No one likes discussing billing or having to pay bills, regardless of if you are paying your phone bill, car registration or your financial planner for services.
Like with many services, there are several different types of fee structures, based on which financial planners you use and what product or services you invest in.
For some people – the larger investors/clients for financial services, there also may be an incentive to invest more. With this in mind, the fee structures over $500,000 invested, for example, may attract a different fee, however, that is for another day.
Fee-only & fee-based structures are the two readily used fee structures within the Australian financial services market, but what is the best method for you? Let’s find out.
Fee-Only Financial Services
As the name suggest, fee-only financial service providers earn their fees through the money their clients pay to them. These can be billed in several ways, including a flat hourly fee for their services provided. For example, $200 per hour for 5 hours = $1000 + GST for reviewing your financial plan, setting up some new investment options you agreed on, and working with your lawyers & accountants to ensure everything is compliant.
The second is Funds Under Management (FUM) or Assets Under Management (AUM) that the financial advisor or planner is managing for you. This will be often used by Financial Advisors - more than planners – such as retail or property investment fund managers, who may for example offer you a return of 16% per annum on your invested capital, however “might pay 1% for all assets up to $2 million in AUM, 0.75% for the next $3 million and 0.65% on all assets above that amount”.[1]
A fee-only financial planner or advisor won’t receive income from any other sources, as their income is derived from the services they provide to their clients and the amount of FUM or AUM.
Fee Based Financial Advisors
Although fee-based financial advisors make money from billing their clients fees and charging a FUM or AUM fee structure, there are other means from which they derive income – which, truth be told, have come under far greater scrutiny within Australia after the Royal Commission into the sector.
These are largely derived from commissions paid by either brokerage services, through recommending of superannuation services, insurance companies and fund managers.
All of this is legal and above board, but it is important to understand if your financial planner or adviser is receiving a commission or kick-back for recommending you switch to a product or service.
Why? Because you need to ensure that you are switching due to superior performance for you as the end user, not a superior incentive scheme for an advisor.
An example of this, was a young executive that was wanting to learn more about what steps they could make on their financial future, so they sought out a meeting with a financial planner. As this was prior to the Royal Commission, the planner although qualified, was certainly not as astute as they should have been.
As such, they recommended and pushed the young client to move their superannuation to a different provider as the first order of business. However upon review of the Product Disclosure Statements (PDS) and the like for like performance over the short, medium and long term of both superannuation funds, it was clear that the current provider was performing better over all three periods, and had lower management fees.
When the client bought this up with the advisor, they had little to no answer as to why they should switch. What was clear through this example, is that the financial advisor was receiving a kick back from the super-fund provider and not working in the ‘best interests’ of the client.
It must be noted that this example is just that, and your financial planner should not only be working for you but should be working within the new guidelines on how they recommend products or services.
For this and many other reasons, it is paramount that you sit down with your planner, understand the fee structure, how if they recommended products or services are they being paid, and ensure that you compare ‘apples with apples’ when it comes to your financial matters.
[1] https://smartasset.com/financial-advisor/fee-based-vs-fee-only-financial-advisor
