Switching from commission to fee-based advice has drawn John Miller closer to his adviser, as Mark Story discovers.
To Adelaide-based radiologist John Miller, paying trailing commissions instead of an upfront fee for advice is akin to paying for the privilege of a public hospital bed instead of having your own suite in a private hospital – for less money. He’s adamant the transition to a full fee-for-advice service three years ago caused a dramatic improvement in the relationship with his planner, Travis Hutchinson of Godfrey Pembroke Financial Consultants.
“I really feel like Travis is working for me and that I’m getting better advice, and more of it,” says Miller.
To Miller, the act of paying a fee to Hutchinson instead of the product provider paying him makes Hutchinson somehow more accountable for delivering successful outcomes.
Their paths crossed three years ago when Miller went in search of a financial planner to convert a couple of legacy super policies – taken out in 1994 – to allocated annuities.
Miller quickly became disillusioned when a large financial planning firm proposed to sock him five percent of his entire portfolio’s value in annual fees. Ironically, when Godfrey Pembroke Financial Consultants offered to charge him 0.6 percent to perform the same exercise, Miller thought he was getting off lightly.
Having assumed that commissions were the norm and that everybody paid them, Miller didn’t give the matter much thought, even though he admits to not really understanding how they worked.
“You don’t see the trailing commissions come out, so it’s not really up-front and transparent,” says Miller.
Having picked up on his dissatisfaction with a commission structure, Hutchinson agreed to replace the $6,000 Miller was paying annually in trailing commissions with a $4,400 fee paid quarterly.
Main game
Like many self-employed ‘veterans’, Miller, who’s now well into his 70s, saw property as his main retirement nest-egg. In addition to his super policies, his other main assets were two residential properties he had purchased in the 1980s: one on the Gold Coast, the other in Adelaide’s beachside suburb of Glenelg. Miller was also sitting on a substantial amount of cash that he’d parked in fixed interest since selling the medical centre he’d built and owned three years earlier.
In addition to altering the allocated annuities as required, Hutchinson was charged with gradually moving Miller’s fixed interest assets into direct equity exposure. While Miller’s investment horizons are understandably wired to capital preservation and income, he has an unusually large appetite for equities for a man approaching four score years. That’s why Hutchinson set about developing a balanced portfolio of ‘safe’, blue-chip stocks displaying strong dividend yields.
What worked?
The two residential properties Miller bought back in the 1980s have both come up trumps – which Miller attributes more to dumb luck than any special knowledge – having delivered income while appreciating in value many times over. To the extent that they offer both capital growth and the all important tax-free income, Miller says his direct equities strategy is proving equally successful.
While there aren’t too many skeletons in Miller’s investment closet he remembers getting his fingers burnt with the small parcel of shares he bought in a failed resort some years ago. Beyond that, his only other serious disappointment was with bonds (in the mid 1990s) which he claims contributed largely to a decade of under-performing annuities delivering returns of between 3.9 and 5 percent.
At Hutchinson’s instigation two older-style allocated annuities in ANZ and Macquarie were rolled over into a better performing MLC MasterKey fund. But performance aside, Miller says their ability to rebate trailing commissions in advance also meant he could move to an entirely fee-for-service structure.
Miller says having Hutchinson act as conduit during the rollover was an absolute blessing, especially when no one knew where a substantial sum had gone to for over a week. Considering the nightmares he experienced dealing with Macquarie and ANZ staff when changing policies, Miller was glad Hutchinson was there to take over.
“Not knowing the whereabouts of $200,000 was an uncomfortable feeling. I should have been able to liaise with these financial institutions myself,” Miller says.
Value for money
Given that Miller is a self-confessed novice when it comes to shares, he’s confident with Hutchinson’s recommendations. Having bought a parcel of shares between $25,000 and $50,000 on average, every week for the last three years, has resulted in a diversified portfolio of shares. But Miller says the execution of share trading could have been smoother.
“I’d typically get a note advising that Travis’s sharebroker, who happens to be in Queensland, required payment within three working days. In hindsight, I should have asked him to explain this arrangement in more detail,” says Miller.
Beyond that, Miller can’t find too much to fault with his relationship with Hutchinson. In addition to their quarterly meetings, Hutchinson is in regular phone contact. He also confirms any investment decisions that have been made and gains Miller’s sign-off before they’re acted upon.
“Compared to year’s passed when I was almost frightened to ring my adviser, I feel that Hutchinson is working directly for me,” Miller says.
“The act of paying him an up-front fee makes him more accountable to me as the client.”
The Planner
Travis Hutchinson
Godfrey Pembroke Financial Consultants
Adelaide, SA
Hutchinson holds a Diploma of Financial Planning from Deacon University and is a Certified Financial Planner (CFP). After qualifying as a financial planner in 1998, he spent a year with National Mutual before moving to Deutsche Financial Planning. Deutsche Financial Planning was subsequently merged into Godfrey Pembroke in 2001.
Advice Structure
When his former adviser retired a few years ago, Hutchinson gravitated from Miller’s secondary to primary point of contact. As part of that transition, Hutchinson moved Miller from a commission-based to a full fee-for-advice Basis.
Two of Miller’s three allocated annuities (Macquarie and ANZ) were unable to rebate the trailing commission in advance. As a result, Hutchinson decided to invoice him for the full $4,400 annual fee and rebate the trailing commission after the event. “Rolling over those legacy-style products meant we could provide the same level of asset allocation breakout without the trailing commissions,” says Hutchinson.
History
Miller’s interest in moving to a fee-for-service structure was spurred by his realisation that Godfrey Pembroke, rather than himself, was in control of commission payments so Hutchinson wanted to move Miller’s portfolio to a structure where they didn’t have to manually rebate any commissions.
Strategy
Given his age and appetite for risk, Hutchinson felt dramatic changes to Miller’s investment strategy were unnecessary. The underlying rationale, says Hutchinson, was to increase the tax efficiency of Miller’s portfolio through hybrid securities, Australian shares (with fully franked dividends), property securities and infrastructure stocks (like Babcock and Brown and Transurban) that offer high levels of tax-deferred income.
Due to Miller’s rental and fixed interest income, Hutchinson had little doubt he could significantly improve his tax profile. Given his robust investment appetite, Hutchinson started Miller on a programme of directly acquiring listed shares and hybrid securities. “My recommendation was a combination of capital growth and fully franked dividend yields of between four and five percent,” says Hutchinson.
Having already reached the desired level of equity exposure, future share buying remains very much price dependent. He’s now looking to reinvest in fixed interest on a risk-adjusted basis. “Given interest rates are likely to rise again, we may also look at hybrid listed securities with a floating coupon.”
As Miller had reached the stage where income was no longer an issue, his appetite for equities complemented a desire to buy assets that promoted cross-generational wealth. Miller’s appetite for asset acquisition gave Hutchinson the ability to deliver capital growth instead of just providing income.
Since 2006, Miller has received around 10 percent net return annually, plus good capital gains. Ideally Hutchinson would love to restructure the tax profile of Miller’s pensions and allocated annuities, but due to his age there’s no opportunity to ‘withdraw and recommence’. “We could cash-out the pension assets and buy more equities within the family trust. But given it’s in a tax-free investment structure this doesn’t stack up,” explains Hutchinson. “And because he’s over 75 he’s unable to recontribute to super beyond the nine percent mandated contributions.”
Portfolio Snapshot
John Miller
Property:
Adelaide, SA: Purchased in 1986, gained nearly 400 percent in value. Gold Coast, Qld: Purchased in 1983, up 300 percent in value.
Managed Funds
Domestic: MLC MasterKey Allocated Pension
Domestic: Macquarie Allocated Pension
Shares
Direct exposure to approximately 20 ASX-listed shares; predominately blue-chip, high yield stocks.
