New and improved deals on financial advice to be introduced this year will only apply to new customers so if you already use a financial adviser, make sure you’re not paying too much.
The Federal Parliament will likely pass financial advice legislation in the coming year. They will prohibit commissions and any other forms of payment for advice that could result in conflicted advice. This includes payments to encourage certain volumes of companies to invest in a specific investment product.
Advisors have a legal obligation to act in best interest of clients.
It’s all great news but some of the rules will only apply to new clients so if you have an existing relationship with a financial adviser, make sure you’re not paying too much for advice.
After the new laws go into effect, advisors will have to renegotiate each client’s relationship. This will give all consumers of financial advice the opportunity to make sure they’re completely happy with the service they’re receiving for the fees they pay.
In the meantime, there’s nothing stopping you from asking your financial adviser to give you a complete update on the status of your relationship, including how your investments are performing, the strategies you have in place and how much the relationship is costing you each year.
These are two things you could address in such an assessment.
1. Are you still getting paid commissions
Investment Trends reports that 43% of respondents have stopped receiving product provider commissions. This percentage is greater for FPA members.
They are charged on a fee-for-service basis. The fees can be calculated in many different ways. An hourly rate can be charged. Another option is to set a percentage according to the size of your portfolio for each calendar year.
Direct payment arrangements between you and your adviser are better than commissions. Direct payment for advice is better than commissions because it eliminates the possibility that an adviser will choose an investment that is more lucrative than another product.
Ask about trail Commissions. These are an ongoing percentage payment received by planners for each year you are an investor in a product they’ve sold you.
Trail commissions have been particularly common when you’ve been signed up to a super fund recommended by your employer, In such instances you may not even be aware that you have a relationship with a financial adviser and the level of service and care you actually get from that relationship can be very low, or non-existent.
It is important that you ensure your adviser receives trail fees on your behalf. This will ensure that your adviser receives fair trail commissions. It’s difficult to end such relationships without changing your super fund and risking higher fees. FoFA reforms will expel them.
Financial advisors that try to sell you unnecessary high-level life insurance or other related products should be avoided. After the new laws have been adopted, this insurance (which includes term, total, permanently disabled, income protection and terror insurance) will still be eligible to receive commissions. Some advisers are starting to recommend these products.
2. What are my annual costs? And what is the quality of the service I get?
There’s certainly a gap between what investors think they should have to pay for advice and what advisers think they need to charge to ensure they don’t go broke. The most recent research found that consumers believe they should pay $300 to get a financial planning program. Advisors however felt they needed to charge between $1500- $2700.
For good financial advice, you shouldn’t pay more than 1% per annum. You will need $200 to invest $20,000 in your portfolio if it is worth $200,000. A $2,000 investment will cost you $2,000 each year.
How complicated your investments are will influence how much advice you get. Advice will cost more if you own multiple businesses, properties or a super fund that is self-managed with large shares. You’ll be a much more time-consuming client than someone who has a small share portfolio, their home and a single super fund.
The key to ensuring you pay the right amount is to negotiate and know exactly what you are paying for so don’t be afraid to negotiate and ask for regular reviews.
— By Jackie Pearson