AMP’s shocker of a ‘profit’ report and its plan to cut its financial adviser numbers, ramp up robo-advice and pay planners a lot less for their businesses, has resulted in a rebellion in the ranks that could end up leading to a court battle.
The AMP story underlines a lot of what’s wrong with financial advice in this country. But it leaves out the bit where the consumer is an accessory before the fact.
As someone who started a financial advice business doing the opposite of most planners by rebating commissions and charging flat dollar fees, because I couldn’t afford to damage my trusted brand, I do understand why the industry ended up with some dodgy practices.
I don’t justify them but I do understand them.
You see, consumers don’t appreciate the value of good advice so what has to be charged just seems too high.
Let me give you some ground rules I’ve learnt about financial advice, having owned an advice business for about 15 years.
Most clients would be happy to pay for advice — say $3,000 to draw up the written plan that has to be done by law, unless someone is classed as a sophisticated investor.
Let me promise you, you don’t make much money, if any, from having to write a comprehensive statement of advice that takes so much time to do properly. From getting the ‘lead’ to a first meeting, then writing up the plan, presenting it and making any modifications, could easily be more than 15 hours work. And the more complicated the client, the greater the hours needed.
Lately I’ve gone out of my way to meet as many clients as possible, as I’m not doing TV four nights a week, so I’ve been sitting through the meetings. This has convinced me that the minimum payment for a plan should be $5,000. The knowledge, the time and the risk involved, not to mention the compliance and the business running costs.
Recently I was sitting in a meeting with a client who had $1 million to invest and wanted ongoing advice. We quoted a fee around $5,000. In addition he would need to pay $2,500 for services provided by others for accounting, 24/7 vision of the investments, etc.
I listened to his concern about the total cost.
I understood, $7,500 is a lot of money but then I thought about Australian Super, which is a good industry fund. They charge around 0.8% or $8,000 for a client with $1 million in super.
And while the fund’s performance has been good, it doesn’t meet its clients face-to-face, unless extra money is paid for advice. And it won’t ring up and tell them when it thinks a crash might be coming. If we can pick a pending crash, we’d tell our clients that they’d better go conservative with their investments.
AusSuper won’t ask clients to think about big one-off expenditures, such as weddings, overseas holidays or lending money to the kids, that need to be incorporated into the management of total funds and cash flow. It won’t get to know both partners in a relationship and be better at what might work for both clients when it comes to their individual and collective goals.
Good financial advisers, who get good returns for their clients and who do the thinking, the planning and money management that many clients don’t want to do or don’t have time to do, are worthy of decent rewards.
But a permanent problem for the industry is that clients don’t know how to value the good stuff advisers do and so the money/cost spooks them. It led to deceptive practices in the past, with ‘back door’ fees and clips of the ticket.
I recall a potential client 10 years ago, who was being charged $60,000 via fees and commissions. This guy had a number of businesses, investment properties and other exotic wealth-building assets. He was very complicated but we could do his work for $25,000. He rejected us.
When I asked him why, he said “the $60,000 I’m paying now is being taken off my super and investments and I don’t see it or feel it, but with you I would have to cut you a cheque for $25,000.” I never quite understood his logic because he wouldn’t have been paying us upfront! I guess he liked to waste his money!
Guys like this encouraged advisers to try to cover up the real cost of advice.
In a perfect world, if people could manage their money affairs, they could use an industry fund but if they have $1 million, they’d be paying $8,000 for no advice.
They could get the costs down even lower with other industry funds but performance could suffer.
The job a financial planner has to do is a really responsible one. The Royal Commission showed some advisers were exploitative and some practices were a disgrace. Monitoring has to be improved and that will be a work in progress.
Certainly they have upped the educational requirements for advisers but I’m not sure if better education means that ethical standards improve.
I recently saw that one financial planner who was hauled over the coals for very bad behaviour was given a three-year ban. Given the money he made before he was exposed, he will take a three-year holiday on the proceeds and ride again!
He and others like him should be banned for life. I believe in the value of financial advice but its reputation has to be protected by the regulator. Bad eggs have to go.
When that happens, we can work on showing clients, who can’t manage their own money, that good advice is good value for money and more Australians should pay for it.