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Given the complexity of superannuation and financial products, and the widespread belief that financial advice is for “people with more money than me”, it’s fair to say there are many more Australians who would benefit from financial advice than there are those who seek it.
According to the 2018 Productivity Commission report on superannuation, only a minority of Australians are seeking advice, with price being a major factor:
It is estimated that 20–40% of consumers in Australia access the services of a financial adviser or planner, with 48% of Australian adults indicating unmet advice needs. Among the barriers to accessing financial advice is perceived cost and lack of funds to pay for it.
Note: The terms financial adviser and financial planner are used interchangeably, with no difference between the two. In this article, we will use financial adviser for the sake of consistency.
It appears many people assume financial advice is beyond their means, but is that the case?
Who can you turn to?
The cost of financial advice can vary considerably, depending on the type and extent of advice, your level of wealth, and how you pay.
No matter what sort of financial advice you are after, anyone who calls themselves a financial adviser or a financial planner in Australia must be an Australian Financial Services (AFS) licence holder (or one of their authorised representatives).
AFS licences are issued by the Australian Securities and Investments Commission (ASIC). ASIC is Australia’s corporate regulator and maintains a financial advisers register where you can find information about an adviser, including:
- Whether they are currently registered
- Their employment history
- Their qualifications
- Their memberships of professional associations
- The type of products they are licensed to advise on, such as superannuation, insurance and investments.
To maintain their registration, licence holders (and their authorised representatives) must be appropriately qualified and they must undertake regular training to ensure they keep their financial knowledge up to date.
Don’t pay for (or accept) any financial advice from an adviser or planner who is not currently registered with ASIC!
Financial advice fees
Financial advisers charge fees for advice tailored to your personal circumstances. (Low cost (or free) financial advice can be found but it is likely to be limited in scope and general in nature.) Fees for advice can include:
- Up-front consultation fees
- Fees for preparing a Statement of Advice (SOA)
- Fees for implementing their advice (after you have given them permission to do so), or you may choose to implement the advice yourself
- Fees for providing ongoing advice (if you have given them permission to do so).
If you have more complex financial needs, you should expect to pay more for financial advice than others whose needs are more straightforward.
For example, if you’re setting up a self-managed super fund (SMSF), this can involve significant establishment and ongoing costs.
Financial advisers can set their own fees, so it’s worth shopping around. Don’t be afraid to approach several advisers to get a feel for what they might offer you and how much it will cost. These days, most financial advisers offer a free initial consultation, which is your opportunity to ask questions, define your goals and priorities, and find out exactly what you’ll be paying for if you hire their services.
What are average fees for financial advice?
One of the barriers to more people seeking financial advice could be the lack of public disclosure and transparency around fees. Unfortunately, there is no single place you can go to find out what financial advisers in your area charge or average fees for various services on offer. The figures that do exist are patchy.
According to recent research by Investment Trends, the amount the average adviser charged their most recent client for full financial advice was $2,700 up front (where the average new client had $770,000 in assets). This may sound expensive, but to give you an idea of what is involved, Investment Trends also found that it cost advisers $2,900 to break even on the advice they provide.
Now contrast this with how much people say they are prepared to pay for advice. In 2019, Investment Trends found that people were prepared to pay $340 on average, down from $530 in 2018 and $750 in 2017.
“Generally speaking, this is very low because most people don’t know how much advice costs,” says Recep Peker, research director at Investment Trends. Clearly, there’s a disconnect between customer expectations and the cost of providing advice that more transparent fee information could help bridge.
The above amounts don’t take into account the ongoing fees for advice if you maintain a relationship with your adviser from year to year. Ongoing fees are scaled according to the wealth of the client and the complexity of their financial affairs, irrespective of whether advisers charge dollar-based or asset-based fees.
According to Investment Trends, for clients with wealth of $500,000 and above, the ongoing advice fee averages around 0.5% of assets a year (or $2,500 on assets of $500,000). While clients with lower wealth can expect to pay less in dollar terms, the cost as a percentage of assets will be higher. So, while a client with $250,000–$500,000 could expect to pay $2,200 for advice, this is equivalent to 0.6% of assets.
To put the cost of ongoing advice in perspective, Peker says it costs an estimated $1,700 a year for advisers to maintain a client on file, including the cost of periodic reviews.
Unfortunately, these and other industry fee surveys confirm that the cost of advice is on the rise.
Fees are on the rise
The Financial Planning Association of Australia conducted the CoreData FPA Member Research in 2019 that found, on average, FPA members charge $2,671 to prepare a Statement of Advice for new clients (up 9.7% on the previous year), and $3,757 per year for ongoing advice for clients (up 12%). If advisers were basing their ongoing fee on the going rate of 0.5% of assets under management, this would indicate clients’ had assets of around $750,000 on average.
While fees have increased over the past year, this trend is likely to continue as advisers implement changes recommended by the Hayne Royal Commission. While proposed legislation is designed to make fees more transparent, which is welcome, it will also increase the time spent on compliance and paperwork.
Philippa Hunt, a certified financial planner and non-executive director of the Association of Independently Owned Financial Professionals (AIOFP) says the average client review was 12–15 hours in 2013 and now takes 18–24 hours. She fears that the added cost burden is putting financial advice out of reach for clients with less than $250,000 in assets.
FPA’s research also investigated how members calculated the fees they charged (see graph below). The use of fixed price fees for advice has almost halved in the past year (60.7% to 32.3% of revenue) as asset-based pricing becomes the new norm (31.8%).
How do you charge clients?
The most common way to collect fees was directly from the client, with 61.4% of advisers doing this, overtaking both investment platforms (60.7%) and client super fund (58.2%) in the past year.
A Roy Morgan survey in December 2018 found that less than 17% of super and managed funds were bought through an adviser, and that this was heavily skewed to the most wealthy.
The report also found that people generally only seek advice when they have a few hundred thousand dollars in investments or are nearing retirement. Of the total value of assets managed by advisers, 63% belonged to the wealthiest 20%, and less than 1% belonged to the least wealthy 20%.
Financial advice from super funds
For many people these days, superannuation is their biggest – and sometimes only – financial asset outside their family home. Which is why their super fund is often the first place they turn to for financial advice.
Financial advice via your super fund can range from free general advice over the phone or via the fund’s website to comprehensive financial advice. See What advice do super funds offer? here.
Chant West head of research, Ian Fryer says there is no data on average fees for comprehensive advice and Chant West only collects the maximum charged. However, he says feedback from funds indicates that fees average between $1,000 and $3,000 depending on the type and complexity of advice offered.
Some funds subsidise financial advice, whether it is offered by the fund’s in-house advisers or external advisers aligned with the fund’s values.
“I’ve seen some internal advice below $1,000, and where it’s external I’ve still seen fees around $1200,” says Fryer. However, at the $1,000 end of the price range the advice may not be truly comprehensive. He suggests truly comprehensive advice is in the range of $2,000 to $3,000, similar to the industry average.
Independent financial advisers
Note that fees charged by independent financial advisers may be structured differently because, by definition, they don’t receive commissions and many also do not charge asset-based fees.
Daniel Brammall, President of the Profession of Independent Financial Advisers (PIFA) says, anecdotally, fees charged by independent advisers are probably in the same range as the industry overall. And like all advisers, he says independent advisers also use a broad range of fee models, including:
- Hourly fees
- Flat fees
- An ongoing retainer
- Transactional fees for based on a menu of services.
Brammall says more experienced advisers often lean towards having an ongoing relationship with a smaller number of clients rather than transactional business.
Unfortunately, the only sure way to find out what financial advisers in your area charge is to make an appointment. Financial advisers are legally obliged to disclose their fees in the following documents.
Financial Services Guide (FSG)
This document should be provided to you when you first meet with a financial adviser. It must include information about how they will be paid for advice they provide you. Their fees could include any of the following:
- Fees for service: These are flat fees for a range of services, such as the adviser’s consultation time, the preparation of a statement of advice (SOA), the implementation of an SOA, or an annual review fee
- Investment portfolio percentage fees: These are an advice fee based on a percentage of the value of your investment portfolio. Be very careful if you have a high net worth and you’re being charged a percentage fee. Even if the percentage fee is small, the dollar amount could be huge and not justifiable if your financial affairs are not especially complex.
- Performance-based fees: This is an advice fee based on the performance of your investment portfolio. If your recommended investments perform well, the adviser can charge a percentage of the performance above a pre-determined benchmark.
- Commissions: An adviser may receive a commission on products they recommend and sell. However, it’s important to note that commissions on new superannuation products and investments were banned from 1 July 2013 under the Future of Financial Advice (FOFA) legislative reforms. Advisers can still charge legacy commissions on products sold before this date.
Statement of Advice (SOA)
This is a document that a financial adviser must give you when providing advice. It must outline any payments or benefits they will receive if you decide to accept their advice.
Product Disclosure Statement (PDS)
An adviser who recommends a specific financial product to you must give you the PDS before you commit to it. The PDS must outline any associated fees.
Annual Fee Disclosure Statement
An adviser must provide you with this document if you agree to enter into an ongoing arrangement with them. This document must outline:
- The fees you were charged by the adviser or planner over the last 12 months
- The services you received
- The services you were entitled to receive.
Under the provisions of the FOFA reforms, an adviser must formally renew any ongoing advice agreements with you every two years. You can terminate the agreement at any time.
Tips to help you get value for money
1. Do your research
This is crucial. Look for referrals and testimonials from people you trust and create a shortlist of potential advisers. Most will offer a free initial consultation, so take advantage of that opportunity to evaluate them.
Ask plenty of questions. They should:
- Be able to clearly explain and demonstrate their track record, their credentials, and the quality of the services on offer
- Ask you lots of questions to help them understand your financial needs
- Clearly outline their fees both verbally and by providing you with their FSG.
Yes, it’s a hassle but do shop around and don’t necessarily go with the cheapest option. Remember the old saying that ‘you get what you pay for’, within reason of course. You don’t want to be paying for an adviser’s flashy car.
And be mindful that while cost is important, it’s not the only factor. Look for an adviser you feel you can trust and who ‘speaks your language’.
The financial advice industry is highly competitive. Be prepared to negotiate fees to secure a good deal, especially if you have significant wealth. So-called high net worth individuals are highly prized, so make sure you are also getting value for money.
3. Tax deductions
Financial advice is tax deductible only if the advice is directly associated with producing assessable income. Examples include fees for:
- Actively advising on/managing an investment portfolio that generates assessable client income
- Actively advising on/managing an SMSF portfolio that generates assessable income.
The following expenses are not tax deductible:
- Consultation fees
- Fees for preparing a financial plan
- Fees for preparing a statement of advice.
4. Check your fee statements!
The Financial Services Royal Commission (tabled in early 2019) heard some shocking admissions by some of Australia’s leading financial institutions that some of their advisers were guilty of charging clients for advice they never received. An ASIC investigation found that over 330,000 people may have been charged more than $200 million for ongoing financial advice that was never provided to them. The offending financial institutions included Commonwealth Bank, ANZ, NAB, AMP and Westpac.
This highlights the importance of being vigilant in checking the fee disclosure statements that financial advisers/planners are legally required to provide to you if you have an ongoing agreement with them. Make sure you’re getting what you’re being charged for!
Note: Financial advice was a big focus of the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. There were 10 recommendations that were made in the final report that could significantly change the ways financial advice is delivered, including banning grandfathered commissions, annual fee renewals and the disclosure of lack of independence. These have been supported by both the Coalition and Labor, but they won’t become law for some time due to delays caused by the 2019 Federal Election and, more recently, the 2020 coronavirus.
In March 2020, ASIC published a consultation paper on its proposed annual advice fees, superannuation fee consent and ‘lack of independence’ disclosure changes, and invited advisers to provide feedback before new legislation is implemented.
Whether you are building wealth, wanting to make the most of an inheritance or planning your retirement income, the financial decisions you make can have important implications for your wealth and wellbeing. With so much at stake, it is often wise to seek professional financial advice to achieve your goals. If you do, take sensible steps to make sure you get high quality advice for the best price.