Every now and then I do a Google search on independent financial advice or a variation to see what comes up. Yes, I’m checking to see if Think Independent does, but let’s move on. Too often there are advice practices that are far from independent. That’s a problem but not what this post is about.
A recent search brought up a practice that upon further digging is what you would call a financial “one-stop-shop”. A one-stop-shop will do your tax and accounting, your financial planning, provide investment advice (even including property advice), administer your self managed super fund, implement your life and disability insurance, arrange your loans and sometimes even deal with your estate planning.
It’s an intuitively appealing offering. All your financial life needs dealt with in one place. For many it will be just what you are looking for. Some even focus on specific industries/occupations making it sound even better. So why do I raise the matter?
As appealing as the one-stop-shop sounds it is inherently lacking in independence in concept and unfortunately very much so in practice, in my experience.
When a practice is responsible for every aspect of your financial affairs it is very difficult for them to be objective in assessing the appropriateness/competitiveness/cost effectiveness of each individual component, as they have a vested interest in not rocking the boat. They want a smooth journey, but not necessarily for your benefit.
For a one-stop-shop there is a vested interest in selling you as many of the services they offer as possible. Now you will probably need a number of these services, but you do not need them all from one place.
The Sting is in the Tail
A scenario I have seen too many times is where a person/couple reaches out for independent, or at least objective, advice from a one-stop-shop and receives something that comes up well short. The overall strategic direction is generally sound. The wealth accumulation or retirement income strategies are usually sound, but debt is often an unnecessary feature. If insurance is recommended it is usually needed. You will usually pay a set fee for the advice, giving you the impression it is objective, after all that’s what objective and independent advisers do.
It’s the implementation (administration, investment, insurance and loans) and ongoing advice stages in particular where the problems lie. As the saying goes, the sting is in the tail. The appropriateness of debt and specific investment options is subjective. Unlike the use of one structure over another (e.g. super v. a company) there is not necessarily a clearly appropriate choice and I believe these grey areas are exploited.
Often people are sold the need/attraction of a self managed super fund (trust and control) and investment in residential property (familiarity and tangibility). Often debt will be needed to pursue the purchase of the property so a loan is recommended. As above, it is not uncommon for the client to need life and disability insurance. On the surface this may all sound OK.
A self managed super fund is a pretty easy idea to sell to many people as we quite rightly don’t trust banks and financial institutions and many like the idea of greater control over their finances. Guess what, we can arrange that for you and administer it over coming years, you won’t have to worry about a thing. Ka-ching!!! upfront and Ka-ching!!! every year. We can also arrange a property in a strong growth area and arrange the loan for you (Ka-ching!!! Ka-ching!!! and Ka-ching!!!). Now we need to get you insured so your family is protected (Ka-ching!!! and Ka-ching!!! again).
It is reasonable for someone to be paid for such services and I don’t have a problem with that. I do have strong questions as to why the products and services are recommended however and a real problem with how the services are paid for and the amounts.
I am yet to come across an advice practice that provides any of the non-accounting services outlined on a transparent fixed fee basis. They are always paid for on the basis of commissions of one type or another. Don’t fall into the trap of thinking that because you are dealing with an accounting firm that charges a set fee for their accounting services that they don’t take commissions and other forms of conflicted income.
You’re paying it
It is not uncommon for the property referral/commission to be up to 5% of the value of the property, the loan commissions are typically 0.5%-0.6% upfront and 0.10%-0.15% ongoing on the loan amount, while the
insurance commissions are now typically 77% upfront (until recently it was more) and 22% ongoing of the premiums. Use your own values for the property, loan amount and insurance premiums and I suspect you will start to see the problem for you as the consumer of advice. You’re paying it and you can usually avoid the costs or substantially reduce them. Great business model though isn’t it. Very lucrative.
An unfortunate additional cost is the independence of the advice you receive. How much has the advice been compromised by these influences?
Don’t be Lazy and Be Sceptical
The banks have tried to be as much of a one-stop-shop as they can and we know how that has played out for the consumer, and will continue to. When thinking of engaging a financial advice one-stop-shop you need to be as careful as you are in your dealings with a bank.
Understand what you are really paying for the services provided. Don’t be lazy. Look and crunch the numbers. They probably won’t be easy to find, but as a general rule they are usually at the back of the report. Also, be sceptical of the advice provided. Is another option just as beneficial and appropriate that does not involve a commission or kickback?
Some warning signs are:
- the recommendation of a self managed super fund when you didn’t say you wanted one;
- use of debt (it should be more of a strategic last resort, rather than first off the shelf); and
- any recommendation where the advice provider will be rewarded upon implementation.
- Examples: Self managed super fund, Property, Loans & Insurance
This advice is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each person are different and you should seek advice from a financial planner who can consider if any strategies or products mentioned are right for you.