Welcome to the Asset Financial Planners Directory

What to pay your planner

By BRUCE MADDEN

Can't get your head around financial planning fees and commissions? This second in our three-part Good Advice series helps to unravel the fee maze.

There's an old joke among financial planners that the definition of a stockbroker is someone you pay to lose your money.

The joke was funny at the height of the sharemarket's bull run when most clients of financial planners were making solid investment gains by simply being exposed to the sharemarket directly or through a managed fund.

Now in the grip of a prolonged bear market, financial planners have discovered the old jokes about their transaction-driven brethren are just a little too close for comfort.

There's nothing funny about losing money.

Many customers of financial planners, especially those representing the bulk of planners' clientele - balanced fund retirees - may find the situation doubly galling. Sold on the promise of secure retirement income and the expectation of double-digit investment performance, they are now suffering the dubious honor of watching those promises evaporate while paying ongoing charges for the privilege.

On the flipside, there are many happy investors who trust the advice they have bought and who see such downturns as part of the inevitable, cyclical nature of markets. Their adviser's payment schedule was clearly explained to them, and they are content to ride out market fluctuations confident that their adviser is on top of things.

Meanwhile, the financial planning industry is showing signs of fracture. On the one hand it is happy with its recent efforts to educate customers about the risks of investing, reaffirming that the laws of diversification and "time in, not timing", still apply - especially when things turn ugly.

But planners face a new challenge. Investment losses have exposed flaws in the charging methods of a large number of financial planning firms.

Personal Investor has spoken with several seasoned financial planners who privately admit that the industry's fee and commission practices are at best confusing and at worst "absolutely impossible" for anyone but industry insiders to get their head around.

Areas of weakness include simple things - poor communication, inadequate disclosure and a reticence to explain (and justify) a mostly complex web of fees, commissions and soft dollar rewards.

Fees and commissions have long been a sticking point, as the financial planning, funds management and portfolio administration (master trust) industries have had the past 20 or so years to devise new and detailed methods to tie in customers and all-important funds flows.

So, what is the situation in 2003? How far have financial planners evolved since their formative years when 8 per cent upfront commissions were considered perfectly reasonable? Many now argue that the planning industry faces a crisis of confidence, and that part of the solution is the urgent need for much higher levels of transparency around fees and commissions. Disclosure is part of the answer, and is enshrined within the new Financial Services Reform Act, due to be formally enacted in March 2004. The disclosure argument runs that if consumers understand the how, why, when and dollar value that their adviser is paid, it matters little if the adviser receives an ongoing trail commission, upfront fee or both.

Unfortunately for consumers of financial planning services, there is no simple schedule of fees for financial advice - mostly because each individual's financial circumstances, their particular family issues, dreams and aspirations are, naturally enough, unique.

Market forces prevail, so it is a case of "buyer beware" when it comes to financial planning fees and commissions. To help, Personal Investor set out to make sense of the fee maze. The good news for investors is that fees are on a downward trend. The bad news is that the industry's pricing structures remain as complex as ever.

The initial consult

Most planners, at least 85 per cent, don't charge a fee for their initial consultation and assessment of your circumstances. If in doubt, always ask the question upon making your appointment with the financial planning firm.

The plan fee

It's a sorry reminder, but only 10 years ago the financial advisory industry (planners, stockbrokers and insurance salespeople) charged an average of 6 per cent upfront commissions or brokerage on the sale of financial products. Today's average is less than 2 per cent, and falling.

Many financial planners will justify these upfront costs as a "quasi-" planning fee. In other words, the costs they incur for gathering the relevant information, preparing your plan, and delivering it would, depending on the planner, be met by the upfront cost of placing the investments.

However, the practice of charging a set fee for the preparation of your financial plan is an emerging trend. Customers can expect to pay anywhere from $300 to $20,000 or more. Highly detailed and complex plans can cost upwards of $50,000, depending on your particular circumstances and the amount of legal, accounting and technical effort required to produce the plan.

But for the average investor, a comprehensive plan can cost anywhere between $500 and $1500. The rule of thumb for a $300,000 investment is to expect to pay around $1200 for the plan. In many cases, this fee barely covers the cost of the adviser's time and preparation, so it's worth remembering that financial planning is a business, not a charity. Also, the lower the plan fee, expect higher ongoing charges.

Be alert for the level of trailing commissions you would pay within the recommended products, usually managed funds. Some advisers also rebate the plan fee back to you once you decide to proceed with the financial plan. In other words, you may only pay the entry or initial fee (see below).

The entry or initial (upfront) fees

Very few financial planners offer their customers a nil fee implementation service. Most invariably charge you to implement your financial plan via one of three methods: commission only; commission and a fee; or a fee-for-service charge. The most common method is commission only, and as mentioned, upfront commissions or brokerages have been as high as 8 per cent in days gone by.

Today, the average would appear to be as high as 2 per cent. But several planners contacted by Personal Investor suggest the maximum justifiable upfront commission would be half that (just 1 per cent plus GST, or 1.1 per cent). This fee should compensate the adviser for his or her time in discussions with you, formulating strategies, and also for the adviser's administrative overheads.

Also, investigate closely the nil entry fee managed funds that may be recommended by your adviser. They would likely contain either a higher trailing commission (see below) or overall management expense ratio (MER) designed to claw back the nil-entry fee. It pays to study the fine print of the prospectus.

Ongoing fees

Embedded in older-style retail managed funds is a provision for the financial adviser to be paid for his or her ongoing service to you, the customer. Even so-called mezzanine funds have some form of adviser trail commission. Also, most margin lenders, home equity loans and protected equity products pay both an upfront and trailing commission to advisers who sell such products. Always ask why your adviser recommends these products and how much (in dollars) they are being paid in trail commissions.

Broadly speaking, trail commissions are under market pressure and falling. The average cost is in the vicinity of 0.4 to 0.6 per cent of the total investment for most managed funds. Many fee-based financial planners will rebate the trail commissions back to the investor - however, they would most likely charge a higher plan fee to compensate for this. "Retail funds, master trusts and some wrap accounts sometimes usually pay between 0.25 per cent and 0.75 per cent as a trail fee," one adviser says.

"Today you would expect to pay a total fee including all trails and adviser fees (but excluding platform and investment fees) of between 0.6 per cent and 1 per cent of assets - if you want ongoing advice. If you are paying this amount, ask what you are getting for your money," he says.

Platform fees

Most investments through planners are now being written through a master trust or wrap account. Known as platforms, these also carry their own fee. Advisers suggest that you should not pay much more than 1.5 to 1.8 per cent a year for the platform fee plus adviser fee. Remember, the investment fee comes on top of that, and that would be described to you in the investment prospectus.

Advice quest pays off

Remember John Bowen? A 64-year-old retiree from Canberra, John's search for reliable and transparent financial advice was documented in last month's Personal Investor. Readers will remember that John visited a total of five different financial planning firms in his quest for reliable advice at a reasonable cost. His contact with the local office of ClearView Retirement Solutions left him with mixed feelings: on the one hand he thought the plan was comprehensive, but the 5 per cent upfront cost of the recommended investments - totalling more than $10,000 - was way too steep.

Personal Investor introduced John to Sydney-based, fee-only financial planner Bruce Christie. Bruce is a financial planner with Centrestone Wealth Management, an independent firm that specialises in higher net worth investors (people with investable assets of $500,000 or more).

What Bruce discovered, through the process of his fact finding, is that John had not been asked a basic technical question regarding his superannuation payout. That is, how much of his payout related to income received before 1983?

This is an important question, as it has a significant impact on the amount of taxation that John would pay upon converting his super to an allocated pension. Dollars received before 1983 enjoy a more favorable tax treatment. "In effect we discovered that John had an extra five years of pre-83 service, and this in turn significantly improved the tax efficiency of his allocated pension," Bruce says. "In short, it means more money in John's pocket and less in the hands of the tax man."

John is happy with the advice, and is considering his options. He also approves of the way Centrestone does business: no entry fees, no switching fees, no hidden charges and no links to a large institution, and the implication that he confine his investment choices to the products owned by that institution. And the bottom line fee? Less than $4000, plus GST.