What do you think it costs for a financial adviser to prepare a five-year
According to a recent survey, nearly half of us (44%) believe that it will cost less than $500 for a financial adviser to meet with us, assess our financial needs and risk tolerance, devise a structure that can hopefully set us up financially for the rest of our life, and then meet with us again, to take us through this amazingly cheap plan.
Less than a quarter (22%) believe a financial plan should cost between $501 and $1500, which means, if my arithmetic is correct, that two-thirds of the Australians surveyed believe that a financial plan should cost $1500 or less, according to the survey commissioned by superannuation fund, GESB.
The actual cost of a financial plan? The ballpark figure is $3,600, on average, for a complex plan based on data from the Financial Planning Association.
The crew at GESB believe Australians don’t fully appreciate the cost (and value) of financial advice because
GESB’s Fabian Ross says:
The industry may be making moves to adopt a fee-based advice model in place of commissions, but in the absence of education giving sight of both the true cost and value of financial advice, consumers are less likely to take up advice, thinking it is both expensive and irrelevant…This will leave their efforts to save through super subject to a range of risks, including market fluctuations, inflation and longevity, at a time when they are striving to reach more adequate levels of retirement savings.
Not surprising, but ironic
The findings are not surprising, but they are certainly ironic. The financial planning industry had held on doggedly to the commission-based structure and it appears that they have shot themselves in the foot. By maintaining the secretive and complex commission-based remuneration system, Australians think financial advice is free or very cheap (ignoring the thousands of dollars of commissions deducted from investment balances).
The survey findings highlight two important issues in my mind:
- Transparency. The majority of financial planners accept commissions for selling financial products which is presented as financial advice (albeit financial advice is included in the service). The commissions are deducted from the client’s investment balance, and the client thinks they are paying nothing for the advice because they have not directly paid for the service. Alternatively, they are asked to pay a token amount (say, $500) to cover the financial plan, and the adviser receives the balance of his remuneration from upfront or trailing commissions. I invite any financial advisers to write to SuperGuide, and present their own version of events.
- Affordability. The survey asked those interviewed to assume they had a super balance of $50,000, and that they owned their own home. Any Australian with $50,000 in superannuation assets would have difficulty justifying expenditure of $3,600 on a financial plan. I would argue that any Australian with only $50,000 in investment assets would have difficulty finding a financial adviser willing to take them on as a client. Again, I invite any financial advisers to comment on this statement.
Huge market for affordable advice
The key message that I take from this survey is that there is an untapped market for affordable, fee-based advice that helps Australians in the transition stage of wealth accumulation. Based on this survey, it seems Australians are willing to pay about $500 for this service. The introduction of
I believe the Government and the regulators need to further progress the option of independent and affordable advice, even if this means a restricted form of financial advice, to ensure that even those with relatively small superannuation balances can access quality information and advice. Without simplifying the process too much, the provision of tax advice is an ideal example of how the two-tiered system can work. You have the tax return service providers at the lower end, and you have the
Other GESB survey findings
Other findings from the GESB survey:
- Only two in five (40%) Australians expect to follow a financial plan precisely, updating it each year. A further third (34%) expect to follow only parts of the plan.
- One in ten (10%) Australians don’t expect to get any useful or relevant guidance from a professionally prepared financial plan.
Findings from an earlier GESB survey, asking Australians why they don’t seek advice (released in February 2010):
- One in three (34%) Australians prefer to seek advice from their family, compared to just one in six (16%) who would visit a professional financial adviser.
- Of those Australians who have never sought advice from a financial adviser to help them build and manage their super, one in three (30%) said they prefer to make their own decisions and one in five (18%) said they don’t earn or have enough money to justify visiting an adviser. One in six (16%) said their financial situation is too simple to require an adviser.
If this is a survey of superfund members then the expectation of $500 for superannuation advice seems about right, which is the only type of advice that GESB can do. The quoted figure of $3600 seems to be more about full financial planning including non-superannuation financial advice. It is not infrafund advice.
For the majority of Australians the key to affordable fee-based advice is accountants not financial planners.
Problem is the Government does not want (and will prevent) you doing this. Financial advice propaganda will steer ALL super sheep towards financial planners so that wealth is transferred into the big banks and large life insurers. It’s all about the economy and financial stability and not much to do with people saving for their retirement.
All my family members are in industry funds, none of them need $500 financial advice or $3600 investment plans. If they need some sort of general financial/money advice they can see our family accountants at tax time – simple.
Before someone starts jumping up and down from the ASIC website: Accountants must not give “financial product advice”.
Cheers
You’re absolutely right Trish, the perceived value of advice has been eroded by commissions that have concealed the real cost. This is a very exciting period for our (financial advice) profession because it’s an opportunity for us to re-define where the value of advice is. So many of the statements above highlight this, where do I start?
I’ll start by explaining some key points as to where our advice adds value. On average, we’ve found that our clients spend 10-15% less each year (or if you want to look at it another way, save 10-15% more each year) 12 months after having put a plan in place. Think about it. How much do you spend a year? (if you’re saying I have no idea, you really need a financial plan), now multiply that by 10%. The amount you will save just by having more direction in your life because you’re sticking to a plan well covers a plan fee of $3,600 suggested above and I haven’t even got into the detail.
The key to financial planning is your ability to save money and do something more useful (this is where our technical knowledge starts to become useful) and more valuable to you life than spending it on jeans, on eating out, on a flashy car which most of us do because we lack direction. The statistics above show this. Only 40% of people stick to their plan, another 34% only stick to parts of it.
One in ten Australians don’t expect to get any useful or relevant guidance from a professionally prepared financial plan. When 4 in 5 financial planners are employed by a bank, fund managers or other financial institution (i.e. their first duty is to their shareholders, not you), then this is not surprising. I wouldn’t expect to get any advice from 80% of financial planners which wasn’t in some way tainted in their favor. It’s sad, it’s true – I’ve seen it from the inside. It’s sickening.
One last point, in regard to one in five (18%) said they don’t earn or have enough money to justify visiting an adviser. This represents a big part of the problem. Most consumers think that they need to earn lots of money or have lots of money to be ‘worthy’ of stepping into the offices of a financial planner. Financial planners that base their fees on how much money you have to invest (not how much advice you need, how much complexity you have or how much value they can add) have done this on purpose. They want to charge 1% on big sums of money, then sit back and do bugger all. The truth is, financial planners can add a fair bit of value up front when investing money (explain options, get your asset allocation right, discuss risk), but ongoing, unless your needs are changing constantly, there really isn’t enough work involved to justify their 1% fee. They’d want to be doing a hell of a lot more than just managing your lump sum; sadly many financial planners are getting away with this and consumers are getting ripped off. Just my opinion.
If your asset allocation is right and you’re in a low cost fund, you’re 80% of the way there when investing money (Alan M says his family is in industry super funds, not that simple in my opinion, MTAA is an industry super fund that made asset allocation decisions which have hurt members compared to other industry super funds; so what do you do, roll the dice and hope your industry fund doesn’t make the same mistakes? Bit more science needed than just saying “go with an industry fund”).
In summary, the value of advice comes in many forms than just investing money. Having a plan give us direction, motivation and leads to saving more money. The more surplus income you have available as fuel for your plan, the sooner you’ll achieve goals – this is far more likely than your adviser delivering you with alpha returns to get you there sooner. The value of advice extends so much further, what do you do with this surplus cash-flow? Does your financial plan cater to plan B, C and D (you or your partner getting ill, injured, dying – insurance and estate planning); are you submitting your tax returns on time, are you organised, are you using a tax agent to ensure you claim all the deductions you’re eligible for, are you making use of mortgage offset accounts, should you flx interest rates, what should you do with your bonus? Are you going to go into business one day? Are you investing in the right structure? Are you saving enough to achieve your goals.
Get paid $500 to care this much about someone else? You gotta be kidding me…
From September 1985 until June 2009 I’ve taken care of my wife’s and my own superannuation needs – first through ADFs (Approved Deposit Funds and similar) and then through our SMSF. In all that time I’ve only once consulted a financial adviser to see how they work. I decided to take my own council and we have never had a negative return and have averaged approx 9% p.a. Now, because of my advanced years, I succumbed last June and transferred responsibility to an industry fund, although I still keep an active interest on what’s happening in the financial world.
Back in 1985, I and 1,200 fellow employees were retrenched. But our employer gave us sufficient notice to plan for our futures. I was given the opportunity of arranging and chairing seminars for my soon-to-be retrenched fellow employees. A series of talks were given freely by a firm of stockbrokers, a bank, two friendly societies, and the DSS (predecessor of Centrelink).
We learned about risk and return; the varying needs according to age and circumstances; how to set goals; how the stock market works; how shares, bonds and other financial products work; how to calculate yields; etc. etc. By request, not once were any recommendations made as to any particular product or where the retrenchment monies should be invested.
The knowledge I gained from those seminars, combined with updates from readily available sources, has been invaluable. To anyone who’ll listen I suggest superannuants seek financial information BEFORE they seek financial advice.
Some is freely available from Centrelink’s Financial Information officers but their resources are limited. There are some good books available too (including your own, Trish
). But I’d like to see some organisation – possibly government funded – provide current, relevant and most importantly unbiassed INFORMATION on an on-going basis for all superannuants who want to avail themselves of it.
This would provide the tools for the individuals to make up their own minds and then, and only then, seek financial advice – if they need it – for their own individual needs
Here are my comments on the above topics of “Transparency” and “Affordability”.
When an investor gets placed into a financial product sold by a commission based ‘adviser’, the fees on those products can be around the 3% per year mark in total (this includes administration fees, fund management fees and adviser trails).
An investor with $50,000 in their superannuation at the moment, with 25 years left to retirement, earning $75,000 a year, and paying 3% pa in fees (as apposed to 1%), relying only on their employer contributions and expecting a gross return of 9% per year, would be worse off in retirement by approximately $225,000.
You’ve got ‘financial advisers’ out there charging clients these hidden fees with no up-fronts and client’s believe they are actually getting value for money at low cost or no cost. Unless these advisers are delivering a valuable service each and every year, what is the 1% for? Why are clients paying $225,000 over 25 years? If the answer is ‘to get better returns’, tell em they’re dreaming! The problem with this sort of ‘advice’ is that it is not advice at all. It’s sales masquerading as advice and that’s not where the value of advice is added. If anything it’s the opposite as percentage based fees erode your wealth exponentially.
Paying an adviser a fixed upfront fee for some good advice around superannuation, investments, property, insurance, estate planning, debt management, structure, taxation, cash flow (the list goes on) will deliver more value for money and will save you a lot of money long term. Provided your adviser really gets to understand you and what you are trying to achieve with your money, I’d argue that you’d make back the investment in your financial plan within a few months as you’re going to be focused and in control. You’re not going to be spending money on meaningless consumerism, you’d stress less, worry less and therefore be more happy and fulfilled.
If you want ongoing advice, this does come at a cost, but if your circumstances are not overly complex, you shouldn’t need to be paying $225,000 over 25 years (working out to approximately $9,000 per year on average. That’s 18 times the $500 you thought you’d pay once off, every year for 25 years!)
Clearly transparency is non-existent with trail commissions. Just disclosing that a trail commission is paid in a 125 page Statement of Advice is not enough to excuse the wealth erosion it causes. You should know exactly what you are paying for and what you get for that.
On the matter of affordability – investors need to ask themselves a simple question: What is having a plan in place that is going to show me how I can achieve my goals in life in a risk managed, structured way worth to me? $500? $3,600? $225,000? For those that are happy to pay the $225,000 all I can say is you better make sure you know what you’re getting for that and if it is an adviser that invites you into their fancy office, gives you a cappuccino and a pretty graph once a year, you need to wake up and smell that coffee because it’s really a streaming cup of something else.
Matthew Ross: Superannuation basics; make sure no one in the family is in retail super and stay away from financial planners. Super check-up once a year at tax time with accountants and if needed make use of the intra fund advice thing – done.
Be aware of Government financial advice propaganda, they created the AFSL/CFP to transfer wealth from the pockets of Australians into the big banks and large life insurers. Super is no different to household utilities, phone or internet, they are after you money – your cash.
Cheers
AlanM, I agree, it’s very hard to find someone you can trust. A colleague of mine, Daniel Brammall has written in an article recently that these are the two key questions to ask when looking for an adviser you can trust:
1) Who are your shareholders?
If any of the shareholders of your adviser’s firm are product manufacturers then the water is muddied already. Go no further if you are interested in hiring an impartial adviser.
2) Are any of your payment options linked to a transaction?
If a payment structure exists which is linked to a transaction then you need to cross this planner off the list too. Talk of ‘no commissions’ doesn’t necessarily address this issue. The issue is “are there any percentages involved?”. You are looking to pay for an advisory service that isn’t linked to a transaction – this includes fees calculated as a percentage of assets, product or any other volume-calculation.
I know accountants who recommend that every client has a self managed superannuation fund which is not appropriate for everyone; but, it keeps him/her busy with work. So yes AlanM, I agree that people need to be aware of these issues, but also, life becomes much easier and more peaceful when you can delegate certain tasks to people you can trust…