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!