It was suggested to me recently that I should write a book about what I know to help those looking for financial planning help. But what could I write about that hasn’t been done to death before. There are plenty of books out there talking about wealth accumulation strategies, super, investment fundamentals and strategies, risk management (insurance) and estate planning, etc. and to be honest this is pretty dry reading even for someone like me that reads finance related books all the time (don’t judge).
And then it hit me. What you don’t see are books for consumers of financial advice and services that talk about how you will be subjected to deceptive and misleading practices with the sole purpose of levering more money from your pocket. A book revealing the tricks and traps consumers of financial advice need to be aware. Maybe one day the book will happen. In the interim, I’ll keep highlighting matters via the posts on this website. Today we look at how much you pay for advice and service.
I find this a really interesting area and you would be amazed at how big a topic of discussion fees is within the financial planning/advice industry. At the same time you’d be just as amazed that the focus of discussion isn’t really centred on you. But first some background.
If you have seen any of the movies or documentaries involving events around the GFC (maybe you are old enough to remember Wall Street with Michael Douglas) or read books such as Liars Poker or Wolf of Wall Street you possibly recall the air of entitlement of many of the key players to make obscene amounts of money at others expense. And who were those “others”? That’s right, consumers of financial advice (typically investment advice).
So how do they get away with it? There are two key reasons. The first is that structurally our society has become so reliant on the financial services industry and the industry has so ingrained itself in our lives we find it difficult to avoid. Think for a minute how difficult it would be for you to operate in our society without interaction with banks, insurance companies, finance companies and financial intermediaries. Hey, you’re reading this article aren’t you. That should tell you something.
This matter is hard for us to address personally so we will leave it for another day. Reason two is something we can control however. It is quite simply because we let them get away with it. So why do we let it happen?
There is more than one reason, but let’s focus on a big one. I’d be surprised if you haven’t heard the adage “you get what you pay for” and in many aspects of life this is true. I’m sure you have bought a cheap (I mean really cheap) item of clothing that didn’t fit very well or started falling apart really quickly or bought the cheap copy of some product knowing it’s origin was questionable only to be disappointed. You possibly even vowed never to take the cheap option again. And herein lies the problem.
When it comes to financial services how much you pay has little, if any, connection with how much the services cost to provide or the quality of the services provided. It has much more to do with how much the other party thinks they can get you to pay. And on this front you need to remember how entitled financial services participants can feel, so they are trying for a lot.
To give you a feel for what I’m talking about, around 10-12 years ago one of the financial planning industry magazines used to interview new entrants to the industry, typically early to mid-20’s, who were looking to transition to being financial planners within a couple of years. One of the questions asked was how much they expected to be earning in a couple of years (asking the question says something in itself). The answers were typically $100,000 + (remember this was around 2005 when average full time earnings was approx. $56,000 p.a.). Only those in the financial services industry don’t see the problem with this.
In Warren Buffett’s letter to Berkshire Hathaway shareholders a few weeks ago he addressed this very issue in relation to investment management fees.
“In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. ……..”
“Human behaviour won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with the experience ends up with the money and the one with the money leaves with experience.” “
If you are thinking “I’m not a financial elite or wealthy, so this doesn’t apply to me.”, think again. You are human and the singling out of elites and wealthy is only to highlight the issue. It applies to all of us.
We are conditioned to think that the more we pay the more we get and that by paying more we will get something “special”. When it comes to financial advice and financial services it’s rarely the case. Much of the time you are just paying more for something that is not special.
In fact when it comes to financial advice and services you often don’t even know how much you are paying, due to commissions, percentage based fees and well hidden (but still legal) disclosure. Over recent years the hiding of fees and charges (especially by financial product providers), while still meeting legal disclosure obligations, has been really crafty. I have to give some credit here for some really clever work, even if it is deceptive and wrong.
So how much should you be paying? I’d love to give you precise answers but unfortunately people’s circumstances and the help they are seeking vary too much to be overly prescriptive. I can however give some guidelines.
Firstly, we need to make some clear distinctions as to the nature of the advice you are looking for and will receive. On this front, I’ll break advice and services into three parts: strategic advice; personal insurance advice; and investment advice. Within the personal insurance and investment advice categories they can be broken further into product advice and product implementation.
Why break it up this way? It’s partly historical, as to the way advice is sought/delivered, and it’s partly compliance related.
For strategic advice, this will typically be $1,000-$2,000 for specific issue (wealth accumulation, retirement income structuring, etc. in isolation) or $2,000-$4,000 for more comprehensive advice (dealing with wealth accumulation, pre-post retirement planning, strategic investment advice, risk management (including personal insurance needs analysis) and estate planning), with this obviously depending on the complexity of your position. If your circumstances are truly complex you may need to pay more, but this is a true 1%’er situation.
For personal insurance, the product advice component should be in the $1,000-$1,500 range, with implementation also typically in the $1,000-$1,500 range. If you work in a hard to insure industry or your health isn’t the best you may need to pay a bit more, but not a whole lot more. You can obtain insurance directly, but you will typically pay full commission based premiums. To have these removed from insurance premiums you will need to have an adviser rebate them.
For investment advice, the product advice component is again likely to fall in the $500-$1,500 range, with implementation also likely to be in the $500-$1,500 range. If you are seeking to implement the investments yourself this should be incorporated in the advice and you can avoid the implementation fees.
Ongoing advice fees that cover review and implementation of your strategic position and personal insurance and investment arrangements should be aligned with the initial advice fees and range from $2,000 per annum for singles with very simple affairs to $5,000 per annum for families with not so simple affairs.
There will always be exceptions, but as exceptions they should be rare. There is a strong chance that as unique as you are personally, your financial circumstances will not be rare, or justify exceptional pricing.
The above amounts should not be materially impacted by how much your insurance premiums are or how much money you have to invest. These matters often do not change how easy or difficult your insurance or investment capital is to advise on. If this is how advice pricing is based, you are getting advice focussed on selling you a product, rather than servicing your needs.
It is important to note the above amounts are only the advice fees involved. You will still pay insurance premiums (greatly reduced when commission are rebated) and investment management fees, whatever they happen to be. These should not include amounts paid to your adviser (check this).
PS – Add GST to everything. Remember this is a tax and the person you pay it to doesn’t get to keep it.
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.