Financial Adviser Fees – The Cold Hard Facts

By on November 27, 2011 in humble savers commentry, Questions for humble savers

Finances can be painful with high fees - humble savers

IMPORTANT - Since Posting this in 2011, we have seen many advisers and product manufactures move to be more transparent with their fees and in many cases, the fees have reduced. This article will be re-written. In the interim, please read the article in the context of what fees to review when seeking advice.

If you have an investment portfolio of $200,000 and it earned a gross return of 8% (before fees) for the next 20 years, the combined financial adviser (financial planner) and product fees could easily amount to over  $350,000!

Why are financial adviser fees so expensive?

The majority of Australian financial advisers are tied to a major financial institution. These institutions manufacture products like managed funds (unit trusts),Wrap accounts (often called an All In One Account). The financial adviser typically includes these products in his/her recommendations as shown in the table below.

Fees related to a typical $200,000 Investment Portfolio

Service/Product Fees  Up Front

Fees  On-Going

Adviser fees (his/her work) $3,000.00 (Plan Fee) $2,000 = 1% of Portfolio
Investment (Managed) Funds $1,500 (buy sell spread)^ $1,500 = 0.75% of Portfolio ICR^^
Wrap Account Usually Zero $1,600 = 0.8%  of Portfolio
Total Year 1 estimate $4,500 $5,100 = 2.55% of Portfolio
All fees are approximate. ^Cost to purchase the funds. ^^ICR Indicative Cost Ratio, estimate of the on-going fees to manage the funds.

The main purpose of this article is not to precisely question each fee, but rather to demonstrate how the combined fees will affect your investment portfolio.

The up-front fees - You are affectively down $4,500 (over 2%) before you make any investment earnings. These fees often look expensive and are usually the focus of the client. However, it is the regular on-going fees that really hurt.

Total on-going fees into perspective - Assuming your portfolio had a gross investment return of say 8%, the net return (after fees of 2.55%)  is 5.45%. Or to put it another way, more than 30% of your investment return is being eaten away in fees! The table below provides further examples.

Investment Portfolio of $200,000 with a 20 year term – Balance after fees

Gross Return

 Zero Fees 1.00% Fee 2.00% Fee 2.55% Fee 3.00% Fee

6%

 641,427 530,660 438,225 394,130 361,222

8%

 932,191 773,937 641,427 578,045 530,660

10%

 1,345,500 1,120,882 932,191 841,702 773,937

Referring to the table, a Gross Return of 8%, with Zero Fees, the balance after 20 years would be $932,191. With fees at  2.55%, your $200,000 has only grown to $578,045. Total fees charged = $354,146  ($932,191 – $578,045 = $354,146).

Can you reduce your fees?

  • Challenge your financial adviser on each and every fee linked to your portfolio
  • Is your adviser prepared to work for a lower fee? Will they work for a flat fee? A fee per consultation?
  • Do you need a Wrap account? Is there a cheaper administration system? Can your accountant do it cheaper?
  • Shop around your portfolio. See three new advisers. Use the web to do your research. The Financial Planning Association provides a service that will help you find a local adviser.
  • Your own research should include friends and colleagues. Often friends have gone through a similar experience and may well be in a good position to help you with finding alternatives.
  • Can you do it all yourself? There has been a massive take up in Self Managed Superannuation Funds (SMSF), also known as Do It Yourself Superannuation. Effectively, investors are doing it themselves to have greater control and reduce the overall costs.

If you only reduce the fees from 2.55% to 2%, without affecting the gross returns, you can earn an extra $63,382 over the 20 years assuming an 8% gross return.

As we often say here at humble savers, “Forewarned is forearmed”. There’s a real battle out there for your hard earned cash and you should do all that you can to build and protect your financial future.

Important – This is a summary of an article written by Colin Williams for mozo.com.au – What every investor should know about financial adviser fees

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  • Paul Hodson

    I am a Financial Adviser and I found the article both interesting and useful and lacking at the same time. I believe that wrap accounts and mastertrusts are a commodity and the cheaper you can administer an investment portfolio the better. There are some important consierations thoug, especially when it comes to super funds, e.g. how are franking credits distributed to members and whether or not members receive a tax deduction for their expenses such as insurance.

    When it comes to investment managers fees, you will typically pay more for managers who adopt an ‘active’ investment approach and less for ‘index’ managers. Which will provide the best outcome? The jury is out on this one.

    As for Adviser’s fees, historically an Adviser would get up to 8% upfront for ‘selling’ an investment plan and a small ongoing trail commission. These days, we charge a plan fee (for preparing considered written advice) and an implementation fee (for ensuring that the portfolio is invested promptly and accurately. Finally we offer an ongoing service, for which we charge a fee. Some advisers charge a flat fee, some charge an hourly rate (usually both are subject to a minimum annual retainer) and some charge an asset based fee. The actual fee will depend on many factors, but as with all things in life, most advisers in my experience will negotiate. The test of any adviser (or any professional generally) is whether they add value above the fees that they charge. Value is in the eye of the beholder and might include coaching, mentoring, counselling and other intangible concepts.

    If you would like to contact me to discuss further, you can reach me via http://www.financialadviceperth.com.au. Thanks Paul Hodson.

    • Colin Williams

      Thanks Paul for your comment. As you highlight in your response, a financial adviser can offer alternate products and fee/service levels. We encourage the clients of financial advisers to discuss what options are available to suit their own portfolio. As we now know, a small reduction in fees can make a big difference to the final investment total.

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  • Mike

    I’m a Kiwi and maybe don’t quite get this cost structure, but to me, it looks like that, of the 3 fees calculated, two are a double-up: this exemplar has $200K invested – the adviser up-front & on-going fees are clear, but surely this $200K was invested into either Managed Funds OR a Wrap Account, OR a combination of the two. 

    Either way, the On-going Fee for each option has been calculated as the stated percentage of $200K – which implies a combined investment of $400K (in which case the adviser fees are very cheap), bringing the total costs to the 2.55% when I would have expected it to be either 1.75%, or 1.80% or somewhere between if the fund is split between MF & WA. What am I missing?Fees related to a typical $200,000 Investment PortfolioService/ProductFees  Up FrontFees  On-GoingAdviser fees (his/her work)$3,000.00 (Plan Fee)$2,000 = 1% of PortfolioInvestment (Managed) Funds$1,500 (buy sell spread)^$1,500 = 0.75% of Portfolio ICR^^Wrap AccountUsually Zero$1,600 = 0.8%  of PortfolioTotal Year 1 estimate$4,500$5,100 = 2.55% of PortfolioAll fees are approximate. ^Cost to purchase the funds. ^^ICR Indicative Cost Ratio, estimate of the on-going fees to manage the funds.

    • http://www.humblesavers.com/ Colin Williams

      Thanks Mike. The on-going fees relate to three sets of management/admin fees that very often apply. These fees are The 1% fee applied by the adviser, The 0.75% fee applied by the fund manager, The 0.85% fee applied by the wrap account (often described as an admin fee).

      In Australia, the three fees are very common. Some advisers often use wrap accounts or retail funds whereby the investment management fee and the wrap account fee are shown as one fee.

      You imply that these fees would be around 1.75 to 1.8% (as opposed to 2.55%)I would state, that most wrap accounts have since reduced their fees and this article can be revisited. In addition, many advisers use Index funds which have lower fees and this to will have a marked difference in the fees.However, many clients will have their funds in such arrangements.
      Cheers

  • SMSFCoach

    Don’t forget the ongoing fees may be tax deductible either to you or your SuperFund. With any investment, insurance or fees, it is important to look at the after tax results especially when looking at which structure to use. Always be aware of the exit costs including CGT when entering an investment.

  • http://www.humblesavers.com/ Colin Williams

    Thanks Liam
    This articles stirred up a few issues when it was first posted (I had a few phone calls!). Since then I think the fees have reduced and with new legislation being introduced (FoFA) everything will be more transparent. You are right to raise the need to consider tax. This will be an article that will be re-written during 2013

     

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