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Client money mistakes: cash-flow crisis

Lessons from a Rising Star February 2017

Cash-flow management skills are critical for client's wellbeing, Peter Hodgson tells Alan Hartstein.

ANZ financial planner Peter Hodgson believes the biggest mistake his clients make is the same thing that affected his family growing up – failing to manage cash flow. “It’s impossible to be successful without getting on top of that fundamental of investing,” he says.

Another mistake he sees often is failure to measure concepts such as risk versus return and opportunity cost. A practical example of this, he says, is when a 25-year-old goes out and buys a Holden Commodore for $45,000 without any regard for how that decision will affect them down the track. “In five years’ time, when they turn 30, they can’t afford a deposit for a home and the only asset they have is a car that’s now worth $10,000 or less.”

This happens at all income levels and professions, Hodgson says. “I’ve dealt with company directors in their late 50s who have huge debts on their homes and cars,” he says, adding that it’s important to remember that when your income goes up your spending levels invariably rise too.

Hodgson was a finalist for 2016’s AFA Rising Star of the Year Award. He has worked in ANZ’s Brisbane office for the past three years and was initially attracted to financial planning to gain a greater control and understanding of his own finances.

“I grew up in a household of tradespeople where there was little understanding of cash flow and investing, and there were constant arguments over money. I wanted to make smart financial decisions for my own family, and to do the same for others,” he says.

Education is key to avoiding mistakes

As far as Hodgson is concerned, good client advice starts with education, regardless of whether you’re talking to school children, young families, or retirees.

“Avoiding mistakes starts with understanding the foundations of good money management,” Hodgson says.

Fundamental to this is budgeting and getting on top of debts, especially those of the credit-card variety. The first thing Hodgson does with new clients is work out a budget that deals with fixed costs and discretionary spending.

“Once people know what they have left after rent, food, clothing and bills like electricity they have a much better idea of where they stand and how much they are spending on entertainment and non-essential things,” he says.

He also recommends getting clients to simply put their credit cards away for a fortnight and take a note of exactly where their money goes. “When people pay cash for everything it profoundly changes the way they look at money,” he says.

Once they understand the importance of money management and learn to control their cash flow, we can show them how to redirect much of it into the most appropriate investments for them, Hodgson adds

Rectifying mistakes after the fact

Hodgson says fixing mistakes is largely dependent on what they are and how long they’ve gone unchecked. “Seeking advice from an expert is always the best initial course of action, regardless of whether you’ve made poor decisions regarding cash-flow management, property purchases, taxation, investing, or debt,” he says.

Clients need to understand their situation and be accountable for their lifestyles, Hodgson adds. He helps develop plans to consolidate debt and to pay it off as quickly as possible and to set aside at least some money for savings. Young people, he says, are usually startled when you show them what they can achieve with better saving habits.

“When I tell a 25-year-old that if they start with $5000 and save $50 a week at a 7 per cent average interest rate they could have $1 million by 65, this really brings home the opportunity cost of wasting $200 or $300 bucks a month on things they can live without.”

The same principles apply to 45-year-olds who have poor financial habits, Hodgson says. “It’s not rocket science. Like it or not you’re going to get to a certain age and you need to do whatever you can to reduce debts and save as much as possible if you want to maintain a particular standing of living when you retire,” he says.

Once you have cash flow and debt under control, you can take advantage of great investment options in things such as managed funds, property, and share portfolios, he continues.

Using with the right tools

Hodgson meets face-to-face with clients whenever they need to, sometimes quarterly, sometimes half yearly. The most important aspect of ongoing client relationships, he believes is being able to talk their language and understanding what it is that they want. “I’m a straight shooter and clients appreciate that. They know that the conversation is always about them.”

When it comes to tools that assist clients, Hodgson insists it’s all about getting the basics right, and this starts with budgeting tools. He uses products such as gap analysis tools to forecast what retirement money clients will need, loan amortisation tools, compound interest calculators, and risk and return charts – all things that enhance clients’ understanding of where their money is going and how it’s benefitting them.

He also directs his clients to the huge amount of salient information in ANZ’s client newsletters and on its website.