30 NEWCASTLE HERALD Thursday, December 4, 2014

business PERSONALFINANCE

All dressedup in red tapeNOELWHITTAKER

A financial adviser shouldact in their client’s bestinterests, apparently.

Noel Whittaker is the author ofMaking Money Made Simple andnumerous other books on personalfinance. His advice is general innature and readers should seektheir own professional advicebefore making any decisions.Email noelwhit@gmail.com.

FINANCIAL loss is nothing new. Infact, Edinburgh in Scotland has aLibrary of Mistakes which containsmore than 6000 volumes thatchronicle a whole litany of financialmisfortunes. There is even a copy ofthe front page of a Chicagonewspaper dated July 14, 1928,announcing that ‘‘Ponzi will notreveal his secrets’’.

What is new is the growingtendency for governments to believeyou can protect consumers by simplyincreasing layers of red tape. Atbest, it gives investors false feelingsof confidence. At worst it createsmountains of non-productivepaperwork.

The current goings-on inCanberra, which revolve around themuch publicised FoFA (Future ofFinancial Advice) rules, are a casein point. Following the collapse ofinstitutions such as Trio, Westpoint,Opes Prime, Storm and a range ofagricultural schemes, there werecries that something needed to bedone to prevent such losseshappening in the future.

Labor took up the challenge andafter appropriate investigation,introduced the FoFA rules in April2010.

Following representations fromthe financial planning industry andas part of their program ofeliminating red tape, the Coalitionattempted to wind back part of theFoFA ‘‘reforms’’. The changesappeared to be on track until a last-minute change of heart by senatorsJacqui Lambie and Ricky Muir tookus back to square one.

A major stumbling block has beenthe requirement that the financialadviser must act in the ‘‘bestinterests’’ of their clients. At firstglance it would seem to be statingthe obvious because one couldreasonably expect that your lawyer,doctor, dentist and every otherperson you dealt with would have an

obligation to act in your bestinterests. But, my legal advisers tellme, this is not strictly the case.

People who contract with you owea ‘‘duty of care’’ – if they fail to fulfilthis duty an action can be taken fornegligence.

The problem with ‘‘best interest’’is that it is so vague that it opens upa whole new area of law. The FoFAlaws already require the adviser toprovide appropriate advice, warnthe client if the advice is based onincomplete or inaccurateinformation and to prioritise theclient’s interests. Surely that isenough.

In an attempt to get around the

inherent problems of defining‘‘best interest’’, the laws allowcompliance with this duty to bedemonstrated by a seven-stageprocess to be known as the ‘‘safeharbour’’ provisions.

To be protected by the safeharbour provisions, the adviser musttick a string of boxes which includeidentifying the objectives of theclient, making additional inquiriesif the information provided by theclient appears incomplete, conducta reasonable investigation into thefinancial products that mightachieve the client’s objectives andbase all judgments on the client’srelevant circumstances.

But that was not enough. Theyadded another provision requiringthe adviser to act in the client’s bestinterest. Yes, we are back to squareone. For an adviser to prove theyacted in the client’s best interests,they have to prove they acted intheir best interest! As a barristerfriend said: ‘‘You could drive a truckthrough it.’’

Back to the real world. The twomost recent large financial disastershave been the failure of Banksia inVictoria and Wickham Securities inQueensland. The new FoFA ruleswould not have done a thing to savetheir investors; the institutions wereraising funds direct from the public.

The reality is that all the red tapein the world can’t offer investorsprotection from loss. Financialeducation coupled with an under-standing of risk and reward remainsthe key ingredient.

Q Can you explain what you meanby paying your mortgagefortnightly? I currently transfer halfthe repayment every fortnight andthe bank takes out the monthlyrepayment. Should I arrange for mybank to take out a fortnightlyamount?

A If you are paying $2000 a monthand move to $1000 a fortnight,you’ll find yourself paying an extra$2000 a year without feeling it,as there are 26 fortnights but only12 calendar months in a year. Theeasiest way is to ask the bank totake it out fortnightly. An alternativeis to accumulate all your sparemoney in an offset account.

Q My wife and I are in our mid 70s,and have $380,000 in shares –all the shares are in dividendreinvestment plans. Our totaltaxable income, including the agepension, is $48,000. Should we sellsome shares each year or opt out ofdividend reinvestment plans?

A If you are receiving the agedpension, I would have thoughtyou would be paying very little tax,if any, thanks to the combination ofthe Senior Australian PensionerOffset and the franking credits fromthe shares. As you need to redeeminvestments to live on, I believe thebest option would be to opt out ofthe dividend reinvestment plans asthis would give you maximumflexibility. If your situation changes,you could always go back into themarket and buy shares.

Beware of buying forgiveness for neglecting family

UNDERLYING MOTIVES: If you tend toshop too much, a deep-seatedemotional reason could be why.

By CHRISTINE LONG

IT’S December and Christmas ishurtling towards us. There arepresents to buy; party outfits to try;and festive food and drink to huntand gather.

It’s a sure bet that in the next fewweeks we’ll all be spending a fairchunk of our time at the shops.

And time isn’t the only thing we’llbe spending.

At a time of year whenexpectations and emotions arerunning high, our spending isn’talways driven by joy and generosity.

Lots of us grapple with a bunch ofdifficult emotions during the holidayseason. For some, the solution lies ina spot of retail therapy.

Behavioural researcher andstrategist Dan Gregory saysspending is just like any othermethod people use to fill anemotional gap in their lives.

Although it’s mostly women wholike to joke about indulging in retailtherapy to reward or treatthemselves, men aren’t immune.

‘‘Often times that kind of spendingis attributed to women but I don’tthink it’s as gender-specific as a lot

of us make out,’’ Gregory said. ‘‘Ithink men do that as well.’’

Emotional spending pops up whenhe shops for Christmas presents.

‘‘I am slightly conscious of the factthat I’m very busy and I travel a lotand I don’t see family as often as Ishould and I do potentially buy themoff at the end of the year or buyforgiveness,’’ he said.

Gary Mortimer, a senior lecturerat the Queensland University ofTechnology Business School, is aresearcher on shopping behaviour.He says emotional spending cancome in a variety of guises.

People may rationalise theirspending as a form of compensation,‘‘so they may reward themselvesbecause they have worked hard;they may have got a promotion,’’ hesaid. There’s also ‘‘therapeuticshopping’’.

‘‘If we’re in a blue mood we willbuy something, or shop, to makeourselves feel better.’’

An impulse buy, when you spot a40 per cent off sale, is a form ofemotional spending. But impulsebuying can also be linked to morethan the chance to score a bargain.Mortimer points to ‘‘revenge

buying’’, where someone snaps up anew dress or a motorcycle or jetskiequipment as a two-fingered saluteto their partner after a fight or abreak-up.

‘‘The other type of shopping thatlinks to emotions is hedonic,’’ hesaid.

‘‘It’s usually around sales time andit’s about the thrill of the chase, the

waiting outside in the morning,waiting for those doors to open andbeing the first inside.’’

At the extreme end of emotionalspending is the compulsive shopper.

‘‘Compulsive shoppers at the veryfar end start to move into hoardingbehaviour. They will buy a numberof items and sometimes they willleave them in their wardrobes withtheir tags on not used or kitchengadgets in boxes not used,’’Mortimer said.

A compulsive shopper has to buysomething every time they shop.

‘‘That is different to other types ofshoppers, who may go to a shoppingcentre but can actually leave empty-handed and not feel like a failure.’’

So when does emotional spendingstart to become a serious problemrather than just a nice little pick-me-up?

‘‘If it’s causing relationshipproblems, or causing you to get intodebt or miss paying things like rentor school fees, then it’s clearlybecome a problem,’’ Gregory said.

So how do you start to curbemotional spending?

Nicole Heales, principal of NicoleHeales Financial, advocates getting

to the root of the problem, partic-ularly if you’re overspending.

‘‘Removing yourself from somesituations and then trying to workout what triggers you is actuallyimportant,’’ she said.

So what can you do to slough offthe shackles of emotional spending?

Track your spending: Emotionaleaters are often encouraged to keepa diary of what they eat plus whenand what they were feeling at thetime. A similar exercise withspending can help reveal what’sdriving you.

Be prepared: Prepare for timeswhen you’re likely to feelvulnerable. If you know a bad day atthe office or a quiet weekend makesyou want to shop, look for alternativeways to boost your sense of well-being or connection.

Set boundaries: Shop withsomeone who will question whetheryou really need to buy something.

Change your self-talk: Beconscious of how your self-talk mightencourage you to spend: ‘‘I deservethis; I’ve worked hard’’; ‘‘I can’t go toa party in that same dress’’. Tryasking yourself: How will I feeltomorrow if I buy this?