Nick Bruining Q+A: Two ways financial advisers charge fees to manage your money, and what they might cost you
Q+A: Finding the right financial adviser can be tough because there’s no set fee scale or schedule of costs. Here are the two ways advisers charge to manage your money, and what they might cost you.
Question
We have finally decided to retire in December and have been selecting a financial planner using the Moneysmart website as a guide.
After talking with a few advisers, we have found the fees being proposed seem all over the place.
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By continuing you agree to our Terms and Privacy Policy.There doesn’t seem to be any consistent method of charging and we’re not sure whether the fee quoted is reasonable or expensive.
Answer
Unfortunately, there are no fee scales, and a lack of clearly defined standards means there are no set costs or schedules.
Advisers are legally required to meet you and prepare a written statement of advice, setting out your facts, objectives, the recommendations, the risks involved and the costs. Often, the SOA preparation might be anywhere from a few hundred to several thousand dollars, but that should be linked to the complexity of your affairs.
There are two models of payment currently in play. One links the amount charged to the value of the investments being sold to you, which many regard as commission by another name.
Underpinning this model are the percentage-based fees linked directly to the investment products, expressed as a percentage. This is where the real money is made and a percentage-based ongoing adviser service fee typically ranges from 0.5 to one per cent of the investments, and up to 60 per cent commission on insurance.
On a $2 million investment portfolio, the adviser would be receiving $20,000 a year. This method is also used with self-managed superannuation fund arrangements.
The second method — now growing in popularity — is a flat fee arrangement where no percentages are involved.
The SOA will typically cost anywhere from $3000-$7000, the latter being one with a great deal of complexity.
Ongoing fees will also be flat and not linked to the amount invested. They could range from $3000 a year to, again, several thousand depending on the complexity of tasks.
Ongoing comprehensive financial advice is not simply looking after investments and insurance. Interaction on your behalf with the Australian Taxation Office, Centrelink and your super funds should be part of the regular day-to-day ongoing services provided in that fee.
Above all, you need to be comfortable it represents good value for money, and you should ask that question every year or two.
Be wary of retirement arrangements where the only service is “managing the investments”. Ongoing advice should result in a stress-free retirement knowing someone is looking over all aspects of your finances.
Question
I read with great interest last week’s article where you raised concerns about investments based on private credit.
We have a sizeable investment with one particular company which is set to mature in the next month or so.
In this case, and because we are classified as “sophisticated investors”, this is a wholesale investment and I am wondering if this changes the nature of any risks.
Answer
In almost all cases, it does not change the underlying investment arrangements or risks in any way, and the tag “wholesale” or “sophisticated” investor is often used to bypass critical investor protection mechanisms.
This includes a detailed assessment of the suitability of an investment for a client and a full disclosure of the risks involved.
Wholesale investors are expected to conduct their own research and assess the risks. In some cases, “wholesale” investments may be even more risky.
The term “sophisticated investor” does not require the person to have any form of financial expertise. Instead, the regulator imposes a simple financial test which was set more than 25 years ago in 2001.
A promoter of these types of investments must ascertain the status of an individual through a certificate provided by an accountant.
To obtain the certificate, you must show gross income of $250,000 or more a year in each of the previous two years, or have net assets of at least $2.5m.
Needless to say, many people now satisfy this test by simply adding the value of their super funds to the value of their home.
Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association
