There is no doubt about it; this is the new era for the financial advice providers. There is so much activity in the media in relation to fees verse commission, most financial advisers are very uncomfortable to discuss financial planning fees. So, let’s discuss fees, financial planning fees. You may have read articles or heard the media debating whether you are better off paying for financial advice through fees or commissions.
Below is an explanation on the difference between a commission and fee for service - and of course what the real issue is.
Fee for service: A fee is an agreed amount between the client and adviser for financial advice or ongoing service. This is often called an adviser service fee and can be deducted monthly from your bank account, your investment account or your superannuation account. The fee might be calculated as a percentage of your investment balance e.g. 1.1% or it might be an agreed flat dollar fee e.g. $1,500 p.a.
These fees are normally agreed between the client and the adviser when initial advice is presented but can also be agreed each year. Whilst you have already elected to pay an adviser service fee to your adviser, you may in the future have to simply agree to this in writing on a more regular basis e.g. every 2 years.
Commission: A commission is an amount that is paid to your adviser from the product provider. This is not taken from the balance of your funds but from the fees you may pay the product provider e.g. investment manager fees. The amount normally cannot be changed by you and the amount or level paid to the adviser is determined by the fund manager or product provider.
A commission was traditionally paid to the adviser to cover the cost of setting up investments and insurance. For example in the past you may have set up an investment fund and the fund manager would pay a trailing commission of say 0.4% to your adviser for the work involved in setting up the fund and reviewing the investment.
The real issue:
Advice fees shouldn’t be based on the quantity of assets under management nor should it be based on the level of insurance a person insured for. Rather it should be calculated on the level of complexity an individual or family face, as they endeavour to maximise the probability of achieving their lifestyle and financial goals.
The fundamental questions are: What value does the adviser provide? And what does the adviser do for their clients? If the answer is: investment advice only, then the adviser should awkwardly go right ahead and charge a fee based on assets under management. They should not make the common mistake and masquerade as a financial adviser.
If however the adviser solves (or even helps solve) the financial and lifestyle challenges that individuals and families encounter during a long and high trust relationship, then asset-based fees are completely irrelevant. Financial Advisers provide clients with tangible and often intangible outcomes such as; time, peace of mind, happiness, financial freedom, control and confidence. In my experience some of the most stressful financial decisions that clients face include; upgrading or downsizing their family home, setting up or selling a business, re-setting financial goals and budgets after a divorce settlement, affording their post retirement lifestyle, determining who gets what and how after they die, deciding the right aged care facilities for their parents, funding education for children etc. Why would an asset-based fee make any sense to a client who is seeking advice on any of these complex decisions?
People don’t mind paying a fee as long as they are getting value for it. As long as they actually know they are paying the fee and where it is coming from, they don’t mind if it is a fee for service, or a commission.
The government has taken matters into their own hands. The changes will come into effect in conjunction with a number of different regulations that govern financial advice in Australia - collectively these changes are called “The Future of Financial Advice”. For further details on these changes please email firstname.lastname@example.org.
This is the new era for the financial advice providers. If you have any concerns or questions about what value you are receiving from yourrrr adviser, what fees or commissions your adviser is receiving and what services are being provided for those fees, please speak to your adviser.
If you have any questions in relation to this column, the author can be contacted by email@example.com or 49 43 4876. Philip T. Smith is a principal of Newcastle based Hunter Financial Planning, Authorised Representatives of Total Financial Solutions Australia Ltd. (AFSL 224954) The information in this column is general information only.
This article was featured in the Newcastle Herald on 12 November 2012.