What every investor should know about financial adviser fees

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

Gross Return

Zero Fees Fees at 1.00% Fees at 2.00% Fees at 2.55% Fees at 3.00%

6%

641,427 530,660 438,225 394,130 361,222

8%

932,191 773,937 641,427 578,045 530,660

10%

1,345,500 1,120,882 932,191 841,702 773,937

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.

What every investor should know about financial adviser fees was last modified: June 26, 2015 by Colin Williams

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7 Comments - Write a Comment

  1. The calculations in this article really do show how much we’re losing in fees. I’ve just started getting my fees back using My Commission Refunds so now I know I’m investing ALL of my super and not losing part of it to some adviser.

    Reply
  2. Financial advices take a major stand for well-going business . So for these services hiring a good company or indivisual person depends on our need and their fee is also vary on our requirement . The above calculation way is right way .

    Reply
  3. A lot of what has been said here is correct, but be warned of running your own fund. It could be seen to be a bit like working on your own car, anyone can do it but I’d prefer a professional does the job. There have been many reforms brought in to make sure financial planners act in the best interest of the client, just make sure the one you choose gives you clear understanding of what your getting yourself into and don’t be afraid to ask questions.

    Reply
  4. Good to see clear outline to the average consumer regarding how to work out the cost of advice vs the amount of money you have invested.

    I’m an Advisor that has worked in three environments;

    1. Bank planner
    2. industry Fund planner
    3. Own Company

    When it comes to Advice, you need to break down the cost of advice into three sections;

    1. How much am I paying the Adviser (to provide you with strategic advice – that is personal strategic advice – that is the advisors intellectual knowledge, you should be paying on a time basis (Fixed fee or hourly rate you know about before proceeding).
    2. How much am I paying to have my money managed, that is the cost of the investments (if you want lower cost alternatives you need to be confident your advice allows for this, index funds, wholesale funds, TD’s will bring your cost down
    3. How much will you pay to ensure ongoing profession advice on theses funds are provided? If the Adviser is only doing a little you should only pay a little.

    Similar to the Medical Industry, the Financial Planning industry has many parallels, everyone needs Medical Advice, not all can pay for it, those that can often pay too much, however when you get a Doctor who knows you and does not overcharge with excessive costs, you are likely to be highly satisfied and understand paying a small gap is reasonable.

    Be aware of sausage factory advice – where you are given almost the same advice as the last person, self service advice where you think you know better than everyone (apply this to the medical model also) and last and very important highly expensive advice where most of the cost is for managing your money rather than providing you with strategic financial planning advice.

    Make informed decisions, and if you have financial savy use it, a good adviser will not be put off if you are well informed, be cautious if an adviser is not transparent or defensive when you ask the question about cost of advice as in the article, adviser fees should be linked to time spent on your scenario not on commissions or asset based fees.

    Nice article

    Reply
  5. I don’t mind paying fees as long as I’m making a good return on the advice.
    Problem is in the current market it’s hard to make more than 3%. We pay less than 0.5% of our portfolio but the returns have been woeful over the last few years.
    Some people are making hay but you need advisers not just on tax and admin but also stock pickers. Big cap Australian companies are a dead loss.

    Reply

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