Over the last 12 months I’ve had at least 50 people talk to me about a book. They started once a month, then once a week, now sometimes multiple times a week! This prompted me to take action to see if I was missing out on something. What book you ask? Scott Pape’s The Barefoot Investor.
Within days my much-anticipated copy of The Barefoot Investor had arrived – thank you Amazon. As I powered through it I was completely surprised at how engaged I was and genuinely pleased for Scott Pape. I find most books on money about as interesting as budgeting, however Pape has been able to turn some simple financial concepts that disengages most of the population, into an interesting and engaging narrative that appeals to the masses. Well played!
Engagement levels aside, the purpose of this article is not to pump up Pape’s tyres, rather and on a more serious note, it’s to bring attention to what is missing from the book, sometimes what is not said is bigger than what is! I won’t comment too much on the oversimplification of some financial issues, as I suspect without it, the book would not have reached best seller status.
A good place to start is with Pape’s background. Starting in financial services at the same time as myself, we both tried out stockbroking early in our careers. While Pape continued to trade stories for brokerage, I realised quickly there was far more potential to help people through financial advising. Pape’s background not only as stock broker, but also growing up in a farming family, appears to fundamentally shape his opinions on the world, and on money, which can get in the way of providing objective advice.
Let me explain. Pape’s farming frugality mindset shows up many times, none more so in his recommendation to invest in a particular super fund based on costs alone. Point of merit for Pape is that most public offer super funds do try to mirror each other as much as possible to avoid standing out as an underperformer, therefore cost is a key consideration. However, these funds are only part of the picture of available options out there in the market. There are options that a lot of Pape’s readership would benefit from but don’t even know exist! Coming from a self-licenced financial adviser with no institutional restrictions in offering the best advice for clients, my tip is to focus on best value rather than lowest cost.
Pape’s insurance advice made my heart skip a beat for a few different reasons. The off the cuff suggestion that 10 to 12 times your annual income is enough life and total and permanent disability insurance is a woefully outdated view formed in the nineties when you could still buy a standalone four by two within five kilometres from the city for under $150,000. A much better approach is to add up everything what you would like to see happen if you cease to exist tomorrow (lets say debt repayment, money to put the kids through school, or a component to compensate your spouse for the loss of your future earnings), subtract off your existing resources (investments net of tax, cash, and superannuation balances) and voila, that’s should be pretty close to how much insurance you need. It must be a personalised calculation as we all have different priorities and financial positions and to dumb that down to a multiple of salary falls somewhere between naivety and borderline negligence. If that ends up costing you more but your wishes for your family will be realised, then that is a good thing.
It must be tough to write a book that keeps up with legislation changes and best practice, but a big ‘warning’ is on Pape’s advice to take income protection through your super provider. There’s a few serious issues here that aren’t mentioned, ranging from your legal contract being with the super fund, not the insurer (leads to wonderful claims experiences...), to having your income protection cancelled on unpaid maternity leave or get this, if you receive a total and permanent disability claim. I can’t emphasise that last point enough. Picture this, you’ve just been in a freak accident and will never work again, ever. Following Pape’s advice would see you with a taxable lump sum of $780,000 (assuming 10 times Australia’s average income) of which net proceeds would be available to pay medical bills, rehab, ongoing medical and care costs in addition to supporting you and your family’s living expenses because that income protection insurance you dutifully took out to assist with these things won’t pay. Time to call Maurice Blackburn.
If you took the policy out through another fund not of Pape’s choice, it’s possible you may be entitled to the claim, but potentially not be entitled to receive the proceeds until you reach your age of retirement (preservation age). I would strongly recommend seeking professional advice through an insurance adviser who specialises in this area, not a stockbroker and definitely not a call centre.
My final point relates to broad financial planning around retirement. Pape genuinely believes you’ll live a comfortable life with a few hundred thousand in super and the Age Pension. This perhaps has the potential to have the biggest impact on most readers as the expectation has been set that the government has your back in retirement. The truth is, health and aged care costs are increasing way out of proportion to inflation and already straining our national budget. We are heading towards an unprecedented financial cliff as the baby boomer generation qualifies for the Age Pension. We may find that our current and future tax payer base just can’t support nearly 20% of our population on Centrelink and will witness severe tightening of eligibility. In fact, it’s already begun. My encouragement for anyone under 50, make sure your plan doesn’t rely on receiving financial support from the government and you start saving as early as possible for your retirement.
There’s a myriad of other financial strategies not mentioned in the book that my clients currently benefit from, however, overall The Barefoot Investor does an exceptional job engaging readers to build better financial habits. I think the best way to think about it is that there is a cut-off point, and where your net wealth surpasses this point, some of the advice in the book becomes a bit of a false economy. The one size fits all approach has the potential to let you down as the stakes, both in wealth and family responsibilities, become greater.
To the do-it yourselfers and those who would otherwise pay no attention to managing their finances better, stick with The Barefoot Investor.
For those who care too much about their family’s well-being to get it wrong, the book is no substitute for personalised tax, legal and financial advice in the long run.
