Our last post about the cost of financial advice in Australia was all about some of the inputs that go into providing advice.
We talked about how the financial planning world is structured, and how that contribute to the cost of financial advice, even when financial planning for divorce.
With this base of costs in place, it’s also worth exploring just how advisers are paid for their work.
Now, in this case, let’s assume that you’ve decided to proceed with your selected adviser and started working with them to map out your financial future.
And the question now is just how are they going to charge you. There’s a fair bit of jargon around the different payment options, and each adviser operates a little differently.
So, here’s a list of the main ways you can pay for financial advice.
1. Percentage of Assets
This is becoming less common, but breaks down to ‘our fee is x% of the assets that we assist you with’.
Is generally somewhere between 0.5% and 2% of the total amount invested.
(We don’t use this option at PlanningSolo. There are some arguments for this model, but I deeply dislike it.)
In Australia, this is only allowed on insurance policies. In this situation, your adviser will receive a percentage of the premium you pay as a commission, on any policy they help you take out or manage.
This commission – legislated at no more than 66% in the first year, and 22% in subsequent years – doesn’t add to your premium but removing it can reduce your premium by up to 30%.
3. Implementation Fees
This is the cost of implementing the recommended changes.
For instance, establishing a new super fund or investing an amount of money as recommended.
This is only payable if you engage your adviser to do this work.
We’ve used these in the past, but there are some issues with it. Critics of this option say that having somebody’s income reliant upon somebody proceeding with their advice undermines the independence of the advice itself.
4. Hourly Fees
A familiar model for most people – your adviser estimates the hours required for the work you’re looking for and will charge you an hourly rate for it.
For instance, “I estimate it will take me 20 hours to complete this work, and we charge at $220 an hour, so the fee is likely to be at least $4,400.”
(In my opinion, this is a broken model without any redeeming feature beyond simplicity of calculation.)
5. Fixed Fee
In this case, your adviser will calculate the cost of delivering the advice you both agree is required and quote you the fee for the work.
This will be quoted in fixed dollar terms – “our fee for this work is $7,700”, for instance – and most advisers will offer payment options.
(This is how the majority of our work is charged at PlanningSolo).
6. Project Fee
Increasingly common, this is a variant on the Fixed Fee option, with an overlay for the additional aspect of managing a specific project.
Useful for cases of particular complexity, and for a fixed term.
“We’ll project manage the complete restructuring of your financial affairs following your divorce over the next six months. Our project fee will be $25,000.”
This relates more to the calculation of the fee – how it’s actually paid is then worked out with your adviser directly.
7. Ongoing Fees
A big part of financial advice is the ongoing work and maintenance required to give you the greatest chances of reaching your financial goals.
These fees are charged in a similar way to the preceding options, but act as more of a retainer payment in a lot of ways.
(We don’t use ongoing fees in PlanningSolo. Instead we use rolling annual re-engagements, based on what we agree you need for the next twelve months. It’s a minor distinction, but one that we’re comfortable with.)
For Your Information
These are the main ways I’ve seen advisers offer their clients to pay for their services. I’m sure there are other methods – let me know if there are any you think worth adding to this list.
Because, as you can see, it’s kind of a confusing maze of options.
And I’ve avoided discussing some of the other overlays involved, like the advisers duty to ensure all fees and remuneration are fair, reasonable and represent good value for their clients.
I’ve also stayed away from a detailed discussion of the merits of insurance commissions (check out the links above for my thoughts on that vexed topic).
But we’re big believers in transparency here at PlanningSolo, so putting it all on the table like this makes sense to us – hopefully it helps you too!
In my experience, these discussions around fees are rarely held with our clients to this level of detail. And fair enough too – I’m not sure I’d want my doctor explaining, in detail, how she gets paid.
But I also think it’s a good idea for people seeking advice to know some of the mechanics that go into what’s an important consideration – the cost of that advice.
In my next, and final post, in this series, I’ll talk a little about what you might expect to receive for what you pay.
And also what value great financial advice can have and how it can elevate your own, personal, financial trajectory.
PS: Oh, and another thing – ASIC has a really useful rundown of more specific information on fees over on their (excellent) Moneysmart website.
I do have one criticism though – for some reason, they’ve incorporated the investment and platform costs when calculating the cost of financial advice. This is akin to quoting the cost of medication when discussing how much it costs to see a doctor. They’re very different elements of the overall equation.