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7 Signs Your Financial Planner is Overcharging:
How to Read Your Fee Disclosure Statement

Photo Credit: Eric Flexyourhead via Compfight cc

Photo Credit: Eric Flexyourhead

Update (June 2016):

Over 11,000 people have read this article, after searching for information on financial advice fees. If you’re like them, and think you’re overpaying for financial advice (or about to), call me on 1300 369 045 or email contact@justinbrand.com.au – and get a second opinion. 

At some point over the next year, you may receive a Fee Disclosure Statement from your financial planner.  If you know what to look for, this statement will help you work out if your financial adviser is worth their money.

As a part of Future of Financial Advice (FOFA) reforms, all financial planners who charge an ongoing fee for their service must give their clients a Fee Disclosure Statement (let’s call it an FDS).  That’s for any advice fee your planner charges you on an ongoing basis, beyond 12 months.

This law is supposed to ensure you are told what you’ve paid for ongoing services and list what services you actually received.

But, the Fee Disclosure Statement is very basic.  You need to ask additional questions to ensure you are not wasting your hard earned money on support that doesn’t benefit you, doesn’t suit your needs or is simply overpriced.

The FDS will give you key information for the preceding 12 months:

  •    Fees you have paid for ongoing service
  •    Ongoing service you should have received
  •    Ongoing service you did receive

So lets look at each section.


How do you tell what you paid is fair?

Firstly, let’s assess what you have actually paid.

Legally, your financial planner only needs to disclose on the FDS the ongoing fee they have charged you for ongoing advice.  But, financial advisers can also receive money from ongoing commission from your insurance.

In fact, the  ongoing advice fee your planner receives may be bolstered by an ongoing trailing commission that they do not need to disclose on the FDS.

Almost all insurance pays trailing commission ranging from 10-30% of your annual premiums.  If your life insurance premiums are $5,000 p.a., your adviser is probably receiving around $500 to $1,500 commission, every year.

If you raise the issue of trailing commission paid on insurance with your adviser, they may tell you that trailing commission is to cover the costs for them to lodge or progress your insurance claim.  You may be better off agreeing to a fixed fee in the event that you need to claim, with all trailing commission refunded.

Regardless, any money that flows from your net worth into a financial planner’s business should be clearly disclosed so that you can discuss its merit and valueIf your financial planner wants an honest relationship with you, they will disclose all commission they are paid.  

Sign #1  Your Financial Planner is Overcharging:
Your Fee Disclosure Statement doesn’t include trailing commission

What do you do if your planner doesn’t disclose commission? 

Tell them you want an FDS that also includes the commission they’ve received  (copy and paste this text into an email and send it to your planner).

Then add up all the money that is being paid to your financial adviser and read the next section to work out of you are getting your money’s worth.

What’s reasonable ongoing service?

There are several ongoing services your financial planner might offer you.


Reviews: make sure your annual review is annual 

Reviews are critical to the success of your financial plan.  Once you set a financial plan in motion, that strategy must be reviewed against changes in your situation and economic, market and legislative influences.

If you’re paying $500 or more for a review, I think you should get a face-to-face meeting and a written review document.  This review document should cover your super, investment and insurance portfolio and illustrate how you are progressing towards your goals.  The effect of any changes in legislation, investment markets or the economy should be outlined.  Any changes in your situation, such as job, partners, children and expenditure should be taken into account.

If adjustments need to be made and any additional advice given, you may need to pay more than is covered by your ongoing advice fee.

If you received a review in the last 12 months, check the date of the previous review.  If there was more than 12 months between those reviews and you are paying for an annual review, you are within your rights to ask for a refund of ongoing fees for that period.

Even if you were not available for a review at the time it was due, your planner shouldn’t charge you for a service they didn’t need to provide.

If you don’t get a refund of your fees, I think you should find another planner.

And if you do get a refund, also ask why you didn’t receive your review when it was due.  A missed review could delay critical adjustments to your ongoing financial plan.  If you don’t get a good reason, get another planner.

Sign#2  Your Financial Planner is Overcharging:
You’re paying for an annual review, yet there was more than 12 months between your last review and the previous one


Ongoing Portfolio Modelling: 
don’t pay twice 

Unless you pay your adviser to actively manage your investments, and even if you do, they don’t stare at a screen agonising over every movement in your portfolio.

In many cases, they will not look at your portfolio until its time to provide you with a review.  One exception is where your adviser receives an alert from their research house or stockbroker telling them a fund or stock needs to be replaced or sold.  In those cases, they will contact all clients affected.

Financial planners should, in my opinion, monitor loan to value ratios on a gearing plan every 3 months, and more often in volatile markets.  This is important if you have borrowed money to invest.  The banks that lend you the money will usually alert your planner when you get close to a margin call.

The reality is that most portfolios don’t need to be monitored “manually” and there shouldn’t be too much ongoing maintenance for the average client.  If you only have managed funds, you already pay a management fee to your fund manager for their investment expertise.  I don’t believe financial planners should charge you much for monitoring a portfolio of managed funds.

Think about what value your planner has added between reviews and ask yourself how much this is worth.  If you haven’t had any recommendations to switch funds or make adjustments, then make sure you are not paying more than a few hundred dollars per year to have your planner maintain your portfolio.

Sign#3  Your Financial Planner is Overcharging:
You pay for ongoing portfolio monitoring for managed funds only


Regular Advice and Support: should be….regular

Many financial planners will list on their FDS’s “Ongoing access to an adviser”.

If you have an actively managed portfolio (and most financial planning clients don’t), you may have constant contact with your adviser.  This could be because you contact them concerned about some economic or market event.  Or, or they may contact you with recommendations for changes or to simply update you on what’s happening in your investment portfolio.

Most legislative changes that affect people don’t require immediate attention as planners know months or years in advance.  These issues can often wait until a review.

I’m not saying your financial planner isn’t providing you with valuable ongoing advice and support.  Just make sure that support is worth the money you pay for it.

If you are receiving ongoing debt management or budgeting support from your adviser, assess the outcomes against the cost.  How much debt have you paid off or how much money have you saved?  How much did your adviser contribute to that result?  How much did they charge you?

List all the times you have spoken with your adviser in the last 12 months and every instance they did something specifically for you (such as liaise with your accountant or provide you with information specific to your situation).  Then check what you are paying for this ongoing support and decide if you are getting value for money.

If you only get generic financial planning information and economic updates that could be relevant to anyone, then you may be paying for something you could get elsewhere, for free.

Sign#4  Your Financial Planner is Overcharging:
Your Fee Disclosure Statement lists “Access to a financial adviser” but you have had no contact with them throughout the year


Newsletters: don’t pay for 
generic content  

Newsletters that only contain generic content are old fashioned and not worth your hard earned money, especially given you can get the same information on the net for free.

Unless your adviser writes their own content and provides a unique insight that helps you make better financial decisions, then you should not be paying for a newsletter.

If your financial planner only sends out ‘canned’ content such as economic updates, generic financial product information or federal budget summaries, consider that:

  • Most fund managers and insurance companies send this information for free (in fact that’s probably where they are getting it)
  • You can get good financial information from the net yourself, for free

Sign#5  Your Financial Planner is Overcharging:
You pay for a newsletter with little or no unique content from your financial planner

Your financial planner may combine several ongoing services into one fee.  Don’t be afraid to ask for a breakdown.  And you should expect a reduction in fees if you don’t want some of the services they provide.


The ultimate way to test your financial planner is charging fairly

Ask for a Fee Disclosure Statement that covers the last 5 years (copy and paste this text into an email and send it to your planner).

Your financial planner has had a couple of years to prepare for your first Fee Disclosure Statement.  If a review is a part of your ongoing service, then you can bet you got one in the 12 months preceding your FDS, but…

Did you get your agreed service during the years prior to your first FDS?

Work out what service you have received in the last 5 years (or since you started using your financial planner), compare that to the ongoing service you should have received and make sure you have been getting what you paid for.

If you are paying say $1,000 a year for a financial review and you have only had 4 in the last 5 years, does that seem fair?

Sign#6  Your Financial Planner is Overcharging:
You weren’t receiving the agreed service during the years before your first Fee Disclosure Statement


Do all financial planners need to send an FDS?

No.

A financial planner who provides the best possible ongoing service will tailor your ongoing support each year and adjust their fees accordingly.  These planners do not need to send an FDS as they are not fixing their fees beyond 12 months.

Even if a your planner sets up an automatic ongoing advice fee, the best advisers will arrange your review months in advance and provide you with a written service agreement that lists the areas they will cover in the review. This agreement should be provided at the beginning of your relationship with that planner.

And the ongoing service agreement should mention a review of the ongoing fee each year.

When your financial planner adapts their ongoing service to your needs each year, you have an opportunity to ask questions and ensure you don’t go for years paying for something you don’t need or want.

Sign#7  Your Financial Planner is Overcharging:
You received a Fee Disclosure Statement and so are paying an automatic ongoing advice fee

One last thing to watch out for….

There is another situation where you may be paying fees and not receive an FDS. Your adviser may receive ongoing trailing commission from your insurance.  If they do not charge an ongoing fee for advice, your adviser does not need to send you an FDS.  Yet, they may receive hundreds, even thousands of dollars a year in commission.

If you have insurance, you should write to your planner and ask them to send you a statement outlining all commission they receive each year from your products and portfolio (copy and paste this text into an email and send it to your planner).

A good planner will tailor your ongoing service each year, based on what you need that year.

Think about it like this: does your accountant charge you every month, in advance, for next year’s tax return or the possibility you might call them?

The best way to ensure your adviser doesn’t receive commissions is to use an Independent Financial Adviser who, by law, has to return any trailing commission to you.

Contact me if you want a second opinion about advice you’ve received.

 

Update: I have noticed that the most client focused (and usually fee based) advisors recommend passive investment strategies, and consistently achieve a greater net return than the more active (and expensive) funds and strategies. You will not only save money using a passive approach but you will also more likely get a greater return. I wrote an article that compares the two approaches here:

Index v Active Funds – The Hidden Costs Your Financial Advisor Isn’t Telling You About

 

 

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Posted by: Justin Brand
I'm an independent financial advisor and blogger doing my best to make financial services less complex, dull and intimidating.
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