Dec 19, 2018
Welcome to Finance and Fury, the Say What Wednesday Episode,
where every we answer questions from you guys!
This week’s question comes from Nelson,
“Hi mate, Love the podcast. Admittedly don't agree with some of
your more conservative political opinions but that aside I think
the financial education you are providing to many people including
myself is amazing. I have a question for Say What
Wednesdays, something probably quite close to your heart.
Can you please elaborate on the role of a financial
advisor/planner. What do they do? Do you have to pay them up front?
And, as a 24-year-old would it be suitable to go see a financial
planner from the beginning of my journey or are they more targeted
towards older people?”
Awesome questions! And thanks also for sticking with the podcast
even though we may have different political points of view.
It’s really nice to see, because there seems to be a lot of
people bail on others, just because there’s one thing they don’t
agree with.
For anyone else – if there’s anything you disagree with please
let me know! I really like to hear other points of view as I might
be missing something or haven’t thought about, so any feedback
would be greatly appreciated.
To the Questions: The term Financial Adviser/Planner can be
fairly broad which is why there is a bit of confusion about our
roles. Each firm does have different methods of providing advice,
and different ways of charging fees which further complicates
things.
The Focus of Advice; What Advisers Should Do
Advisers SHOULD focus on helping individuals achieve their
individual financial goals
- How well this is done does vary - giving the industry a pretty
well-deserved bad reputation.
- Reports of ‘self-interested’ advisers. This might be
inappropriate advice for customer given just so the adviser can
benefit.
- The main focus should always be on how to achieve each client’s
objectives
- The advice provided to younger individuals should focus on
setting up some foundations for building wealth over time, and
achieving lifestyle goals such as buying a house.
- For someone who is 60 and looking to retire, the advice should
be around strategies for funding income passively after they finish
work.
- Cookie cutter advice for everyone, regardless of their
situation, has landed some advisers in trouble with ASIC as the
advice is not always the most appropriate for the individual’s
situation.
The Process
The process and the type of advice varies between advisers
- Advisers’ process can vary but it generally involves at least 2
meetings, where one is a “Fact find” meeting, and the second is a
presentation and explanation of the financial plan (called a
“Statement of Advice”).
- My initial process involves meeting with clients (either in
person or online) to complete a fact find, where we work out what
people want to achieve financially (short and long term), looking
at what they have to work with now, and then ways of achieving
this.
- Research and prepare strategies that will help to achieve these
goals. These strategies are discussed with the client in a second
meeting.
- The advice is then finalised and presented again with the
chosen strategy in a third meeting.
- Advice is then implemented and reviewed regularly – I prefer to
think of it as an ongoing relationship
- This is why it is important to get along with and trust the
person, which is a difficult initial step to take.
Costs
In most cases, initial consultations are at no cost.
- Advisers will either charge a fixed dollar amount or a
percentage of the funds invested / under management.
- Upfront initial advice costs, and then ongoing annual costs
(“Upfront” and “Ongoing” Fees)
- Percentages – these advisers don’t normally want to see
younger/low balance individuals
- It isn’t very profitable when there is a low or no balance to
charge a percent against.
- This is how all of the industry used to charge, up until the
past decade - plus product providers used to pay percentage
commissions on the balance of funds invested to the adviser (up
until 2014).
- This is also where the reputation came from that advisers only
want to see older clients, as older clients tend to have the
largest balance out of the demographics to target.
- Savvy tip: If an adviser is charging a percentage of funds
invested as their upfront fee, invest a lower amount upfront and
then contribute funds later - $1m to $50k, at 3% ($33k to
$1,650)
- Flat Fees – Typically charge based on the level of services
provided
- Strategy, product, meetings – this all depends on the specific
firm as to what is charged
- Percentages are slowly dying off
- Fee Disclosure Statements (FDS) and Opt in regulations
- This is what sparked a lot of the Royal Commissions – Advice
business provide letter with $ and clients have to opt in every 2
years
- People were getting a letter in the mail showing they had paid
a few hundred (or thousands!) to someone you don’t know was
charging you.
When to see an Adviser
- In my opinion, it is always better to start thinking about
setting your finances up sooner, rather than later.
- At 24, you have around 36 years to work towards your retirement
(assuming you want to work till 60).
- Knowing what you need and what you are on track to achieve is
the first step, as it gives a long time to close any gaps. The
longer the time, the easier it will be to achieve.
- Example: $80,000 of passive income needed = $1.6m invested
earning 5% (assuming no tax, just for simplicity)
- 36 years’ time = $194,602 (future value) needed = $3.9m
invested
- Projections
- Perhaps you see you’re on track to get to $2.5m by 60: you’d
prefer to know now, so you can start to invest the $545 p.m. now to
begin closing the gap of $1.4m
- Opposed to being 55 years old with $2m and needing to invest
$18,600 p.m. to close the gap in 5 years
- 7 times longer requires 5 times less in contributions due to
growth
Is advice for you? – Knowing what you are trying to achieve is
better
- Depends on how committed you are
- Depends on how time poor you are – Some people love to DIY
which is great, but sometimes life takes over
Thanks again for the questions!