The financial planning industry is built on shaky foundations
We have all seen the news of advisers behaving badly and the heartbreaking impacts their actions have on people’s lives.
As a result, there’s a lot of discussion on what should be done to improve the professionalism of the financial planning and wealth management industry. Solutions such as mandating higher education qualifications and a register of advisers are worthwhile. But they don’t deliver the fundamental change needed.
So what’s the fundamental problem with the industry?
It is the way the industry pays and rewards advisers.
Every financial adviser (except for those who charge a fee only service – more on that later) has a conflict of interest before they even open their doors.
It’s a result of the way they charge for advice - invariably one or more of the following:
- Commissions – although some legacy arrangements still exist, these are no longer used, except for insurance – which is a good thing
- Percentage of assets under management – this is the industry norm and you will pay up to 2% pa of the value of the assets your adviser ‘manages’ for you.
- Flat fee – a flat fee per year instead of the above. Unfortunately that flat fee will be too expensive for most Australians.
- Hourly rate changes – one-off or ongoing based on the time required.
Advisers who charge a percentage of assets as a fee will tell you they are not incentivised to sell a specific product.
That’s correct, but they are motivated to gather as much of your assets under their management in order to increase their fees. The only way they earn more is if you invest more.
This could include moving your super or diverting funds towards investments instead of paying down your home loan.
Lets put it up in lights. Much of the financial planning industry uses professional, written advice as a means to justify selling you investment products. Why? Because they get paid more, the more you invest!
While there are good advisers out there who do genuinely want to help you reach your goals, unfortunately there are many advisers who are influenced by other factors. As a result, your interests are not placed first.
The only way to obtain truly independent financial advice is to use an adviser who charges a flat fee or hourly rate for their services and works for an independent advisory firm.
While the link between financial advice and product sales or recommendations remains, you cannot be sure you are receiving truly independent advice.
So the big change the industry needs is to untie the financial rewards of advisers from where we invest our money.
That way, they are not motivated to advise you to invest more than you should or in a way that would generate more fees for them. They will focus on strategies and investment solutions based on merit alone.