With out apologising in advance and while this is controversial and will upset a number of other planners, investment managers and those who “earn” a living out of financial planning industry… I do believe a lot of people would be better off with sacking their adviser, paying for one off advice and not paying for an ongoing advice relationship rather than the one they have.
Financial Advice is very simple for a lot of people, the complexity surrounding our lives as much as we do not like to believe it…..is very similar. Most of the time our advice is and should be very simple.
A simple list of jobs to do right now or to put in order. For example this may be to setup a low cost super fund, to keep paying your debt off as fast as possible or similarly start saving more. It could be as simple to setup some insurance or put a will in place and other than that keep ticking along and paying down debt. Not rocket surgery as I like to say.
The challenge however….is the fundamental flaw in the advice system and process itself.
People seek advice generally when they are concerned about what they are or are not doing financially, frustrated with how and where their cash flow is going or their circumstances have recently changed and they feel like they need to head out to obtain financial advice. Everyday Australians book meetings with advisers for great advice but little do they know that in reality the adviser is being driven by targets, personal income needs and the obligation to sell something to make it worthwhile.
This conflict is one of the most damaging our advice industry has to deal with.
In a lot of cases the adviser is coming up with a reason to charge an advice fee and that may be placing their value on saving fees on your super fund, getting you a lower cost of insurance or charging you a silly fee for modeling when you are not at the right stage. A lot of these are transactional pieces of work that could have been solved with a one off piece of simple advice but hey the adviser wouldn’t get paid for that. Unknown to advice seekers is that the adviser has to hit targets whether personal or business, so they will come up with a way to charge you a higher upfront fee and importantly encourage an ongoing relationship with you.
An ongoing advice relationship will always be worthwhile from a great adviser …there is no doubt in that and we add tremendous value purely through having detailed problem solving conversations…. however due to the time and fees needed to be charged to have these conversation access to up to information… the fee itself is not wise financially for a lot of people due to value may be minimal for some.
From what I know of the industry in a lot of cases it is not needed and an adviser is justifying it for no real reason besides because…. they need it.
The good news I believe is that technology is disrupting this style of transactional one off advice and I truly do believe computer software will wipe out all this style of advice almost completely in the next 10 years. 10 years is a long time away – the first iPhone was released in June 2007.
Is it really that difficult to put your current details in to a form and for that to say well based on this you need to solve X,Y,Z. This is what transactional advice is. Bare in mind we are planning on humans going to space in the next few years and we can shoot missiles thousands of miles to targets.. not that I like this last piece of technology . It’s overseas already and 10 years is my conservative-self speaking.
I cannot wait for the day that technology is used for the majority of basic advice and that leaves all our work to where we add value in conversations with clients.
Moving on… Deep breaths…
Most advisers will justify their ongoing fee through their investment advice. I truly ask you to stop and question the value in this altogether. Advisers are NOT investment experts or fund managers. We have not passed highly technical “chartered financial analyst investment management exams” to be an adviser and we do not know how to predict markets, government decisions, interest rate movement (however I did get the one today.. yes I am smart) and the future… I argue no one does. In fact as a wise man once said “prediction is difficult especially about the future”.
This is ok however…. because an advisers job is not to predict markets, but unfortunately a lot of people they think can and that it is their job. What confuses this even further is that advisers pretend they can and get excited by the gravy train asset based fees provide. What makes the matter worse is that by building their business solely around investment management the clients start to believe they can…till the cards fall down however. I know from reviewing hundreds of advice businesses nationwide, that the VAST majority do not have the systems, processes, independent product analysis, time, investment team and skills to do this. It’s a fact and a lie that they say they do.
To prove my point; are their portfolios beating an index style investment fund over the last 5-10 years consistently firstly or do they have a clear philosophy around protecting you from downturns if capital protection is key? Very few do.
After this, is YOUR valuable retirement saving returns still way ahead once you remove their ongoing “asset management” fee and also allow a margin to justify the additional risk of underperformance in the first place?
From what I know about funds management, beating this index by 2-3% is highly unlikely long term unless you are making significant predictions and this is the type of return you will need to justify this fee and the risk you are taking.
I could write a list hundreds of articles to prove this point, but in reality the wash of it all is that investors and advisers themselves are their worst enemies. Humans act irrationally and our behavioral biases mean we generally make the wrong investment decisions at the wrong time. We can’t help it, it’s the problem with being part of the human herd and not only are we unknowingly driven by these behavioral biases but we also do not know that fees and our actions are the biggest cause for poor investment returns. So in summary….we dig our own and our clients grave I believe.
An adviser has a very simple role to combat this. Firstly help you to act rationally- the most difficult one, stay invested long term, keep your fees low, spread your money wide through diversification, allocate you away from wide spread valuation differences at points in market cycles (hard to know unless extreme) and most importantly protect you from making silly decisions. It’s not rocket science but it does require a detailed investment philosophy and consistent management system to monitor. All something that can be built and managed.
This is not gambling investment management and predicting the future. This is sticking to set decision trees and making slight tweaks to protect your portfolio/take advantage of huge discounts. So if we say advisers are not investment managers but more behavioral investment managers, why should you be paying for one?
The reasons are below and stem from the true value in advice… actual strategic advice.
If you are not having these type of discussions below with your adviser and many more then my argument is whether the relationship is adding ANY real value at all
- Lifestyle and Outcome Planning
- Does your adviser have clear actions set with you both short and long term and are they helping you to achieve the lifestyle you want
- Does your adviser encourage you to live your desired lifestyle, go on holiday and buy that new whatever but keep you focused and disciplined on your long term aspirations
- Does your adviser clearly know what is and is not important to your family financially and emotionally – WHY it matters to YOU
- Does your adviser meet with you at least annually to discuss these points and any challenges, choices or opportunities that lie ahead
- Detailed Strategy Advice for each year ahead
- Does your adviser recommend what to do with your left over cash flow each month
- Does your adviser explain how much you should aim to pay your debt down this year
- Do they consider whether it is wise to salary sacrifice in to superannuation and where you should be at this age
- Do they help you consider purchases or selling assets
- Are you encouraged to take less risk based on your goals and current position at times
- Are they truly helping you to understand, consider and educate you around what is likely to be your biggest assets
- WARNING: Property is a minefield both of opportunity and risks so they need to be having these discussions with you
- Large Portfolio Investment Advice
- For portfolios sub $250,000, the ability to diversify effectively and significantly across many assets classes is difficult.. Yes you can buy three simple ETFs and this works. But value is limited. Due to the benefits of taking tactical asset allocation decisions on investment portfolios that make any substantial difference to returns.
- If you have under $250,000 investible assets, you may be better off in a low cost multi asset class index style fund who will ensure you are getting a reasonable return while you grow your balance over the coming years
- If over, it starts to get interesting I believe as opportunities begin to come in play
- Estate Planning
- Has your adviser set a clear plan in place for your current and growing asset base. Is this reviewed each year to ensure it is still achieving the best-desired tax and personal outcome
- Professional Relationships
- Do they have trusted solicitors, accountants, bookkeepers, real estate agents, buyers advocates, surveyors, mortgage brokers, general insurance brokers to help you whenever you need it.
- Product Selection
- Are they free and motivated to recommend whatever is the best for you; not for them. Be very clear they are working for you and not themselves. That is what you are paying them for.
This ongoing relationship is an ongoing commitment from both an adviser and a client point of view. This ongoing relationship is needed 24/7 for more complex and higher net worth clients. However for the vast majority, this type of relationship is not affordable for all people. For an adviser to run a profitable business, this relationship will likely cost at least $3-10,000+/year to cover all the costs of the business while also having the resources, education/training and time required to maintain strong relationships with many clients… Also for them to make a living themselves…. This style of relationship may only be possible with 100-200 clients depending on business efficiencies.
So my question is this – If you are NOT sitting down with an adviser and doing all I have discussed, look to get some one off advice from an independent financial planner and save yourself the time and money. This money will mean one day, as your complexity increases you will be in a position to not only afford but actually need advice.
It has been proven that great advisers make unbelievable differences over the longer term but a lot of the time advice is clouded in a way that does more harm than good I believe.
Where do you go? Shhhh… There’s nowhere, well there’s a few places I would recommend but I still have my toes left!!
One off advice is not profitable for advice businesses and would be considered more of a time loss than anything else. Very few advisers want to give advice that says “do x,y and z then come back to me a few years and we will see what has changed”. They really only want ongoing relationships; you paying them a fee means their business is worth more and they make more money.
A good adviser will be able to clearly demonstrate whether you will benefit from a formal ongoing relationship or not. They will not suggest an ongoing package unless it is wise for you and will give you a clear list of what you need to be doing in the mean time.