A new study has found consumers are better off with opt in arrangements in place, as paying for financial advice upfront made the cost “between two and 17 times cheaper”.
The research titled The Value of IFFP Advice, conducted by Rice Warner Actuaries and commissioned by Industry Super Network (ISN), compared charging structures between commission remunerated advice against hourly rate fee for service advice.
While Industry Fund Financial Planning (IFFP) advisers hold a strict “fee for service, no commissions” philosophy, retail advisers using the ongoing asset based fee arrangement with their clients have been in the firing line.
Jonathan Ng, actuary at Rice Warner, says that one of most significant findings of the study was that “having upfront fees is a cheaper way to access advice”.
The study found that in every instance, the “actual cost of financial advice was greater where the client paid an ongoing fee”.
Ng says opt in would therefore support the crucial need for cheaper financial advice so that more Australians will be able to afford it.
The report notes: “Paying for advice upfront is consistent with the Government’s proposal to require clients to annual ‘opt-in’ to their advice agreements. The ‘opt in’ rule ensures that adviser remuneration is aligned with personal exertion and brings the service into line with other professionals…[and] avoids fees creeping up in line with market performance”.
Ng says: “With the opt in with retail planners, a lot of them seem to be remunerated through an ongoing asset-based fee whereas the IFFP planners are remunerated upfront.
“Being remunerated upfront and a client opting in every time they take [annual] advice, they’re aware of the fees upfront that they’re going to incur and the fees incurred at the time of advice.
“Whereas retail planners with the ongoing fee, at the moment, each year they don’t necessarily opt in and know [what they’re paying],” he says.
“When opt in comes in, retail planners will have to approach their clients each year to get them to agree to the fees they’re going to charge.”
David Whiteley, chief executive of ISN, says that financial planners attempting to block opt in as part of the Future of Financial Advice (FoFA) reforms could therefore lead to Australians paying up to “17 times more” for advice.
“The report demonstrates ongoing fees are typically the most expensive way to pay for financial advice,” he said in a statement.
“The report shows that, as proposed in the Government’s Future of Financial Advice reforms, one off and transparent charging for financial advice will reduce costs to consumers. This will consequently increase the capacity for ordinary Australians to access financial advice, whether from financial planners, accountants or super funds.
The Rice Warner study focused on the different advice models that Australians approached their planners with: insurance, co-contributions, salary sacrifice, transition to retirement planning and retirement planning.
“We then compared three sorts of scenarios,” Ng says.
“One, if the client did nothing, what would their retirement balance look like?
“The second was if they got the advice of an IFFP planner and see what the additional value the planner would bring to their account and obviously, deduct off the upfront costs associated with the IFFP planner.
“And the final one was if they went to a retail planner and once again, compared the value of advice and cost of advice.
“Basically, by comparing those three scenarios we were able to look at the relevant value between each,” Ng says.
I don’t understand how this article was published on a site called Professional Panner Online. Surely the two are mutually exclusive.
Convenient motherhood statements that add no substence to the debate and hide the true worth of financial advice. When the profession stops kicking itself and starts working together for the good of clients then we can all demonstrate our particular worth. Industry funds and retail all have their place and purpose. Using legislative uncertainty as a marketing and media stunt is costing the profession credibility and ultimately hurting Australians who need advice.
The report is a waste of time.
In the 1980’s it was the consumer groups who pushed for changes to the up-front commissions generated by insurance and superannuation accounts. Up front and exit penalties were reduced to make the policies more transportable, and to reduce the potential for rorting by salespeople.
So advisers who were in it for the long term agreed to take a massive cut to their up-front income, in return for providing a long term service of sufficient value that clients would remain with them.
MLC offered a “deal” when they forcefully altered old accounts to the new “no large commissions” accouints, whereby they refunded any difference in fees after 5 years. Guess what? The refunds were substantial. In other words, the upfront was cheaper – but at the cost of potential rorting and failure to deliver value. Exactly the flaws that “fee-for-service” lawyers are trying to deal with.
These changes will increase the cost of advice for the bulk of average Australians. The changes are politically motivated and ideologically driven by egomaniacs or idealistic advocates who do not understand what they are doing.
Amazing isn’t it! Studies also show that people that don’t seek advice also pay less in fees. Jonathan NG = Genius
So, essentially they are saying there is no value in an ongoing relationship with a financial planner. Well that makes sense given the union funds aren’t interested in ongoing advice, they want transactional, non personal advice that they can dumb down Australians with. Jonathan Ng, your research is pointless, what value have you just added to the debate?
I agree with Nick, initial advice and ongoing advice are separate services, a client can walk after the initial advice or they can choose to purchase ongoing service which will therefore cost the client more.
Again a load of David Whiteley bullshit,obviously if a client only pays fro one lot of advice it will be cheaper than some one who enters into a lomg term advice service agreement. It is no different with asset based ongoing fees or fixed ongoing fees
He who pays the piper calls the tune, Industry Super Network.
Is this guy serious or just stating the obvious?
Of course ongoing advice is going to cost more, it appears that he feels there is a need for upfront advice only.Let’s remember The industry Super Network commisioned this report so I think they may be pushing their barrow which seems to have a very squeaky wheel. Ongoing advice is sometimes absolutely vital. The research only seems to consider the clients retirement balance and not any strategic planning advice which often adds a new dimension.
This is just more union fund propaganda which shows they still have no idea about the benefits clients derive from paying for an ongojng relationship with their financial planner. David Whitely can once again take his propaganda and put it where it will never see the light of day. He would never have dealt with a real client and yet tries to preach what is in his view the best way for financial planners to derive their income. This report isn’t worth the time and paper it was written and outs into question the independence of Rioe Warner who seem to becoming union fund lackeys producing yet another report which supports the already established views of Whitely Shorten and co.