Financial Planning Realities

This note is a broad look at financial planning fees and costs in Australia. It is necessary to put this all into the “public domain” as there seems to be a massive disconnect between what that financial planning industry/community IS versus what it is perceived/stated to be by various players. This leads to a horrible misunderstanding of just what is on offer, and more importantly, stops many people (who would benefit from using planners) from using planners.

It’s not all about financial planning “bias”

I’ve talked a lot about bias in previous posts. Although bias is a big part of the wall-of-worry about dealing with financial advisers, it’s not really the most important in either a practical or an academic sense. If it were then the millions of very informed, very wealthy people currently dealing with the “private adviser” section of the major banks, brokers and institutions would all stop their dealings immediately. The fact is that many people are quite happy to deal with an adviser who offers a more limited range of products or services. Everyone will have their own preference in this regard, so i’m not going to say that one is any better than another.

By definition, salaried advisers are going to be biased. i understand that this does not make sense, as the standard thinking would be that if a person is salaried then surely they don’t care about what products you buy? However, the reality of the financial planning market is that salaried financial advisers are likely to be employed by a business that predominantly offers its own products (such as a big bank or an industry fund), and that many of those salaried officers/advisers will have sales targets to reach to keep their jobs or to achieve bonuses.

The key point being that financial planning should not be seen as something you measure purely in terms of costs – it should be measured in terms of obtaining the style and level of advice that is suited to solving the financial planning issues you face. If you aren’t likely to read this post to the end then i’d suggest quickly scolling down to look at the table i’ve included comparing 15 financial planning companies…

Financial Planning costs

Enough talk about my old hobby-horse of bias. Let’s move on to costs, as there is a total mismatch between the expectations of what it should cost to deal with a planner and the actual cost to a planner of providing services, and i think that this is stopping many people from seeking financial advice. Some research surveys suggest the ‘average’ price people would expect to pay for a basic financial plan is around $750 – yet the ‘average’ cost to prepare that plan for a financial planning firm is around $1,200. Clearly, there is a disconnect here.

There are many reasons for this but the most important to this post is the fact that there is no such thing as a “standard financial planning service”. There simply isn’t – it doesn’t exist. There are planners who specialise in insurance, there are planners who specialise in superannuation, there’s a zillion planners specialising in the arcane world of Centrelink entitlements. There are planners who see themselves as investment advisers, and planners who see themselves as providers of “holistic advice”.

Picture in your mind a financial planning service that you would be interested in (go on… if you aren’t interested then make one up) and now close your eyes and try to work out how you will determine your pathway to obtaining advice on that issue. Where will you start? Who will you talk to?

Financial Planning Services

You may wonder why i would start on costs and then move on to services? It’s because i believe that this is the way that many people will view the process.

Think about superannuation. Millions of dollars of cash and thousands of hours of marketing have conditioned us to think of superannuation as being something based on cost. Therefore, we’re going to try to bring down costs at every step of the way. No problem. i can pretty much guarantee you that the lowest cost methodology of providing superannuation is for the government to run a nation-wide fund. Libertarians and Ludwig Von Mises followers everywhere will be throwing up their hands in disgust at this statement, yet ASIC figures show that the lowest cost funds are inevitably Government run funds. Terrifying thought, isn’t it? Lower even than “industry super” funds, who have spent millions convincing everyone that they are the best on offer. Mind you, it does get a bit messy, when some government funds call themselves “industry funds” and all the other marketing palava that goes on in the world of superannuation. The point of this incredibly long-winded paragraph is to suggest that most people would not consider going to a financial planner to start to look at superannuation. They will think of friends, acquaintances, their existing super fund, their Accountant or Billy-Bob… the guy down the road who’s done so very well for himself – he’s gotta be an expert on super.

Why don’t people start with financial planners? i think it is because perceptions about financial planning fees and costs, and the mismatch between whatever was in your mind when you thought of seeking advice, and the best processes to use to find an answer to whatever that issue was. Another reason may be the time distance between incurring the cost (now) and the eventual payoff (10 or 15 years or a retirement 30 years away). It’s one thing to pay money to help you achieve a goal that is likely to bring you happiness in a year or two versus parting with hard-earned cash now for the possibility of a better income two decades from now!

Examples of financial planning services and costs

Here is a bit of current, thoroughly researched data that i’m hoping you will find as interesting as i did. It pretty much prompted this post, as it finally provided me with an arm’s-length, independent source of hard facts.

Listed below is a scenario in which a couple are seeking financial advice. Also listed are the stated approaches that 15 financial planning firms would take in dealing with a client scenario such as this. If you are not surprised by the results then i certainly am, as it is my observation that most people in Australia today would NOT be aware of this as a possible outcome. In my subjective opinion, most people would see this couple as great “fodder” for financial planners, and someone to be pandered to in a search for new business and customers… and yet some firms would not even deal with these clients but would refer them on to others.

This shows the diversity of services on offer, and the huge range of costings that go along with those service offerings.

Many thanks to Sue Viskovic, Managing Director for Elixir Consulting, who has generously allowed me to share the research results with you.

You can see just how pointless it would be to make a comparison of these different companies based solely on the fees that they charge. It is clear that most of these companies offer quite different options and services and levels of advice.

The lesson to learn? That it is worthwhile to start by seeking financial planners that specialise in the type of advice you are looking for, and only then to make comparisons on financial planning fees and costs and charges. It’s a bit like the hairdresser whose window sign reads “We fix $10 haircuts”. Far better to get what you want in terms of the advice you need than to save on dollars that end up being wasted anyway.

How do financial planners charge?

Many financial planners are moving to an hourly rate of charge for providing advice. From my own research, i’d suggest that the rate for an experienced financial planner is running somewhere between $200 per hour and $550 per hour. For $200 an hour you would expect to be dealing with a planner from a bank or an industry fund or one with a more limited scope of engagement.

However, the hourly rate is really only dealing with the cost of advice. It may not cover the ongoing administration of your file or the operation of your accounts. It all depends on the financial planning firm and how it charges for what it does. Some firms will have a fixed cost per account or per client, while others may wrap up all of their costs into an hourly rate. This is something that you will need to check and work through. You may even have  a preference for one style of billing over another.

Recent legislative changes will require financial planning firms to be even more direct on their fees and what you are charged for various accounts or advice. Where once this detail was wrapped up in a commission or brokerage, it is now being set out in a statement each year.

Some clients will find this a great step, while others will not like it at all – i’ve had quite a few people tell me over the years that they’d rather pay a commission that “they don’t have to look at” or write a cheque out for than to ge an up-front bill. Everyone will have their preferences but more disclosure is likely to be a good thing.

Financial planning fees and costs in detail

If you are not really interested in the background on costs within a financial planning business then there’s no need to finish the rest of this post.

Financial Planning business Costs

Here’s a bit of insight into the world of financial planning. i’m really just sharing a bit of uni Business Management 101 and filling in some of the details as they refer to running a financial planning business.

It costs a lot to provide financial planning advice of any kind. There are a myriad of reasons for this but they can be summarised as being :

• Legislative costs (getting the authority to operate as a financial planner)
• Insurance costs – mainly Professional Indemnity insurance
• Operating costs (rent, staff, computers, software, insurance, telephone, internet etc, etc, etc)
• Profit – the need to make more than you spend…

The lowest cost providers of advice are going to be the local advisers, who operate with extremely low overheads – often as sole operators. These financial advisors may be able to bring the cost of providing their services down to as little as a few hundred dollars a year.

The first cost – obtaining the legislative environment to allow you to operate as a financial advisor – is usually dealt with by being licenced under one of the larger financial planning “Dealer Groups” (the industry jargon for the licence holder who then appoints people as being authorised to provide advice). It costs a lot of money to get and keep your own dealer licence, so the vast bulk of planners operate through one of the big planner groups (as per my earlier posts on the topic).

As soon as you open an office, you have much higher fixed costs – especially rent and salaries. This means that you need a certain level of scale in your operations in order to make a profit, and ensure that you will still be around to fulfill the promises you make to clients over the longer term.

Making a profit, and being around for the long term may be obvious but it is of far more practical importance than most people realise, as one of the most common complaints that i hear from people who deal with institutional/banking upper-level “Private Client” services, is about the turnover of staff. How the person you deal with is “reassigned” or promoted, just when you were beginning to get used to dealing with them, and felt they had a handle on your overall situation. So pricing of services is incredibly important to smaller financial planning groups, as they do not have as much leeway as the big institutions – who can casually write off a hundred million or so to “transition costs” or the like.

Financial planning salaries are what i would call “middle level”. A senior financial planner would be looking at a salary of anything from $80,000 to $180,000 a year depending on experience, qualifications and the clientele they either provide to a business or can help service within a business. If it is not all salary then there will usually be some form of incentive or bonus or commission (call it what you will… it’s exactly the same thing) but in the end, the costs are going to be in the range i’ve shown. This means that employing a financial planner is an expensive business, and why the provision of personal advice is going to be expensive.

That’s about the same level as middle management in a large firm.

How do you reduce costs?

The simplest way of reducing costs is to reduce options. Less options equals less research, duplication, manual intervention and the ability to use less skilled staff. It’s a fairly basic rule and is used by a lot of management consultants to increase profits in businesses everywhere. Please remember this any time you think about financial planning fees and charges.

If you are worried about seeing a financial adviser because of the fees and charges then why not have a chat to potential advisers about ways in which their costs could be reduced? For many, there won’t really be much room to move, as they would have already set their costs at the lowest level that still remains profitable, to try to be as competitive as possible. However, there may be ways of packaging information or steps you could take that reduce some of the work that the planner has to do, and this might help reduce your costs.

In the end, it’s all about communication. Try not to buy something just because of the cost, as you may not get what you really wanted. Be open and honest about what you are trying to achieve, and if you don’t like the first discussion or its direction – say so, and you may find that you end up with a better relationship and understanding about your financial planning requirements.

As usual, comments, criticisms and corrections cheerfully accepted – even if sometimes ignored.