  5 out of 5.
  • Online Fulfilment – Where the institution allows online fulfilment (eg super) then Plenty will do it.  If not, Plenty makes the process as painless as possible (eg insurance).  4 out of 5.

Total:  27 out of 30

Robo-Adviser

A robo adviser provides investment advice online.

  • Convenience – Robo-advisers also offer 24×7 convenience.  5 out of 5.
  • Cost – Generally lower cost than human advisers, and recommend low cost products.  4 out of 5.
  • Broad range of categories –  Robo-Advisers limit their advice to investments only.  1 out of 5.
  • A broad range of products within each category – Robo-advisers usually restrict their investment universe to just Exchange Traded Funds.  3 out of 5.
  • Personalised Recommendations – Every recommendation is tailored to your situation.  5 out of 5.
  • Online Fulfilment – Everything can be done online.  5 out of 5.

Total:  23 out of 30

Human financial adviser/broker

Suppose you decided to see a human financial adviser who doubles as a mortgage broker.

  • Convenience – You will have to fit in with the adviser.  2 out of 5.
  • Cost – Financial advice is expensive.  1 out of 5.
  • Broad range of categories –  A good financial adviser will cover debt, insurance, super and investments.  5 out of 5.
  • A broad range of products within each category – A good adviser will have access to most products in each category.  5 out of 5.
  • Personalised Recommendations – Every recommendation is tailored to your situation.  5 out of 5.
  • Online Fulfilment – Time to chop down a tree or two.  2 out of 5.

Total:  20 out of 30.

Conclusion

While there are lots of options out there, the closest thing we have to Amazon in the financial services space are Financial GPS based services such as Plenty.

What do you think?  Can you think of any Australian financial services business that would score more than 27 out of 30?

The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.