Guest blog by Colin Williams
We recently launched a new investment section on Mozo and our money forum, Mozo answers has been abuzz with questions from the Mozo community about investment products and fees. We are thrilled to have guest blogger, Colin Williams on the Mozo Blog to spread his knowledge about financial adviser fees. Colin is the founder of humble savers and has over 25 years experience in the financial planning industry.
Financial Adviser Fees – What you need to know
Trying to decipher the fees charged by a financial adviser can be one of the most difficult tasks that you’ll ever undertake. Many investors simply give up trying to understand the all of the fees and choose a financial adviser based upon their personality (the one everyone likes!). This can be a big mistake.
Why understanding financial adviser fees is so important
If you have an investment portfolio of $200,000 and it earned a gross 8% (before fees) for the next 20 years, the combined financial adviser and product fees could eat away about 30% of your return.In total around $350,000 can be paid in fees!
Financial adviser fee structures
The vast majority of financial advisers in Australia are tied, in one form or another, to a major financial institution. These institutions have a similar approach to financial planning and as a result, clients will often have a standard portfolio and fee structure as shown below:
- A portfolio consisting of a number of managed funds (unit trusts)
- These managed funds will be held in an administration system, better known as a Wrap account or an All in One account
- An adviser fee for developing the Statement of Advice (Plan fee)
- An on-going adviser service fee, usually linked to the Wrap account.
Now, let’s take a closer look at all the fees related to a typical $200,000 investment portfolio. All fees are approximate.
|Service/Product||Fees Up Front||Fees On-going|
|Adviser fees (his/her work)||$3,000.00 (Plan Fee)||$2,000 = 1% of Portfolio|
|Investment (Managed) Funds||$1,500 (buy sell spread)^||$1,500 = 0.75% of Portfolio (ICR)^^|
|Wrap Account||Usually Zero||$1,600 = 0.8% of Portfolio|
|Total Year 1 estimate||$4,500||$5,100 = 2.55% of Portfolio|
^Cost to purchase the funds. ^^ICR Indicative Cost Ratio, estimate of the on-going fees to manage the funds
The fees will vary from one financial adviser and one institution to another. The main purpose of this article is not to precisely question each fee, but rather to demonstrate how the combined fees will affect your investment portfolio.
The up-front fees. You are affectively down $4,500 (over 2%) before you make any investment earnings. These fees often look very high and in some cases they are. However, these up-front fees are not normally the major concern.
The big issue is the on-going fees. While an adviser fee of 1% does not sound so high on its own,when combined with the products, the total on-going fees can easily be around 2.55% of the investment portfolio.
Let’s put the total on-going fees into perspective
If your portfolio had a gross investment return of say 8%, the net return after the fees, in our example is 5.45%. Or to put it another way, more than 30% of your investment return is being eaten away in fees! This situation takes on a greater importance, as when your investment grows, so do the fees. This is highlighted in the table below.
Investment Portfolio of $200,000 with a 20 year term – Balance after fees
|Zero Fees||Fees at 1.00%||Fees at 2.00%||Fees at 2.55%||Fees at 3.00%|
As you can see, if your investments earned a Gross Return of 8%, with no fees attached, the balance would be $932,191. With fees charged at 2.55%, your $200,000 has only grown to $578,045. The fees charged over this period will have been $354,146. ($932,191 – $578,045 = $354,146). Ouch I hear you say!
Can you reduce your fees without jeopardising your financial position?
There are alternatives, such as:
- Challenge your financial adviser on each and every fee linked to your portfolio. Ask for investment alternatives to be considered that could cheaper. For example, index funds and/or Exchange Traded Funds, better known as ETFs.
- Is your adviser prepared to work for a lower fee? Will they work for a flat fee? A fee per consultation?
- Do you need a Wrap account? Is there a cheaper administration system? Can your accountant do it cheaper?
- Shop around your portfolio. See three new advisers. Use the web to do your research. The Financial Planning Association provides a service that will help you find a local adviser.
- Your own research should include friends and colleagues. Often friends have gone through a similar experience and may well be in a good position to help you with finding alternatives.
- Can you do it all yourself? There has been a massive take up in Self Managed Superannuation Funds, (also known as Do It Yourself Superannuation), whereby more and more people are taking on the responsibility for managing their own financial future.
As we often say here at humble savers, “Forewarned is forearmed”. There’s a real battle out there for your hard earned cash and you should do all that you can to build and protect your financial future.