Confirmation Bias

Check the transcript of the video here:

Hi, I am Imran Amjad, senior financial adviser at Veurr Financial Planning. Today, I will be explaining Confirmation Bias and sharing a story with you of a client of mine who got stuck in his own confirmation bias. So, what is Confirmation Bias? It’s a behaviour where someone develops a preconceived belief towards a certain theory or perhaps an investment strategy. They tend to ignore any counter arguments. They may also seek a professional to confirm this bias so they can continue on their preconceived path.

Now, about my client, Harry. A few years ago during one of our reviews, he brought in a chart showing property growth for the last 20 years and said, ‘I am going to buy a townhouse, the value will grow exponentially, isn’t that a great idea?’

I said, ‘Harry, the information may be correct, but I know the goals that we agreed upon and I understand well, for instance, your: current liabilities, income, cash flow and long-term goals. ‘This isn’t for you, yet.’ No, no, no, he says, in my community circle, everyone has 2 or 3 properties. And he said his brother was getting one as well, so he didn’t want to miss out.

I said, ‘Harry, I don’t know about them but I know your circumstances. ‘Have you considered: What if you lose a tenant for 6 months? What are the maintenance costs? What happens if interest rates rise?’

He searches and shows me another article on his phone, suggesting interest rates will stay lower for a decade at least. Yet this was current information only – as we have seen recently, financial landscapes change, and sometimes they change very quickly. Reluctantly, Harry promised to think about it more before doing anything.

On our next review, Harry seemed a bit distressed. He went ahead and bought the townhouse with his maximum borrowing capacity. During the pandemic, his tenant could not pay the rent for 3 months. Agent, tenant and maintenance costs had crept up since then. I asked him, ‘Harry, what happened to our discussion? You were going to think about it.’ Harry said he didn’t want to be left out of the property boom.

This time, Harry has brought more information with him that suggested property prices would increase post-pandemic with low vacancy rates predicted. I reminded Harry: ‘Regardless of these predictions, your income hasn’t changed, you have increased your liabilities and your long-term wealth creation is at stake.’

A few months later, Harry calls and sounds anxious.

Without heeding my advice, he had gone ahead with a ‘home and land package’ this time. He made a deposit just before the interest rates started to hike. Property prices came down and the future repayments doubled in a matter of a few months with reduced borrowing capacity.

He faced uphill struggles even on the current loans. He lost the preconceived growth even before the property was built. As his Confirmation Bias was shattering, he was struggling to comprehend his situation.

This scenario shows how some people can get carried away under their Confirmation Bias. My role as an adviser is not only to guide my client towards their financial freedom but also educate them along the way in making better decisions that are free of confirmation bias. Avoid disastrous results. Take a balanced view with expert advice.

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Product versus Goals Based Advice

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Hello. I’m Maciej Stanek, Senior Financial Adviser and Director at Véurr. There seems to be a disconnect between what clients understand financial advisers can help them with and what advisers actually do. Our aim is to help you achieve your goals with the right mix of products and advice. Let me explain. I recently had a discussion with a potential new client. This client had $80,000 in a bank account, which had not been touched for many years, and she decided it was time to invest it. The client wanted to know what to invest her money in. So I asked what she was hoping to achieve. She said, ‘I just want to know what to invest in to get the best return.’

My response was, ‘Why? What will be the purpose of the money when you get that return?’ The client response? ‘I don’t know. I just want to know what will go up the most.’ For contrast, let’s compare this conversation to one someone might have with their GP. A patient walks into the doctor’s office with a huge lump on the side of their neck and says to the doctor, ‘Doc, can you give me the best painkiller as my neck hurts?’ Doctor’s response is: ‘Why do you want a painkiller? Perhaps we should run some tests and figure out why your neck hurts? Then we can deal with the problem rather than just treating the symptoms.’

As you can appreciate, the doctor would not just prescribe painkillers – the doctor’s ‘product’ in this case. They would investigate why the patient has a lump on their neck and recommend the appropriate treatment to help the patient get better. It’s about the goal of getting better, not necessarily choosing a particular product. It’s the same with financial decisions. I can tell you that every investment is a product and different products have different characteristics.

Some products are suitable for what you want to achieve, and some are not. If we can establish a realistic financial goal, then I can help you choose the most suitable products to get there. In the case of the original client with the $80,000, I suggested we needed to think about her goals differently.

For instance, how much money does she need to be financially free? How much does a comfortable lifestyle cost? Once we have this baseline, we can figure out what combination of assets and products can help her meet the cost of her comfortable lifestyle. The next step is the timeframe. Say she wants to achieve this goal in 20 years, then we can work backwards to figure out: her starting situation, what she’s willing to regularly contribute to help achieve her goal what is the minimum required annual return on her capital to get her there.

Only once we’ve established these projections can we talk about which products are more suitable for the individual to help them achieve these goals. For instance, some clients have no interest in shares. Some only feel stress-free when they have their money in a property so they can drive past and see it. Some clients have no interest in excessive debt and they want to build up their wealth through regular contributions from their cash flow. Some clients have a tax problem if they choose the wrong product, while others will compromise on potential entitlements if they elect to invest in a way that just saves them tax.

It is only when an individual’s goals and circumstances are understood that products should be discussed. They help achieve the goal. They are not the goal itself.

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What is an LVR?

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Hello. I’m Maciej Stanek, Senior Financial Adviser and Director at Véurr. Today I’m explaining the loan to value ratio, or what’s called L V R for short. This term is used to describe the size of a loan as a percentage of the underlying asset that the loan is for.

It is commonly used when talking about loans on properties. The best way to explain this is by way of example.

If a property is worth $500,000 and a lender offers a loan of $400,000, $400,000 divided by $500,000 is 80%. So, the LVR on this scenario is 80%. In my opinion, this is a relatively high LVR, but I’ll explain the risks of a high LVR later.

There are two ways to reduce the LVR. The most common is by making regular repayments on the loan. If a loan gets paid down from $400,000 to say $250,000, and assuming the house value remains the same at $500,000, then $250,000 divided by $500,000 is 50%. So, the LVR in this scenario is 50%.

If a properly actually increases in value from, say, $500,000 to $1 million, and the loan remains the same, $400,000 divided by $1 million is 40%. So, the LVR of this scenario is 40%.

Both these scenarios are good for wealth creation. What if the opposite occurs? What if the property falls in value instead of increasing?

Take the same initial example, but instead of a property going up from $500,000 to $1 million, it instead falls from $500,000 to $400,000.

Now the debt is $400,000, and the underlying asset is $400,000. $400,000 divided by $400,000 gives an LVR of 100%.

And if by any chance the property fell even further in value and the loan remained the same, the LVR would exceed 100%.

This is a wealth destruction scenario, and if the individual in this scenario cannot make loan repayments, then the lender will confiscate and sell the underlying asset to recover as many funds as they can from the money that was lent.

Any unrecovered funds would still be the borrower’s responsibility. This is a scenario where the individual is now left with a loan obligation and no asset for their troubles.

It is a situation that I try and help all of my clients avoid as it is extremely difficult to recover from. Calculate your own LVR and get in touch for expert financial advice.

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Bad Debt and Good Debt

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Hi. I’m Maciej Stanek, Senior Financial Adviser and Director at Véurr. Bad debt is the focus of today’s discussion. Bad debt is simply borrowing money to receive goods or services, that once acquired, cannot be recovered to clear that debt.

An example of this would be to pay for a haircut or a holiday on a credit card. Once the service of getting the haircut has been provided, you cannot reverse that action. If this haircut was paid for by a credit card, which are borrowed funds, then you have to obtain funds to pay back that debt to the credit card company.

Similarly, if you take a holiday, pay for plane tickets, accommodation, and mojitos while using a credit card or a personal loan, then once you return from that holiday, you have to obtain funds to pay back the debt you incurred – you cannot un-fly in the plane or un-stay in the hotel!

Borrowing money in this way means you can pay for goods and services today. Yet future you has a responsibility for paying for those goods and services in the future. This becomes dangerous if today’s you goes overboard with the level of funds borrowed and future you cannot possibly obtain the funds required to pay for all of the borrowed funds of today’s you. There is also nothing to salvage and sell to pay back to the lender.

Bad debts also include loans on assets that depreciate in value. The most common asset in this category is a car.

You might get a car loan of $50,000 for a brand-new car, but as soon as you drive around in that car, the resale value drops below that $50,000 price tag you paid.

If you then sell the car, you may find that the price you get for the sale is less than the outstanding level of debt. In this instance, you have no car, but you still have debt. Even worse. What if you crash your car and it is uninsured or underinsured? You have no car and an even greater level of debt.

That all being said, not all loans are bad debts. If the resale value of the asset you buy using debt holds its value or increases in value, debt can be used to increase your wealth much more significantly than you would be able to do so on your own.

A house has historically been example of this. If you ask someone who purchased the house 20 or 30 years ago what they paid for it, they will most likely tell you a price which is significantly lower than the value of that same house if sold today. They probably took out a loan to buy that house equivalent to the value at the time of purchase.

So, in their instance, worst case scenario, if they had to sell the house to pay off their loan, the higher value of the house would clear the loan and they would be left with some extra cash.

Another example of a good debt can be explained as follows. What if I borrow $100 from my friend Jack and I tell him that I will pay him $5 interest every year that I owe him money? We do this for an undisclosed period of time until I have the original a hundred dollars to pay him back.

Now, if I do this for one year, I would owe Jack $5 in interest and I’d still owe him the a hundred dollars borrowed.

Now, let’s say I go to Jill and I say, ‘Hey Jill, I’ll lend you a hundred bucks if you give me $10 for every single year that you owe me that money.’

Now, if Jill agrees to this, she will have to pay me $10 every single year that she owes me money. And if I take the interest that I collect from Jill, the $10, and I pay back Jack his $5, I’m making a $5 profit on the difference.

Now if I did this for 10 years, I would get $5 profit every year for 10 years, resulting in $50. And I didn’t need to use any of my own money to do so.

This is an overly simplified version of what banks do when they offer interest on term deposits. They use the money from those term deposits to then lend money at higher interest rates to people who are borrowing for things like a house, a car, or the credit card purchases we spoke about earlier.

I hope this shows you that not all debt is bad, but if you’re unsure whether to take on a particular debt, it’s prudent to have a financial advisor guide you so you use debts to your advantage.

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Defined Benefits Schemes

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Hi, I am Imran Amjad, senior financial adviser at Veurr Financial Planning. Today, I will share with you the power of Defined Benefit Schemes (as shown on screen) and how they can provide a comfortable retirement.

I’ll also share an example of a situation where I helped my clients achieve their desired outcome using my knowledge of these schemes – I know them back to front and upside down!

I have vivid memories of meeting Steve and Bec. Steve was in the CSS defined benefit scheme. He was told by his employer that he had been made redundant. Steve and Bec had no idea how to cope with the situation. They had never seen a financial adviser and did not understand the defined benefit scheme.

Here they were sitting in front of me in extreme stress and as soon as I asked how I could help them, Bec was in tears and Steve dropped his head in his hands. Long story short, I got them talking about the outcome they wanted from this situation.

They wanted to achieve two things: pay off their mortgage balance and live comfortably. Bec also told me through tears that since they got together 30 years ago, they had a dream of travelling around Australia as grey nomads. They never had the chance with other liabilities and she felt now there was no possibility.

As an expert adviser on the CSS scheme, I understand the incentives that come with a redundancy in that scheme and how to maximise those benefits. I told them to leave their stress with me and go home. I would contact them in a few days with the strategies to achieve their desired outcomes.

A few days later, they were sitting in front of me again. Based on my expertise, I was able to explain how they could: pay off their mortgage in full and be debt free and have a guaranteed income indexed for life. And as a bonus, I was also able to: set up an account to invest a significant lump sum to cover any ad hoc needs they might have in retirement.

A few weeks later, Steve calls me. He says, ‘Imran, we found a camper and 4×4 on the coast at a dealership, costing this much. Can we afford it?’ I said to Steve that I’d call him back in 10 minutes. Knowing about their dream, I had considered this in their financial plan already. I checked the figures and called him back. I said, ‘Steve, go for it.’ I explained that his income is there for life. They are debt free. It’s time to live their 30-year-old dream.

Two weeks later, there is a knock on my front window in the office. Moving the blinds, I see Steve and Bec with big smiles on their faces and he waves to me to come out. I go to the front and there is a brand new 4×4 pulling a massive campervan. With tears in his eyes, Steve says, ‘Mate, you made it happen.’ But this time these were tears of joy.

So, if you have a defined benefit scheme, let me help you achieve your goals and you could be my next success story!

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