02.Who, what, where
An adviser’s ownership, level of independence and how they’re paid may influence their advice. For ownership, there are three main types of advisers.
1. Institutionally owned
An estimated 85% of advisers are owned or employed by banks, fund managers, super funds and other financial institutions, which causes enormous biases. Confusion abounds over the ownership of planning groups and influence on advice. This is particularly common around third-party brands; Hillross Financial Planning, for example, is owned by AMP, yet 50% of its super customers surveyed believe Hillross is independent. Our news piece on the latest Roy Morgan research, which exposes massive bias among the six largest financial planning groups, details who these are.
2. Independently owned
These advisers claim some degree of independence because they’re not owned by banks or other product manufacturers. This, combined with a fee-for-service approach, means many are less likely to be swayed to recommend particular investments and companies. However, where these advisers collect commissions, they cannot claim to provide independent advice.
3. Independent advisers
Legally, financial advisers can only use terms such as “independent”, “impartial” and “unbiased” to describe their services if they’re free from any conflicts of interest caused by links to product manufacturers, and if they refuse (or immediately rebate to customers) commissions and other payments and gifts from the financial institutions whose products they recommend. Theoretically, impartial advisers are much more likely to charge a fee for their services, and to recommend low-cost investment products that don’t pay commissions, including industry super funds, exchange traded funds and listed investment companies.
The list of genuinely independent advisers is small; 10 are named by Independent Advice, a website run by SMART Compliance, a service provider to advisers. The website lists some (not all) independent advisers.
How much can I expect to pay?
There are three main types of payment for advisers.
This is the most common and usually attracts the highest fees. An adviser will get a commission from product providers such as managed funds when they sell their products: an initial (entry) fee of up to 5% of your initial and subsequent investments, and a trail commission of about 0.5% of the balance of your portfolio each year. Commissions are much higher on life, income protection and disability insurance – our case study's adviser (see below) would have received a payment worth 100% of her first year’s premiums and 14% of annual premiums after that if she’d followed his advice.
2. Asset-based fees
A second form of payment, similar to trail commissions and agreed between investors and advisers, is a percentage “asset-based” fee. It’s charged as a proportion of your investments or portfolio.
3. Fee for service
A straight-up fee-for-advice, based on a set or hourly fee. This attracts the fewest conflicts of interest. There is an increasing number of fee-based advisers, and groups including the Financial Planning Association, AMP and MLC are moving to this model ahead of the July 2012 regulatory deadline. However. even with fee-based advice, there are traps to watch for. Some advisers may like to appear independent by charging fees, while continuing to rake in product commissions as well.
A full financial plan usually costs $3000-$4000, with smaller ongoing review fees applying in subsequent years. Some advisers provide more basic services for a smaller fee, and free limited advice and information is sometimes available from super funds.
Case study: Lessons learned
CHOICE members Denise and her husband were talked into having a fresh look at their finances by an adviser. They were charged $1250 up front. “We were advised to borrow $200,000 against our house to invest elsewhere, to switch our super funds, and to take out extra life insurance to cover new debt,” Denise says. “They ran through it as if it was a win-win situation and expected us to sign on the spot.”
The couple didn’t sign as they felt uncomfortable with the recommendations. The adviser would have taken a large cut of their money – not only the $1250 upfront fee, but a further $6600 from the loan for “initial advice”, $3800 in initial insurance commissions, $2700 per year in insurance trail commissions and $2200 annually in superannuation investment commissions. All up, the strategy’s fees were almost $12,000 up-front and $2700 annually. Denise’s super fees would have doubled if she’d switched, as recommended, from her industry fund, REST Super.
“All I wanted was advice on how to minimise our tax, pay off the mortgage and boost our super. We also wanted some advice on a property investment, but were advised to invest in a managed fund with lots of adviser commissions. Our bank felt it was risky and that the expected returns were a bit inflated, so we didn’t follow through. I wish we hadn’t been pushed into the appointment, as that $1250 could’ve been spent on my mortgage.”