Two days before Christmas the Australian Securities and Investments Commission (ASIC) released an interesting report into the financial advice industry titled “Access to financial advice in Australia“. There are many interesting insights in the report – the one I will highlight today is the cost of delivering financial advice.
In conducting the research ASIC “surveyed 35 holders of an Australian financial services (AFS) licence (licensees) selected as a sample of the personal financial advice industry“, as well as more detailed discussions.
The ASIC research reveals that “Licensees reported an estimate of the cost of providing comprehensive financial advice to a client in the range of $2500–$3500.” (para 171, page 42)
The report does not go into greater detail but I suspect that cost estimate does not include the cost of providing support in implementing the advice. That would be an additional cost to licensees. I also suspect (know) that more specialised advice and complex client situations have a higher cost to deliver the advice.
No business owner interested in staying in business wants to sell their services for less than it costs them to deliver them. In fact to reward them for the risks of entrepreneurism they need to add a profit margin above the cost. (Many professional service industries target a minimum profit margin of 30% in order to be sustainable and rewarding.)
So in shaping your expectations of what advice will cost you (“the price”) keep in mind what it could actually be costing the adviser to deliver it to you. By quoting you a fee in the thousands they are not having a lend of you, they are just trying to stay profitable.
ASIC noted in summary “Overall, it appears that the costs of providing financial advice are much higher than the average amount consumers are willing to pay.” (para 169, page 42)
That is no surprise to anyone in the industry. But it is a big problem as it means that many people miss out on getting great advice because we as an industry traditionally haven’t clearly articulated the value of advice. But the value of advice is a topic for another article.
“About 19 per cent of investors say their preferred model for paying an adviser is performance-based fee,” according to Mark Johnston, principal of research firm Investment Trends. (Reported here today).
Performance based fees will not work for most types of financial advice.
Performance based fees for finance advice may only be appropriate when:
- The advice service has a narrow focus solely on investment selection; and
- The value proposition of the adviser is based on beating the investment performance of valid alternatives such as the broader market or what the investor could achieve on their own.
But that scenario is a very small portion of advice. It perhaps only really applies to stockbrokers and some other investment advisers.
Most financial advice provides a far broader service including providing intangible value such as clarity, direction, confidence and peace of mind. Other benefits include saving you time by handling a lot of research and paperwork on your behalf.
The advice fee is therefore relative to the value of such benefits to you. And it is separate from the investment performance.
Certainly performance based fees couldn’t apply to true financial planning.
The value of planning anything in your life is that it gives you greater confidence that you will get the future outcome or experience that you desire, how and when you want it. You get that confidence because planning and purposeful action actually increases the likelihood the desired outcome will occur.
If the financial adviser controlled every element of you achieving that life goal then maybe you could argue for a performance fee based on you getting the desired outcome. But they don’t control most of it – you do!
Traditional percentage based commissions on product sales are absolutely not the way to remunerate an adviser for strategic advice and guidance. But neither are performance fees.
The solution is a move to transparent fees agreed up front for a defined scope of advice. The level of that fee will be based on mutual agreement between you and your adviser to provide mutual reward:
- The fee needs to be high enough to cover the adviser’s costs plus a reasonable profit margin;
- Whilst also being low enough to represent value for the tangible and intangible benefits received by you
If you are wary of your financial adviser being biased by commissions then you will want to work with an adviser who charges fees and rebates commissions to you. But according to new research released today such an adviser may be hard to find, with only approximately 1 in 10 Australian financial advisers focused on charging that way.
The research by Investment Trends found that just 11 percent of Australian financial advisers now derived a majority of their revenue from pure fee-for-service models. (Read more here.) Some good news is that this number is increasing.
One very interesting result from the report is that: “those planners with over half their revenue derived from pure fee-for-service were likely to spend more time discussing planning for financial and lifestyle goals…”
To me financial advice and wise money management is not actually about the money – it’s about the lifestyle that you want money to facilitate.
So if the first questions you want your adviser to ask are about you and your lifestyle goals, and not about how much money you have to invest, then this research suggests you should seek a financial adviser who charges fees. That way you are more likely to find one who will ask you about your goals.
Don’t know where to start? Then start by finding advisers whose licensee is not owned by a product provider. That will eliminate about 80 percent of the market.
(This is not to say there aren’t exceptions to the general guide, but if you want a clear path through the maze then this is your quick start approach.)
If you paid your financial experts solely on the basis of a percentage of the benefit to you of their recommendations, what percentage would you prepared to give them?
I just had a conversation with a client who I sense is very fee conscious. Fee appears to be the major, initial focus and by comparison benefits seem to be almost overlooked. Conversion of my dollar based, fixed fee to a percentage of tangible benefit was one of the things discussed. (That’s ignoring all of the intangible benefits of advice, which you can check out here.)
If a financial adviser recommended a strategy to you that gave you a benefit of $10,000 this year how much would you be prepared to pay them for that advice? Would you consider a 60:40 split (i.e. you pay them $6,000)? Or would you be prepared to share more or less with them?
Having now voted please consider this analogous situation. How much of your employer’s total revenue (income) do you expect them to pay in total wages to their work force?
Is it reasonable to set the split exactly the same as the split you suggested above, or do you think it is more reasonable to be higher or lower?
In considering your answers to the questions I have posed you may find the following statistic interesting. It is my understanding that on average around 30% to 35% of total revenue is spent on remunerating and rewarding the workforce.
Does that change your answer at all?
One year ago a large institutionally owned financial advice group switched its charging structure to fee-for-service from commission. Since then all new clients have been fee-for-service. Existing clients have been able to opt to continue their commission structure.
Interestingly, one year on the dealer group reports that most existing clients have opted to continue with the commission based fee structure.
How do you prefer to pay for financial advice? Assume that the total dollar cost to you is identical no matter how you choose to pay. Realistically that would be around $3,000 per year.
Do you have investments, superannuation accounts and/or insurance policies sitting around? If you’ve had them for years then it’s quite possible that some company somewhere is receiving an ongoing (trail) commission from that product, and you possibly don’t know who they are.
If you’ve had no contact from them then they are just receiving the commission rather than earning it. Would you like to reclaim that money and put it towards your own wealth creation?
Here are the steps I suggest that you take to reclaim lost trail commissions. They are in a specific sequence:
- Contact the product provider and find out the contact details of the adviser appointed to your account/policy. Also ask the level of upfront and ongoing commission they receive at the moment. This is likely to be a percentage figure. You will find the contact details of your product provider on your latest statement.
- Contact the appointed adviser and ask them to define the level of service that you are eligible to receive in return for the income they have earned from the commissions. Plus the service you will continue to receive if they remain the appointed adviser. (Here, I strongly suggest you call with a tone of genuine enquiry rather than an adversarial tone.)
- If you are not satisfied with the existing adviser find a fee for service financial adviser who will either rebate the commissions or offset them against their quoted fees. You can use the Financial Planning Association’s Find A Planner service. Or contact me as that is precisely how I operate.
- If you are a die-hard do it yourself wealth creator who doesn’t even seek fee for service expert assistance then you may be interested to know that there are now a few discount brokers who will rebate most of the commission to you. You appoint them as the adviser to the policy and they send you a cheque. You can find out about two such discount brokers in this article published yesterday in the Sydney Morning Herald.
Update: I have compiled a public list of commission refund services. Follow the list using your Google account and you’ll be automatically advised whenever I come across a new provider.
If you do choose to use a discount broker and receive a rebate cheque then be sure to use it to boost your wealth creation by reinvesting it.
The financial advice industry is still evolving and consequently there are lots of different ways that you will pay for the education, guidance and advice that you receive.
Prior to seeking advice it is a good idea to be clear on what type of advice you are seeking and also to get a handle on the diferent ways you could be charged for that type of advice. To help you obtain a snapshot of some common fee for service charging models I recommend you read this article from The Australian newspaper.
In my opinion there is no single best way. You must agree with your adviser a charging method that you feel is appropriate to the type of service they are providing.
That said I am fascinated to learn how you would prefer to pay for financial advice, of any variety. So please let me know your preference by leaving a comment below. (You can choose to be “A. Nonymous”)