The most dirty word in the finance industry!
Most financial planners, along with other professionals such as lawyers and accountants, will generally give you one meeting free of change. Once you engage any of these professionals you can expect to be on a time meter.
Financial advisers are heavily governed by ASIC to ensure that they are providing quality financial advice. By quality financial advice, I mean an adviser by law must provide you with a Statement of Advice. This is a legal document which outlines their recommendations in detail. For this you can expect to pay from $1,000 upwards depending on the complexity of your financial affairs.
Now comes that grey area. How do you as a client pay for the advice? How do you know that the advice is in your best interest? Only a fool would try and explain these things, so I’m going to have a go.
Traditionally many people have thought financial advice is only for the wealthy. However, every person can benefit by talking to an adviser to structure their affairs correctly. Talking to an adviser and getting appropriate advice can save you thousands of dollars every year. There are many methods that advisers can charge for their advice. The charge may be calculated on a percentage basis of funds under management (commission) or an hourly basis. Some advisers charge a hybrid of both of these.
It can also be argued that if a financial planner receives commission from the sale of products or charges as a percentage of the total amount they are managing, then it can be argued that they have conflicts of interest as they might be more tempted to sell products for which they get the highest commission. As a result, when you are given product recommendations, make sure your adviser explains why they have chosen the particular products.
One good aspect about commission based advisers is that when you invest through your superannuation fund or a separate investment, your adviser’s earnings are tied to the performance of your investment. When the investment grows, the amount of money the adviser makes from you increases. On the downside, when the markets fall, financial advisers will feel the effects in their own bank accounts.
The counter argument is that commission creates conflict of interest. If the planner is transparent in what he charges, then commission should be acceptable however, many people still argue that it is difficult to interpret and make sense of all the financial jargon. Due to this, there has been a growing trend towards fee for service. This is the only model where your planner is least likely to have such a conflict of interest.
Fee for service also has it fair share of issues in that many smaller clients may not have the cashflow or savings to pay the large upfront fee for financial planning advice. Due to this, many smaller investors of financial planners will cease to remain clients if financial planners move to the fee for service model. This will create a large gap in the market for people that could benefit from advice but are not able to pay for it. Commission based advisers tend to accept a loss on a upfront (with smaller clients) in order to receive the commission or gains at a later stage.
In the end, fee for service will prevail as it is only a matter of time before the future of financial advice reforms (currently being reviewed by the Australian government) are put into place. When this happens, there is one clear trend that everyone cannot argue about. There will be a migration of financial planners that will only cater towards clients with high net wealth who can afford to pay for financial advice. Once again the rich get richer.
Hmmm……I wonder where that leaves the average Australian battler?