When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.
– Thomas Sowell
As the royal commission on financial advice continues to crucify the banks and their executive teams, I’ve been watching with great interest and can’t argue with the revelations to date. Late last week I came across this article, which irritated me a little to say the least.
As grandfathered commissions are all but dead – and I would argue they should never have been grandfathered to begin with, the Hayne royal commission seems to now be moving its shiny bazooka toward ongoing fees charged by financial advisers.
The financial industry has evolved from not charging clients anything at all and being remunerated via product commissions, to percentage of assets under management (AUM), to no commissions whatsoever and simply charging their clients a flat dollar monthly/annual retainer (with some charging a combination of percentage of AUM and flat dollar).
At my firm we charge a flat dollar monthly retainer as we think it removes most if not all conflicts of interest. It means we remain outcome focused rather than product focused. It also removes the vested interest to gather as much ‘AUM as we can. We’re free to advise clients across all asset classes instead of guiding them toward assets we would otherwise control/manage (and charge a fee on).
The commission is exploring the idea of overhauling ongoing advice fees, so financial advisers, like accountants and lawyers, must provide the service before they can invoice their customers.
When NAB chief executive Andrew Thorburn tried to defend ongoing fees as a “transparent upfront fee” of $12,000 a year that is paid $1,000 monthly, Mr Hodge challenged the need for such expensive financial advice.
“How many Australians do you think really need to be paying a thousand dollars a month for financial advice?”
Here’s the transcript:
Mr Hodge, my neighbour thinks paying $13.99 per month to Netflix for unlimited streaming of movies, documentaries, and shows from all around the world is expensive and unnecessary. He also thinks paying Spotify $9.99 per month for unlimited streaming of music from all around the world is expensive and unnecessary. In fact, he even thinks paying $100 per month for a gym membership that will help him get back into shape is expensive and unnecessary. You see Mr Hodge, regardless of the cost of a service, the customer or client must see value in the service. There’s an old saying, “price is an issue in the absence of value”. This also applies to financial advice.
Charging a fee for service via a retainer promotes engagement, it encourages dialogue, and it incentivises clients to pick up the phone and ask questions without the fear of being invoiced and charged for a phone call (or meeting). It’s the basis of a true partnership.
What’s interesting to me is the number of accounting firms we speak with who are moving to the financial advisers’ fee model – a monthly retainer. The concept of charging clients after the work is done is great for one off transactions, and if that’s the business you’re in – good for you. This, however, is not the business we’re in. We’re in the business of ongoing advice, ongoing oversight, ongoing discussions, ongoing dialogue, ongoing debate. Our clients’ financial lives are not a one-off transaction Mr Hodge. Global financial markets, economics conditions, and the ever changing legal landscape are not a one-off transaction.
Mr Hodge, more Australian’s need to and should be paying $1,000 per month (if not more) to a good quality financial adviser. To help them make good decisions with their money. To help them avoid speculation and grow their wealth the slow way. To help them avoid buying and selling at the wrong time and chasing investment returns. To act as their sounding board when they are faced with options and confusion. To help guide them toward their financial goals. And to save them time, energy, and anxiety with managing their money and financial affairs.
Show me the incentive and I’ll show you the behaviour.
– Charlie Munger
Finally, some of the responsibility needs to fall on the consumer. If you are engaging a professional to help you with your financial matters, and you are paying them a fee to do so, yet you are not receiving a service, it’s up to you to call it out. Here are 16 questions you need to ask your financial adviser.
Despite all the negative press aimed at financial advisers, it’s not that hard to find a good quality, ethical adviser. Here are just a few of them:
There are many of us that pride ourselves on our ethics, transparency, drive, and our purpose. And we won’t allow uneducated and misinformed points of view dictate the great work we do for our clients.
Next time I turn on Netflix or Spotify, and I’m not receiving the service I am paying for, I will not be waiting for a royal commission on the cloud streaming industry, as a consumer I will be on the phone to find out what’s going on. You need to do this same. You deserve better.