What you need to know about paying for financial advice
If you’re thinking about using a financial adviser, you will want to know how the process works, the costs involved and if you’re getting value for money. In Australia, financial advisers typically use one of two fee structures to charge for financial advice; Fee for Service or a Fee for Percentage of Funds Under Management (FUM). This quick guide covers what you need to know about the process and the costs involved - and highlights some important factors to consider along the way.
Working with a financial adviser
From the initial meeting through to implementing the financial plan and working with you over the long term, your chosen adviser will likely run through the following process:
1. The first meeting
You will spend the time discussing your advice needs and the planner will give you a clear picture of their services and how they can help you. The adviser should also provide you with a Financial Services Guide and Adviser Profile. This will cover fundamental details such as their licencing, services they provide and how you can pay for their services.
2. Data Collection and Strategy Development
You need to share with your adviser the information that is relevant to the advice you’re seeking to ensure they have a reasonable basis for the advice, and that it is in your best interests. Typically, the more you disclose and the broader the advice brief, the greater the likelihood the advice will cover the big picture questions you may be looking for answers on.
3. Statement of advice fee (SOA)
Next the adviser will prepare a financial plan called the Statement of Advice (SOA). This is a formal document clearly outlining the advice, strategies and any products being recommended for your financial plan. You are normally charged for the preparation of your financial plan. There are a number of ways you can pay for the financial plan including directly or from your investments.
4. Fee for implementing the advice
If you decide to accept the financial plan and proceed with the adviser’s recommendations, there is usually a fee for implementing the advice. This fee covers the administration side of things. Again, you can pay upfront or the cost can be deducted from any products or services you may choose to use.
5. On-going advice fee
Your financial plan set the initial roadmap to meeting your stated objectives, now it’s about ensuring you stay on track to meet those financial goals. As the name suggests, the on-going advice fee is an on-going agreement between the client and the adviser to ensure the set goals are regularly reviewed, tracked and if needed, new strategies are implemented to keep you on the right path. Most clients should meet with their adviser at least annually, or more often if needed, depending on the complexity of their personal circumstances. Again, fees can be paid directly, or can be deducted from any products or services you use, depending on what best suits your circumstances.
While the first meeting may be free it is common practice for advisers to charge you for steps 3 to 5. How you are changed varies significantly, with some fee structures more transparent than others. Make sure you get all costs outlined to you before you decide to proceed with a financial plan to ensure that you are not hit with any unexpected fees.
Comparing the different types of fee structures
In Australia Financial Planners typically use one of two fee structures for providing advice. Your adviser’s Financial Services Guide will provide details on which of the following structures they use;
1. Fee for Service, also known as Fee Based Advice.
2. Fee for Percentage of Funds Under Management (FUM), also known as Asset Based Fee model.
So, what exactly should you be looking for? “The key to paying for any financial advice is transparency” says Stephen Buhlman, a Certified Financial Planner at WLM Financial Services. “You should expect to pay your financial adviser just as you do your accountant or doctor, knowing that the advice you receive is objective and tailored to your needs.”
Fee for Service
Operating under a Fee for Service model means you pay an agreed rate for the financial services you receive. From the moment you formally accept the SOA you know what you are going to pay over the next twelve months. Under this structure there are no unexpected fees.
A key benefit of the Fee for Service model is you pay for advice based on the complexity of your investment needs. This is an important factor to consider and can be thought of as only paying for what you need, nothing more.
For example, if you are single, not running your own business and life is relatively simple then your fee will reflect the reduced complexity of your needs. More complicated life circumstances, businesses or investment structures mean you pay more to allow for the additional complexity. What is important to note under the Fee for Service model is you are getting value for money because your fee amount is in line with the level of service you receive.
Given one of the biggest scandals to emerge during the Hayne Royal Commission related to wealth management companies charging fees without delivering the appropriate services, it comes as no surprise financial advice customers will be demanding the high level of transparency provided by the Fee for Service Model.
Buhlman provides more detail on the benefits of the Fee For Service model “As WLM operates under its own licence with a Fee for Service model, we have no alignment to one product or investment platform. This means we are able to completely separate our advice from any product,” Buhlman explains. “And, unlike an asset based fee structure you aren’t penalised because you have more assets to invest.”
Overall, fee-based advice tends to be more transparent and aligned to the investor’s objectives. Still, there are some important factors you should consider. Fee-based advice can be perceived as more expensive than Fee for Percentage of FUM. But remember, this is often the case because Fee for Service Advice is more fully disclosed and better understood. Full disclosure of costs means that although the cost may seem larger at the outset there are no additional costs that could come as a surprise down the track.
Fee for Percentage of Funds Under Management (FUM)
The Fee for Percentage of FUM, or an asset-based fee, is charged as a percentage of your investment portfolio. This means an investor with $300,000 in investable funds pays less for advice than someone with $600,000 in investable funds.
Watch out. As you now know, just because a portfolio is larger it doesn’t mean it is more complex. In this situation if you have a large but relatively simple investment portfolio you could end up paying more than someone with a small portfolio that requires a lot more attention. Also consider what happens as your funds grow under this model. Your adviser receives more fees even though the complexity of your portfolio has not changed.
Which fee structure is best?
Whatever your reason for seeking financial advice you want to be confident your adviser is working with your best interests in mind. It is important to do your research and understand the options available.
Remember to ask questions, seek clarity and transparency, and ensure the advice is clearly aligned to your financial circumstances and goals. Buhlman explains “At WLM our Fee for Service model puts our client’s first and ensures they are paying for the services they have previously agreed to with their financial planner.”
If you would like more information, or want to speak to a financial planning professional, please contact the WLM team or download our free guide How the right financial Partner Can Increase Wealth and Success.
For more information on WLM's Financial Planning services, click here.