Money Matters: Money drain or wealth builder?

By MARY HOLM

Q. My wife and I earn about $80,000 a year gross between us, including income from interest.

We have $240,000 invested in a fixed- interest account at 6.5 per cent, with the interest being reinvested, and not spent.

We rent a house at $240 a week. We have no large assets other than two cars. We are both 40 and have two children, aged 12 and 9.

We are not sure how best to invest our money.

We have been considering buying a house and taking out a $100,000 mortgage, but are not sure if this is the best way to go, given that house prices are not rising in the way they used to.

If our needs are to have adequate housing and provide for our own retirement, and preferably become financially independent before retiring age, what would you recommend that we do?

I have been reading a book, Rich Dad, Poor Dad, that recommends not investing in the family home.


A. You're different. Most families in your circumstances would have bought a home without even thinking about it. But are they right?

A family home probably shouldn't be viewed primarily as an investment. It provides accommodation, one of your "needs."

There is, of course, the alternative that you have chosen - renting. And that might be financially better.

It all depends on what assumptions you make about mortgages; future rises in rent, house prices and interest rates; what alternative investments you would consider and so on.

But there are non-financial issues, too.

In New Zealand, it's hard to get a lease for several years or more. So you can't usually do extensive decoration or make other changes that would make rental accommodation feel more like your home.

And you can be forced to move at a time that doesn't suit you. Most people, especially those with young children, like the security of owning their home.

Where investment - as opposed to accommodation - really comes into the picture is when you're thinking of buying a more expensive house than you need, particularly if you will borrow lots to do so.

If you do that, you benefit from living in more pleasant surroundings.

But, beyond that, you might not do as well financially as you would investing in something else.

In Rich Dad, Poor Dad, Robert Kiyosaki doesn't really argue that you shouldn't own your own home. It's "better than nothing," he says.

What he does say is because home owners have to pay rates, insurance, maintenance costs and, usually, mortgage expenses, a home can be a financial drain rather than something that builds wealth.

And the bigger the home, the higher the expenses.

"Most people work all their lives paying for a home they never own," says Kiyosaki. "[They] buy a new house every so many years, each time incurring a new 30-year loan to pay off the previous one.

"The greatest losses of all [from home ownership] are those from missed opportunities. If all your money is tied up in your house, you may be forced to work harder because your money continues blowing out of the expense column, instead of adding to the asset column."

While I don't agree with everything in Rich Dad, Poor Dad, I think Kiyosaki makes some good points here.

Owning a modest home makes sense.

It gets you into the housing market. Even though house prices aren't rising as fast as they used to, no one knows what will happen in decades to come.

But owning a home that puts you deep in debt - in these days when interest rates are much higher than inflation - may not be so smart.

Where does all this leave you? Perhaps buying a mortgage-free $240,000 house with your savings. Perhaps going a bit more upmarket and getting a small short-term mortgage.

You could, for instance, get a 10-year loan of about $85,000 and pay it off at the same rate as you now pay rent. Or, given your incomes, you might manage a larger loan or a faster payoff.

Whatever you do, it would be good to be mortgage-free around 50. And don't, then, trade up. Stay put, and plough any former mortgage money and other savings into a retirement fund.

Q. The unit trust marketing manager (Money Matters, June 17) gave only some reasons that a financial adviser is a valuable person worth paying a fee. Your reply goes to extraordinary lengths to avoid facing up to this.

As a certified financial planner and practising lawyer with many years experience, I can assure you lawyers do not charge fees based only on time spent.

Lawyers also take into account issues such as specialty skills, urgency, complexity and, most of all, responsibility for the amount of money involved.

You are wrong to suggest a fee should be the same for a $1000 or $1 million transaction. I would not accept clients with more than $1000 to invest if I was not paid for these other aspects.

Advisers organise clients' affairs, minimise taxation and set good habits. They hold the client's hand and educate.

Advisers provide patience and discipline, without which investment is devoid of strategy.

Your attitude is understandable, as I have little time for chain-store advisory services. But to encourage people not to take advice could be more damaging in the long run. Please be constructive and not cynical.

It is not correct to say clients do not need advisers because they can learn to contradict their instinct to sell and buy at the wrong times. Obviously this is best done with a teacher.

I believe I more than pay for fees in the short term, definitely in the long term.


A. I started responding to you bit by bit. Then I realised I was being as sensitive about every nuance as you seem to have been about what I wrote in the first place.

You make some good arguments which, no doubt, balance some of the "extraordinary lengths" I apparently went to - without even realising it.

And I love your paragraph starting, "Advisers organise." It sounds like something we chanted at Girl Guides.

If only all financial advisers were as good as you say you are, I would be happy to be constructive.

But as long as they continue to be a mixed bag - which you acknowledge - I will keep warning people to tread carefully in Financial Adviser Land.

Now for a word from a colleague of yours, who backs up some, but only some, of what you say.

Q. I am a financial adviser with 14 years' experience and would generally agree with your comments that the so-called portfolio monitoring fee charged by many financial advisers can be a problem - particularly so when that fee is based on a percentage of the portfolio.

In broad terms, I agree with you that it may not take any more work to manage a portfolio of $1000 than one of $1 million.

However, I also concur with the unit trust marketing manager who pointed out that clients who are "advised" are less likely to be deterred from their investment strategy than those who are not.

This is certainly my experience. Our firm charges a "flat" fee for "strategic financial advice" as against merely portfolio monitoring.

You make the point that people probably don't need an adviser to be told to "hold on to their investments." A great sentiment, but probably a little naive.

Even the best intention can be easily diverted by the hot tip, the well-meaning advice from a relative, the fad or changes in Government policy.

A good financial adviser working strategically with the client can and does make a difference. If so, a reasonable fee can pay handsome dividends for the client.


A. A couple of quick comments:

First, I like your flat fee policy. I wish more firms would do that.

Second, a change in Government policy might be a legitimate reason to change an investment strategy.

Okay. That's five Q&As over the past few weeks on the one topic. I think that will do.

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