‘Consumers of financialadvice services need to understand the industry and should take due care when choosing an advice professional… The industry is undergoing its most significant period of change: industry wide education levels are being lifted, remuneration and business models are being tested and unfortunately a lot of unnecessary politics is being played.’
You need to understand what services you require and what an advice professional can deliver. Not all ‘financial planners’ are the same. You also need to be aware of fees and the options that are available to you.
Financial Planning vs. Investment Advice
Industry participants & consumers need to start differentiating between financial planning and investment advice. These are two very different skill sets. For too long the profession has been confused and there are misconceptions as to what a financial planner actually does.
Not all financial planners are qualified to give investment advice, many clients are seeking investment advice and measure their planners’ usefulness based on the return within their super fund or investment portfolio, not the tangible peace of mind, confidence and guidance that is provided.
Financial planning and investing services are two distinct services, although inextricably linked. Consumers need to be comfortable that their Financial Planner/Investment Adviser has both skills.
As soon as you cross over and ask for investment advice or you assume investment advice as part of the service being provided, your advice giver becomes an investment adviser or wealth manager which is a separate service that attracts a different remuneration and service model. Portfolio construction, implementation, trading, ongoing monitoring, benchmarking and reporting is not financial planning, it’s investing and asset management.
You need to understand the profession and have confidence that your advice professional has both skill sets, that is, understands regulation, can assist you to construct a life plan whilst also understanding markets, having an in depth knowledge of how different securities behave and more importantly, understanding what types of investments and asset classes are appropriate for your circumstances.
Someone who has had a career in selling insurance or merely placing non-discretionary super product are not necessarily qualified to provide asset allocation, risk profiling and investing services.
During the 1980’s and 1990’s many life insurance salesmen morphed into financial planners as the service became popular, the investment industry in this country began to take off with institutions developing product to distribute through ‘financial planners’. During the last ten years the industry has matured and is now without question a profession, many of these ‘salesmen’ are no longer in the industry. Consumers are more educated and demand a higher level of initial and ongoing service, professionals are beginning to rise up to meet the needs of their clients, Planners and Wealth managers are becoming the trusted mentor and overtaking the family accountant or solicitor as a source of guidance and confidence.
The current proposed FOFA regulations to May define and restrict the term ‘financial planner’. Will it go far enough? A financial planner needs to be degree qualified, a member of a reputable industry association, adhere to a high level of ethics, undertake ongoing professional development, ensure they are up to date with all relevant regulations pertaining to the services they specialise in and if they hold themselves out to be an investment professional they must also meet the requirements of this skill. That is, to have undertaken appropriate studies and experience in this field. An investment adviser or wealth manager needs higher levels of education and qualifications than a financial planner. An advice firm may separate the individuals providing each service.
The nexus between product and advice needs to be broken. You need to seek out professionals that provide you with a scalable advice service that can meet your needs as you move through life. Your differing needs at life stages will potentially attract a different service and thus a different fee proposition.
What about fees?
The value of advice is not just linked to an annual return. Over the last three decades the industry has muddied the waters and confused remuneration models, giving away financial planning advice for free whilst taking up commissions and trails through product placements, essentially receiving a payment for distributing a manufacturer’s product.
Financial planning services can be charged at an hourly rate or flat fee, no argument there. Centrelink support, budgeting, strategic life planning, retirement planning, risk analysis, aged care advice and the actual production of a statement of advice can all be provided at an hourly rate. In some cases this charging method will price advice seekers out of the market and push some towards the no-frills one size fits all union or bank owned products. Unfortunately, that’s where the current Australian government wants the industry to go.
There are four main fee types in the planning/advice world:
1. Asset based fees or an annual retainer.
2. A flat annual fee or retainer.
3. Commissions & ongoing trails.
4. Hourly rates.
Traditionally financial planners have provided planning advice and investment advice whilst accepting a commission or trail from the product provider. As long as you are receiving something in return this is a valid fee model and preferred by those who cannot afford upfront fees or a retainer. A flat rate plan fee or implementation fee may also be charged via a product placement. This is the model adopted my most banks and large tied planning firms with in-house products being distributed to their customers.
Commissions are still a valid remuneration model for the placement of insurance policies or home loans however they are generally not viewed as appropriate for superannuation contributions and some investment products.
The trend these days is for advice professional to provide financial planning guidance for a flat rate or an hourly rate whilst being retained by the client for ongoing investment advice at either a percentage of assets under advice or a flat annual fee. This remuneration model provides a strong solution for those seeking both or either service. There is flexibility, control and transparency. It also aligns the advice professional’s interests with that of their client’s.
If an advice professional meets your criteria and wants to charge an asset based fee or retainer for ongoing asset advice this is a very transparent and valid fee for service model. An asset based fee or annual retainer is a fee for service negotiated with you, controlled by you and not set by any product provider. I wonder when the wider Australian public, the politicians and self interest groups will wake up to the fact that hourly rates, flat rates, commissions and asset based fees are all valid forms of remuneration and can be used in conjunction to provide you with flexibility and choice. The ‘transparency’ of fees is the critical issue, not the type of fee itself.
You must have a level of financial responsibility and understand what you need, what you are paying and what you are receiving in return.
Michael Ibbotson is Managing Director and a Senior Financial Strategist & Private Client Adviser at Security National. Security National is a self-licensed boutique advice house based in Melbourne offering financial planning, insurance and investment advice services.
