At least, that is the impression you can get when tuning in to some sections of the media.

As covered in previous posts, the post-GFC world is a tumultuous one, with many long cherished “laws” of investment being turned on their head, and many investors feeling helpless in the face of small, zero or negative returns. Some are abandoning financial advisors in favour of a “do-it-yourself” approach to their finances and investment. It’s already the case that it is only a minority of Australians who regularly deal with a financial advisor, so i’m wondering if this is the best outcome overall. It’s not a simple question though, so i thought it best to tackle the issue by working through some of the areas in which confusion as to the role of a financial planner can arise.  This post looks at some of the limitations as to what a financial advisor can or cannot do for you.

Remember, this is simply my opinion. I’m biased because i am a financial advisor, and i am a part owner of a financial planning business. Feel free to ignore any aspect of what i have to say but regardless, there is a lot of misinformation, bias and distortion out there in that big, wide world and this is my attempt to put some logic into the thinking about financial advisors – what they can and cannot do for you.

You will find quite comprehensive listings of the shortcomings of financial advisors and the financial planning world by trawling through just about any of the “do-it-yourself” websites or organisations. If you don’t have time, i’ve included  a couple of links at the base of this post to some articles from the “Motley Fool”, one of the world’s largest such sites. It’s American based (an Australian arm is building its base at the moment) but a lot of the ideas hold true here in Australia. If these articles don’t convince you to abandon your financial advisor then i’d be rather surprised.

Firstly, we need to get a couple of key points very, very clear.

All Financial advice is very limited

And if it isn’t then it is of limited use to you. Let me explain…

There are theoretically two types of advice on offer today:

• General Advice
• Personal Advice

General Advice is the type that is provided by websites, newsletters, newspapers, magazines, tv, radio and broad mainstream media. It is the type of advice that you expect someone to give when they have no idea of your personal position.

For example, a highly respected newsletter may suggest that you should be paying down mortgage debt as the most appropriate way of investing your spare income to improve your finances. Without pointing fingers, we could suggest a government website that makes exactly such a suggestion – and the website even goes as far as saying that this is “the best option”. While the comment may be generally true in a purely generic sense in a credit constrained, post-GFC world, there are circumstances when it would definitely NOT be the “best option” for an individual. For example

• when a person’s job is at risk and they have little reserve cash,
• when they do not have sufficient insurance,
• when paying down your mortgage is not accompanied by easy access through a draw-down facility in the event of financial stress,
• when close to retirement and money could potentially be contributed to super as a concessionally taxed contribution, and withdrawn later to retire debt. This could substantially reduce the total dollars required to reduce the debt, and increase options for maximising the value of a given dollar. 
• when the person has credit card or other high-interest debt that should be cleared first.

The point being that “general advice” is a dangerous weapon, and like all dangerous weapons, it’s potential for harm should never be understimated. What may be true in a general sense may be completely untrue and damaging in certain circumstances. That is why “general advice” is supposed to be accompanied by a general advice warning – which should point out that this general advice could turn out to be completely and utterly useless to you, and you should take no action on that general advice without seeking personal advice to ensure that the general info is applicable to your circumstances.

That doesn’t stop “general advice” being helpful in a broader sense but it should serve as a warning about taking too much that you read, see or hear, to heart.

General advice is dead easy to give…

It truly is. The average financial planner in Australia today could write an article for just about any of the major newsletters and it would be up-to-standard as general financial advice. Financial planners are required to keep up-to-date in a wide range of areas that would be standard grist-to-the-mill for financial newsletters. For example, in the recent past, i have attended analyst or investment updates from Westpac’s BT, Advance, Goldman Sachs, Platinum Funds Management, Colonial First State, NAB and others – as well as partaking in webinars, webcasts, telephone hook-up’s and one-on-one meetings with property, venture capital and alternative asset managers or representatives. And i am quite selective of where i go and how my time is spent. And yet i am no Robinson Crusoe in the financial planning world. You will find that financial planners are a reasonably up-to-date bunch.

That is not a brag paragraph but a snapshot of some of the personal time, research and effort that a planner uses just to stay in touch, so they can more prudently build, manage and discuss long term plans in an extremely volatile world.

My point is that a financial advisor does not have the luxury of simply taking a point, waxing lyrical on it, and moving on to the next point – because that is what “general advice” is all about. On a scale of “easy” to “hard”, it’s pretty much at the bottom of the advice pile. That’s because it does not have to cater for anything more than the trend of the day.

This is most easily borne out by looking at any self-help website or newsletter (such as this one), and looking at what is discussed on a particular day. If that site suggests the property market is “high/low/boring” then its’ no big deal to put out a completely opposite statement a little while later. Not so easy for the person who when ahead and bought/sold/jazzed up their investment property following the original article… that investor has to deal day-to-day with the consequences of their actions. They must continue to meet ongoing interest on any loans, negotiate with tenants/agents on maintenance, contract renewals, rent arrears, insurance/rates/ repairs and generally ensure that their original decision continues to make sense. It’s the same with personal investment websites, magazines, and other forms of general advice with regards to mortgages, property, shares, asset trading or just about any other form of money activity. For example, there was once a column called “Blue Spec” (i may not have spelt that correctly…) in the Personal Investment magazine, which offered tips and tricks, and portfolio suggestions for running a share account. It ran for years, with pithy comment and market insight that can only be gained from someone with intimate participant contacts and leading edge access to information. And yet the column eventually closed down, partly owing to the inability of the ongoing portfolio to beat the overall market indices over the long term. That is not unusual, as it is extremely difficult to beat market indices – but it does show that the general advice given by even the best of the best that is available, does not necessarly mean that you will obtain the best outcomes.

Financial Planners do not have that luxury. They have to give concrete recommendations. They have to put their name on the line, and give advice on when to sell or buy, and what to sell or buy. When to look at this strategy and when to look at that strategy. This means the planner is distilling a raft of inputs in a football field with goal posts mounted on wheels. They cannot say “move to cash because the world is ending” without having a backup game-plan because they know the client still has goals and objectives they are hoping to achieve, that will be less likely to occur if (as an example) all money stays in cash.

With these comments, i am not asking for forgiveness on the errors and misjudgements and misdirections of  every planner whose advice has ever led to worse outcomes. i am simply trying to highlight the difference between advice that is provided in a general sense (eg. “the world is risky – cash is looking attractive”), and that which is personal (eg “you are unlikely to achieve your long term goals if you hold cash investments at greater than 40% of your assets, and without taxation reduction, you will be working 5 years longer to achieve the same outcome”).

Financial Planning – Personal Advice

“Personal advice” also has two component parts, which i will refer to as “full advice” and “limited advice”.

There is that which is most beloved by regulators, professional bodies and “dealer groups” (the name given to the entities holding the Australian Securities and Investments Commission, “ASIC” licence that allows them to licence authorised representatives who then give you advice). It is “full advice”. It is usually delivered in a thick, rambling Statement of Advice document. i’ve called it “full advice” because the idea is that this document encapsulates all of the following:

• A snapshot of your complete current financial position
  • Personal contacts details, age, occupation, health
  • Assets and liabilities
  • Income and expenditure
  • Likely or anticipated changes to any of these
• A statement of your aims and objectives that have a financial impact
• A statement of your assessed attitude to risk and the risk/return trade-off
• A list of recommendations based on these factors in the light of :
  • Current legislation
  • Current and anticipated Centrelink positions
  • Assumed asset class rates of return and relative risk
  • Assumed inflation and interest rates
  • Assumed portfolio construction outcomes in different market cycles and environments
  • A review of available investment options, including financial products
  • As assessment of the taxation impact (although financial advisors are not Accountants)
• Recommendations will include statements and/or calculations on
  • Insurance
  • Investments
  • Cashflow and budgetting
  • Superannuation
  • Retirement income planning
  • Wills, powers of attorney and estate planning
• A “because…” statement that sets out why these particular recommendations are appropriate to your financial situation, objectives and risk tolerance, based on an anlysis of all the factors mentioned above
• A list of alternatives considered
• A disclaimer and warnings of limitations for the advice or the advisor
• A statement of fees and costs for the recommendations being made
• A statement of where the advisor and dealer group receive fees, compensation or money – and how much
• Copies of appropriate research on financial products recommended

As you can imagine, this is a time-consuming effort for even the most straight-forward of financial situations. This isn’t an exhaustive list but some folk suggest my musings are a tad lengthy so i’m working on an abridged version.

One of the limitations expressed in such a missive is a time deadline, after which the recommendations no longer hold. Similarly, if the client’s personal objectives or financial position change then the recommendations are no longer approrpriate.

The idea is that a person is then in a position to consider this recommendation, and to decide whether or not to implement the suggestions it contains.

When the time comes to review the recommendations, all of this is repeated.

This is “full advice”, and the idea is that all advice is this kind of advice, unless it is specifically limited in some way by the advisor, after confirming the agreement of the client to those limitations. You may have spotted the limitation of the full advice approach – it’s only appropriate at the time it is recommended. Regardless of the work done by the advisor to try to deal with changes of one type or another, small changes in underlying assumptions can rapidly erode the value of the full advice statement. To check whether the advice remains correct, the advisor has to start the entire process over again.

Because of that, full financial advice is expensive. If it is not then it is most likely not full advice. It’s probably general advice, wrapped up as personal advice.

Personal advice is expensive. Full stop.

As a by-the-by, recent polls suggest that Australian’s still don’t like paying for advice but where they do, the expectation for the cost of a position review is $590. When polled, financial planners average expectation of the cost of providing that review was $2,500. There is a bit of a mis-match in the perceived cost of providing personal advice and the actual cost.

Such misconeptions are not helped by the “free advice” statements included in a lot of super fund and investor material these days. If there is a financial advisor out there prepared to offer “free advice”, send them to me. I’ve heaps of work that i’d love some competent, qualified and experienced person to assist me with – especially if they’re doing it on a volunteer basis.

Now that would help me bring down the cost of advice…

Financial Planning “Limited Personal Advice”

Now we move on to the “limited advice”, which is that required by the vast majority of Australians on the vast majority of occasions that financial advice is required. Examples would be where people want the advisor to ignore the bulk of their position, and focus on one or two areas only – such as insurance or superannuation or investments outside of super or cashflow and budgeting.

Clearly, there would be circumstances where advice could be provided on these areas without the need to cover the full advice spectrum. However, ASIC and dealer groups are wary of such limitations, as they could allow an unscrupulous advisor to simply “limit away” key areas. In such circumstances, the advisor is able to focus on a “quick sale” of a financial product or service, and avoid a great deal of the work normally required to ensure the advice is adequate, appropriate and tailored to the needs of the client. ASIC rules and simple common courtesy require the advisor providing “limited advice” to highlight the inadequacies of any such advice, and to provid warnings and disclaimers that can theoretically help the customer decide whether limited advice is really what they want and whether it is in their best interest.

This is something that ASIC is grappling with right now – how can the cost of advice be kept within the reach of the average Australian (more specifically, the average superannuation fund member), without reducing its effectiveness by allowing advisors to limit their obligations to provide “the best” advice?

There are a lot of vested interests pushing the barrow of their particular lobby. Super funds would like to be able to advise fund members of answers to simple questions without having to charge an arm and a leg to do so. A person wanting to take out more insurance doesn’t necessarily want to review their Centrelink entitlements. It’s a tough job to get the legislative rules strict enough to protect the general public without having those rules lift the cost of advice out of reach of that same general public.

For example, Industry Super Funds are lobbying right now for changes to “intra-fund advice” under the new MySuper rules that will allow the fund advisors to provide severely limited advice – for example on rollover from a super accumulation to a retirement pension account. Usually, a financial planner must look at all potential alternatives – which we know is expensive – and the Industry Super folk are trying to keep the cost of that advice as low as possible, so that it can be provided under the standard fees of the product. In effect, they are asking the government to approve a substantial increase in bias (pretty much no comparison with other funds will be required) in the name of providing a lower cost service.

From the perspective of the average person on the street, limited advice makes a lot of sense. Most people have a fairly good idea of what they want and need – they just need help to sort through the raft of options that are really only clear to someone who works in the industry.

Ongoing versus transactional advice

As a financial planner who tends to deal with people over the longer term, it appears to me that regulators and legislators in Australia see all financial planning advice as a sale or a transaction. That is, the only point of seeing a financial planner is to take out or increase insurance, to start or change your superannuation or to account for some life change, such as marriage, a job change or a single major financial decision – like retirement or buying an investment property. These are all valid reasons to see a financial planner but over the years, most of the people that i deal with on a regular basis are simply paying to have me available – as someone who understands their long term aims, and is trying to help them navigate the range of financial decisions encountered over many years – and not just one single decision. This approach to planning does not appear to receive much airplay when legislation and policies are being put together.

Owing to this approach, it is easy to see why so many “do-it-yourself” services can look attractive when compared with a full financial planning service. It’s just a matter of divergent expectations on service provisions.

Most commentary i read about financial planning is based on the assumption that every interraction is a sale and a sale that involves investment advice. That’s simply not a true reflection of a lot of what financial planners can do. For example, a good deal of my time is spent discussing outcomes and alternatives for courses of action. They don’t even relate to investment. Some use the term “strategy” but regardless, it’s not always about the best/worst investment option.

Another common assumption is that the bulk of advice is provided for superannuation advice. In our business, we can pinpoint 22% of our business income as relating to the provision of advice on superannuation. That’s not what you’d expect when you read government or consumer advocate reports and papers.

Very little commentary sees the value in having a human being to talk to. Simply talking. Not everyone has the time, interest or ability to read up and study every aspect of their finances. Many people want to talk through the context of their financial world, and use that as a chance to gain a greater understanding. They could go to seminars or sign up for courses but most people know that this is only part of what you need when you are confronted with daily decision making on money matters. And that is where a human being that can help clarify specific point can be helpful.

Financial Planning – Most advice is actually a sale

Did you know that? Yes, my friend – there aren’t a lot of financial advisors out there who will simply charge you a fee to sit and chat about money. That’s because most advisors work for dealer groups who also sell financial products, and the advisors get to keep or lose their financial planning role depending upon the level of financial product sales they achieve. This does not mean that the advice provided is wrong or not appropriate. I know many financial planners employed by banks or major institutions that i would be happy for them to provide advice to my own family or even myself. It simply means that this is just one more area of potential bias that you need to be aware of.

Of course, there is another reason that most financial advice is a sale. It’s the fact that most Australians will turn to family, friends or associates for advice before they turn to a financial planner.

That is, most people in Australia are not used to the concept of paying money to sit and chat about their circumstances to someone who has a handle on the world of money. Some of the people that i see are quite self-directed, and so they simply pay me to let them bounce their ideas around. Not everyone is prepared to pay $330 an hour or enter into a long term fee arrangement for that privilege though. Most people want that advice for “free”, and so they will visit their local bank or see someone from their super fund in the hope of not paying that hourly rate. i’ve even had people tell me that the recommendations prepared by a financial planner from their super fund were “free”. mmmmm….. you mean that qualified financial planner works as a volunteer? As per my earlier comment, maybe they’d volunteer to work in my business for free?!

And so a great deal of advice is driven by specific objectives, such as questions on super or insurance, which ends up with most advice being in the form of the sale of a financial product.

How you pay for advice

This is the focus of the bulk of discussion on financial planning in Australia today. Everyone has an opinion. Many commentators suggest that Australians would be better off if all financial advisors charged for their services a particular way – the most commonly proposed method is via hourly rates. Another commonly proposed arrangement is the separation of advice from the selling of products. That’s a tough call though, as it would make it particularly difficult to provide cost effective advice to super fund members. It may not make sense but what it would mean is that someone working for the Industry Super Fund AustralianSuper, for example, would have to assess the full gambit of superannuation offerings before answering even the simplest of questions on their fund – and that would be a crazy outcome.

ASIC has recently enforced the long-standing rules about the use of the terms “independent” and “unbiased” in the world of money, forcing many groups to stop using the term. The reason is that any dealer group that receives any form of commission cannot call themselves independent under the terms of current legislation. For example, Wealth & Security Planners receives income in the form of ongoing commissions on most of the insurance, investment and superannuation policies that it is noted as “advisor” on. Even if the business can provide an hourly rate specifically not tied to any product sale, the business cannot use the independent terminology. And that’s a good thing, too – as there are plenty of super-keen dealer groups that like to push any legislation into grey areas. Unfortunately, the recent changes to the financial services industry brought about by the government, will be highly unlikely to reduce bias in the industry. If anything, there has been a sharp consolidation within the industry, with many dealer groups actually “white badging” financial products so that they can replace income lost through other parts of the legislation. The more things look to be in favour of the investing customer, the more i see nothing but a further entrenchment of bias.

A quick note on fees…

The articles shown at the base of this post are fairly negative on advisors but they do highlight some of the areas that can be difficult when trying to make sure you only pay for the advice you need.

A lot of commentary seems to be based on the idea that paying for advice can only be a bad thing. This seems rather strange to me – it’s like someone suggesting that Tiger Woods shouldn’t pay for a coach because he’s already one of the best in his field. Similarly, not everyone has the time or even the interest to put their abilities into coming to grips with every aspect of their financial world.

One of the facets of money that is usually absent from any such critique’s is the cost of the alternative. In other words, if a person did not seek advice, what would be the cost of solely following their own thoughts and investigations? There is no guarantee that obtaining advice will provide a better outcome, as everyone has their own level of skills, expertise, knowledge and financial literacy but it seems a rather strange perspective to suggest that not seeking financial advice or input from a professional will always provide a better outcome.

As a financial planner who often spends a good deal of time trying to navigate this option against that option, amongst a swirling mist of ever-changing variables, it seems a fairly long draw of the bow to suggest that paying for financial planning advice is always a bad thing.

One of the interesting things i have noticed about fee comparisons is that the yearly and ongoing cost of “trailing commissions” is usually explicitly calculated and highlighted, whereas the cumulative cost of hourly billing rates on transactional enquiries is barely ever given even the slightest consideration. i know this because i have tried to estimate the ongoing cost of hourly rates on a “present value” basis and compare them with ongoing trailing commissions, and the results can be very surprising. But there’s no point ruining a good story with facts now, is there?

The key with fees is to talk to your planner about your preferences – but also being open to the possibility that your planner is currently undercharging you for the services they provide. Here’s a quick example… There are sites on the web, where you can transfer the “noted advisor” status to the site’s dealer group. In return, they will rebate the commissions you are otherwise paying. That’s not always the great answer it seems (there’s a lot in this issue, so i’m trying to keep my comments brief), as the site will usually only rebate amounts over a minimum figure (such as $300 or $400 or the like), and often less than 100%. In other words, there is a cost to simply having your policy or account “on the books”, and this is often forgotten in any fee discussion.

How do i know advice is “good” advice?

Quite simply, you don’t. That’s a bit like asking a person to grade the technical proficiency of a solar panel installation. Unless you are qualified in the task, it’s a pretty tough job trying to ascertain whether what you have is exactly what you need.

However, there is the good ol’ “duck test”…

If it waddles like a duck, quacks like a duck, and flies like a duck – it’s probably a duck.

This is a big field of enquiry, with many twists and turns, so feel free to submit questions or thoughts and we’ll cover them in more detail over coming months. 

 Links to articles highlighting the potential negatives of financial planning advice.

“How to assess your financial advisor’s performance“ – a damning assessment of the investment credentials of financial advisors.

“So many hidden numbers: How advisors give their clients the vampire treatment” – after reading this, no-one would ever visit a financial advisor again.