The fact the financial planning industry hasn’t been able to separate advice from financial products goes a long way to explaining the high cost, and therefore the low uptake, of planning.
Advice is one part of the financial services value chain. It’s inextricably linked to a bunch of financial products including insurance, superannuation, investments and administration. There are fees attached to each part.
There are three key parts to the financial services value chain: advice, administration and investment management which includes super. Anecdotally, each component costs between 0.8 and 1 per cent on average.
In isolation, strategic advice should cost between 0.8 and 1 per cent or a flat fee based on the complexity of the client’s situation, needs and objectives. Scaled advice would cost less. However, the structure of retail financial services industry, whereby 80 per cent of financial advisers are aligned to an institution, means it’s unlikely the institutions will help their aligned advisers deliver cheaper, scaled advice unless they can clip the ticket somewhere else.
Relative to the existing advice model, where investors are channelled into several related party products, the nature and shape of scaled advice isn’t conducive to wrap platforms and expensive managed funds.
A fair price
Furthermore, the structure of the retail financial services industry makes it difficult for advisers to charge a fair price for their expertise and advice without the total fee blowing out for investors.
Looking at the value chain, advisers deserve to get paid the most because they do the most work. They find and win the client; they get to know the client; they educate the client about the strategies and options available; they construct, implement and monitor a personal financial plan; they provide ongoing service and advice; and they take on the most risk and liability.
And yet, they get paid largely the same as an administration platform even though administration is widely considered a commodity.
They also get paid largely the same, if not less, than investment managers.
According to ING DIRECT/Rice Warner Superannuation Fees and Performance Report, the average fee across the whole super industry was 1.15 per cent for the year to June 30, 2014. Retail funds were the most expensive with an average fee of 1.57 per cent. Public sector funds had the lowest average fee of 0.6 per cent. The average Australian equities fund had a base fee of 0.94 per cent and the average international share fund had a base fee of 1.04 per cent.
That’s tough to take considering 74.9 per cent of active Australian equity funds, and around 86 per cent of global share funds, failed to beat the benchmark in the five years to June 30, 2014, according to the Standard & Poor’s Index Versus Active (SPIVA) Report.
The ING DIRECT report also found no clear indication that funds which charged higher fees for active investment management strategies led to better performance over the three years to June 30, 2013.
Key drivers
While retail super fees have fallen 21 per cent in the past 10 years, according to ING DIRECT, the key drivers were growing pressure from industry funds and a higher allocation to passive strategies. Despite the enormous growth the industry has experienced due to mandated super, the industry overall has been reluctant to pass on scale benefits and meet investor demand for cheaper, more transparent products.
That will change as the IFA community rises up and new players enter the wealth space with innovative super and investment products.
A proliferation of smarter, cheaper, quality options would force sleepy industry and retail funds to be more competitive. It would also empower advisers to charge a fee commensurate to the value and service they deliver without fees blowing out for the consumer.
It’s hard to imagine that more Australians wouldn’t take financial advice if the process was cheaper and it was sold differently. After all everyone can benefit from advice.
