Financial advisers have moved from selling products and receiving commissions to the more transparent fee system. Here’s how you can work out what you should pay.
Paying for professional financial advice is much the same as paying other types of professional services. It comes down to the size and complexity of the issues that you want to solve. Simple problems cost less than solving complex ones.
Most financial advice fees are structured in one of three ways:
An hourly rate, where the client will be charged on the basis of the number of hours that it takes to provide the financial advice and implement it. It is important for clients to understand how many hours are likely to be required and what the hourly rate is. Depending on the experience and qualifications of your adviser, this would typically be between $175 and $375 an hour.
Some advisers will agree a flat fee for a clearly defined package of advice and services. It is important that you fully understand what you get for the flat fee and be sure that the package will address the issues you want to solve.
Others will charge a percentage of your assets that they advise on – this will normally exclude things like your house. With this method the amount that you pay will be directly related to the total value of your investments. Where your investments go up in value, the remuneration to the adviser will increase. The reverse will also occur – if your assets decline in value, the adviser’s remuneration falls, aligning them with your interests. An example would be a 1 per cent ongoing advice agreement on a portfolio of $100,000 means you will pay $1,000 a year.
Just remember if you have extra funds to invest, the adviser will be paid more if you add to your portfolio rather than, say, paying off a debt.
Some advisers use a combination of the fee models. It is possible for fees to be paid from your investment or superannuation account rather than you making a separate payment from your bank account. There are tax advantages to consider here that you can ask your adviser about.
Financial advisers disclose all fees at the time of providing the advice and are required to give you an annual fee disclosure statement setting out the fees paid over the last year and services provided. As the client, you always have the right to discuss the fees you are paying to make sure you are receiving good value.
And by the way, advisers can’t be paid by commissions for any new superannuation or investment accounts that they arrange for you.
What about paying for life insurance and income protection advice? Life insurance advice can be paid for by hourly rates or flat fees, or your adviser may offer you the choice to pay all or part of their fee by way of a commission. This means that from the cost of the insurance that you pay to the life insurance company, the insurer pays part of that amount to your financial adviser. If you choose to pay a commission, your adviser will clearly explain in writing to you what they will receive before going ahead with any advice. Commissions can make it easier to afford quality advice but the choice is yours.
Generally, financial advice is broken down into three steps and these days, most advisers charge a separate, clear amount for each one.
STEP 1 – STRATEGY FEE
A good way to think about this is like paying an architect or a designer to draw up plans for a renovation to your home. You talk about what you are looking for and they go away and design the plans.
Financial advice usually starts where you and an adviser discuss possibilities, and then agree what it is you would like to achieve. The expert creates a financial plan to get you from where you are today to where you would like to be. Depending on complexity this could range from as low as $500 – $1,000 for simple matters.
STEP 2 – IMPLEMENTING THE PLAN
Using home renovation as an example again, this stage involves getting the plan built – the chippies, the sparkies, the roofers, painters, and so on.
STEP 3 – KEEP YOUR PLAN ON TRACK
Just like maintenance on a property, it is so easy to lose focus and get distracted by everyday life. Financial advisers take on the role of personal trainer or accountability coach to help you ensure that the plan stays relevant to what you want to achieve.
Of course, overseeing investments is important, but the greatest value can be in helping you stay on track with the promises you make to yourself about using your money.
BRAD FOX | CEO, AFA
THE REALLY SIMPLE GUIDE TO MONEY | OCTOBER 2015
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069