It can be handy to receive advice on your finances and investments from a qualified professional, and it’s a good idea to understand the payment structure your planner may implement for their services up front. There isn’t a set industry-wide scale of fees, which means there can be a range in what financial planners charge clients. In this article, we look at the types of services provided by financial planners, and the common types of charges they could incur.
What do financial planners do?
It’s worth noting that financial planners can also be referred to as financial advisers. You can engage a financial planner for a range of needs, whether it’s a question about the best way to invest your savings, looking at your life insurance needs, or putting in place a long-term plan for retirement.
A financial planner will assess your current financial situation and provide advice to try to help you meet any financial goals you’ve set. These goals may be short, medium, or long-term and may require a combination of different financial strategies and products in order to be met.
You may have a general idea of what steps you’d like to take, but a financial planner will generally be able to advise you on some of the different options available to reach your financial goals, and the one they believe is most likely to get you where you want to be. A financial planner can take into account a range of factors such as the law, tax effects, and the complexity in financial products, which is what can make their services valuable.
It may be a good idea to seek out an independent financial planner – find out more about what to look for in a financial advisor here.
How much does it cost to hire a financial planner?
Financial planners and advisers are legally allowed to charge as much as they like for their services – so it’s important to consider shopping around to find an adviser who you trust and can afford. That being said, it may help you to understand how financial planners are paid, and what you do and don’t have to pay for when engaging their services.
How do financial planners make money?
Financial planners can use a range of models to charge fees for providing advice. When you first meet with a financial planner they should provide you with a Financial Services Guide, which explains how they are paid, and it’s important you understand this before formally engaging their services. The four main types of payment schemes for financial advice are commissions, asset-based fees, fee for service and performance-based fees. Let’s look at what each of these could look like.
A commission is a payment based on how much of a product is sold. In a financial planning context, it could be a percentage of the premium you pay for insurance, for example, and will typically be paid by the financial institution offering the product. Commissions used to be the most common payment model for financial advice, but the Future of Financial Advice (FoFA) reforms banned commissions on new investments and super products from 1 July 2013. However, if you bought such a product before 1 July 2013, it can still yield ongoing commissions for your financial planner. A financial planner can still receive commissions on some new products, such as stand-alone life insurance, but they must tell you if this is how they are being paid.
Asset-based (portfolio percentage) fee
An asset-based fee is charged as a proportion of your investments or portfolio. So for example, an individual with $5,000 in stocks would pay less for financial planning advice than an individual with two investment properties and $20,000 in stocks for the same advisory services.
This model is common among Australian financial planners. However, it does have some potential drawbacks to be aware of:
- If your portfolio is on the larger side, you may find you’re paying more money for less effort compared to someone with a smaller portfolio – for example, it may not take much additional effort for an adviser to advise on a $2 million portfolio compared to a $1 million portfolio.
- A flat percentage fee doesn’t necessarily encourage your adviser to work hard to grow your wealth for you – while their fees will grow as the value of your portfolio grows, they will still receive a payment even if the value of your investments have fallen.
The following table contains details of the superannuation funds rated by Canstar based on someone aged 40-49. This table has been sorted by three-year performance (highest to lowest).
Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.
To view the past performance of all super funds, rated by Canstar, use our comparison tool:
Fee for service
Generally the most straight-forward of the four models, a fee-for-service structure is where you simply pay a flat fee for a set amount or type of advice. For example, an hour-long session with your planner of choice might cost $250. Having them prepare a Statement of Advice might cost $1,500, while implementing the advice might cost $1,000. Ongoing annual review fees could vary anywhere from $1,000 to $5,000 depending on the complexity of what’s involved. Set fees align closely with the models used by other professionals such as solicitors and accountants and can be good for those who want to know exactly how much they’ll be paying ahead of time.
However, it is important to be mindful of the following:
- Whether the financial advice is framed as a disposable, once-off transaction rather than as an evolving and ongoing service, as this won’t suit every customer;
- A one-off financial advice fee may not be tax-deductible, depending on the nature of services and advice provided. According to the Australian Taxation Office (ATO), fees can generally only be claimed as a tax deduction where they are considered to be a cost incurred in the course of producing assessable income;
- High up-front costs can be a turn-off for some individuals, regardless of the potential long-term financial benefits of the advice being paid for.
Performance percentage fees
This model involves a financial planner being paid a small ongoing fee for their services, with the potential for a higher fee to be charged if their advice results in higher performance for the client’s investments. While there can be closer alignment between the interests of the financial planner and those of the client, this model can run into issues, for a few reasons:
- There can be disagreement on what constitutes above-average performance, as well as on the benchmark against which to measure performance;
- Not all of the value provided by a financial planner manifests as higher performance, especially in the short-term;
- Performance fees are often more suitable where financial planners actively manage an investment portfolio, rather than setting, monitoring and ‘tweaking’ a long-term strategy such as superannuation savings.
What to do when you first meet with a financial planner
The Australian Securities and Investments Commission (ASIC) says the following about your first meeting with a financial planner:
It might be free
You may not have to worry about paying for the privilege of figuring out whether a financial planner is right for you or not. ASIC says the first meeting with a financial planner is often free.
They should lay out their upfront and/or ongoing costs
Part of the meeting should be dedicated to the financial planner detailing how much their services will cost you. According to ASIC, during the first meeting a planner should be discussing their fees in terms of dollar amounts rather than percentages.
If you proceed, you should receive a Statement of Advice (SOA)
After discussing your financial situation and goals with the planner and learning what fees they will charge, you should get an opportunity to decide whether you wish to continue. If you decide to proceed with the planner in question, they should prepare a Statement of Advice for you. This document will formally outline the advice they’re providing to you, along with their understanding of your financial situation.
The planner will charge a fee for this, which may either be charged to you as an upfront cost or deducted, with your consent, from the balance of the assets you placed under their management.
If you agree to the adviser’s recommendations, you may then be charged an additional fee for the future implementation of the advice you’ve received, however this fee should reasonably reflect the difficulty of the implementation and the effort it will require.
ASIC advises you to regularly review the price you’re paying for your financial planner’s services to avoid losing track and potentially end up paying more in fees than you’re receiving in value.
A financial planner could help you to grow your superannuation and ensure you have enough for retirement – but it’s important to try to ensure you’re with the best-value super fund possible. You can compare super funds with Canstar.