How do you know if the fees your financial planner charges are worth it?
More importantly, how can you tell if high fees are causing bad advice?
The recent Banking Bad episode on ABC’s Four Corners showcased ordinary Australians who trusted the CBA, only to find they had paid a fortune for bad advice.
One client got bad insurance advice that left him uninsured when diagnosed with a terminal illness. After the bank replaced a perfectly good Westpac policy with one of its own, Noel Stevens then had his claim denied due to a dispute over the information he disclosed.
Other clients received terrible advice from a planner who put them in overly aggressive investments that paid bigger commissions.
A CBA whistleblower suggested at the Senate Inquiry into ASIC that there are tens of thousands of clients affected by bad advice driven by high fees.
These clients seemed to lack any method for checking if their advice was reasonable.
While I thought the CBA got the shellacking it deserved, I’m frustrated the episode did little to help people understand the warning signs they were getting bad advice (other than perhaps the bank logo on their financial planner’s name badge).
After the Four Corners episode aired, I talked to a Sean Graham who is a prominent financial services consultant. Sean introduced me to the concept of cuo bono, which is Latin for “who benefits”. The idea is to understand the motivation for an act by identifying who benefits from the act.
The same logic can be applied to financial planning advice.
The laws require your financial planner to disclose all the benefits they may receive – and anything that may have influenced their recommendation – in their Statement of Advice (SoA).
The payments, benefits and kickbacks they will receive may indicate a strong bias towards a particular strategy or product. The SoA may even highlight where your planner’s benefits are greater than your benefits (as was clearly the case with many CBA clients).
Ask “who benefits” and review the SoA to identify if your financial planner’s recommendation puts them in a better position than you.
If your advisor recommends that you replace your existing insurance policy to save you a little money, or follow their investment advice because of their reputation, you should scrutinise their motivations by checking how much they are paid, or what other benefits they’ll get, if you do what they recommend.
In Noel Stevens’ case, there was little real gain to Mr Stevens in replacing his Westpac policy, but his CBA planner was paid over $800, the bank teller received over $400 and CBA got business away from Westpac.
Mr Stevens gained little, but put his insurance cover at risk by changing policies. A fact the CBA didn’t properly warn him about.
Last week, I had conversations with 3 people who were trying to work out how they benefit from their respective financial planners latest advice. The fact they were not sure is a warning sign to begin with.
I spoke with Don, a retired guy from Sydney, who was recommended a SMSF by his advisor. Don is having trouble working out if he should follow this advice. We talked for over an hour but in short, I asked him what he felt the benefits were, for him, in starting a SMSF.
Don didn’t know. He said he wasn’t sure and that his adviser talked about some investment efficiencies (cost savings) and not much else.
Firstly, I suggested Don check what his advisor stands to gain from the SMSF recommendation. The advice fee the advisor charged would increase from $3,000 to $6,000 p.a. The advisor’s company would also stand to gain money through the set up and management of the new SMSF.
The $3,000 advice cost increase was only just met by the investment management savings (which were questionable anyway). His planner had not done a good job of explaining exactly how Don’s retirement savings would be better off in a SMSF.
The planner talked about future benefits, but at $3,000 a year extra, why would you pay for something you’re not using immediately (and may never use)?
In short, I think there was little gain for Don. Actually, there’ll likely be a loss through additional costs to set up and manage a SMSF, not to mention time and legal responsibilities.
So, why was the SMSF recommended? Well, that extra $3,000 p.a. to the advisor is a strong motivational factor.
Rather than the SMSF, I could see an even better alternative than Don’s current fund, based on what he told me he needed.
I asked Don what reasons his advisor gave for recommending his current superannuation fund some years ago. Don said he felt the recommendation was influenced by the fact the super fund was owned by the group that authorised Don’s financial planner. This is another instance you can apply “who benefits” to check your advice.
I think you should ask “who benefits” whenever you receive any recommendation from your financial planner and their employer. I have often recommended an option for a client that pays me less, or I’ve reduced benefits I can receive, because I want to make it clear I’m acting in their interests and that there’s little doubt as to my motivations.
And if I am going to charge $3,000, you can bet I make it very clear there is greater than $3,000 benefit to my client.
When you get advice, check that you benefit more than your financial planner.
By law, your adviser needs to act in your best interests. But you should also check they are doing just that.
Contact me if you want a second opinion about advice you’ve received.