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.
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