What's the cost of financial advice?

Should you put more cash into superannuation? Buy more life insurance? Or invest in the stock market? These are some of the questions more people are likely to be asking right now.

Periods of pronounced economic volatility like we’re seeing now are when a good plan is most important. Which highlights the importance of financial advisers. But with a shrinking pool of financial planners in Australia, it’s becoming increasingly difficult to access this advice.

The Financial Planning Association CEO Sarah Abood says the main driver for an increase in costs for financial advice is the significant complexity and regulatory requirements that have been placed on financial planners, particularly in the past few years.

“The current regulatory settings are adding unnecessary cost and complexity to the financial advice process, at a detriment to those who need advice. Unfortunately, this means that many planners have had to lift their fees in order to cover their costs,” she says.

“As well as making advice more expensive than it should be, the regulatory environment is making it harder for Australians to understand.”

What are the fees for financial advice?

The median cost of financial advice is around $3,500 having risen around 8% in 12 months, and around 40% in the three years to the end of December 2021, the Adviser Ratings 2022 Financial Advice Landscape Report finds. This aligns with a similar study conducted by KPMG, which found that $3,660 is the average cost of financial advice.

FPA data suggests that the cost of producing a financial plan for new clients rose more than 15% over the 2020 calendar year, on top of the 10% increase during 2019.

Much of the value financial advisers add are behavioural factors, which help their clients make better long-term investing decisions. This includes information about budgeting and saving, staying in the market during downturns, tax strategies, estate planning and insurance. All with an overarching aim to accomplish financial and lifestyle goals.

How do advisers charge?

There are a few different ways financial planners can structure their fees. The cost depends on the complexity of the client’s situation, as well as the method the financial planner uses. The fees might include an upfront fee to identify the client’s needs, develop a financial plan and implement their recommendations. Separately there may be ongoing fees if clients choose a review service

What is a financial advice fee model?

This refers to the way a financial advice firm charges you for implementing financial advice and for ongoing financial advice including opening and purchasing investments, reviews, phone calls, emails and newsletters. An implementation fee is usually an upfront, one-off charge based on the value of your assets.

There can be hourly fees for addressing one-off questions that aren’t part of an ongoing arrangement, or fees for services such as preparing a Statement of Advice.

What is a commission?

This is an amount earned by a financial adviser for selling specific products, as a percentage of what you pay for the product. Your financial adviser can’t charge a commission on superannuation products and ordinary investments. They can still charge a commission on life insurance products you buy through them.

Are all commissions banned?

No. Instead of an up-front fee for an insurance policy, a financial adviser may offer to charge you a commission. If you choose a commission, then you'll pay a higher premium for the life of your policy.

You can reduce the commission by asking to pay a higher up-front fee to your adviser. This also reduces your premium.

How do asset-based fees work?

This is a percentage fee based on the total value of the assets in your portfolio. The more assets you have, the higher the fee. You pay this fee regardless of how well your investments perform.

How do you know what fees you’re paying?

You should receive a fee disclosure statement (FDS) every 12 months. This shows the fees you've paid.

Use this statement to check:

• that your financial adviser did everything they charged for
• the fee amounts — if they've gone up, find out why
• (if you pay an investment performance fee) that your financial adviser is actively managing your portfolio, not just monitoring your investments
• that any asset-based fee balances with the value of your portfolio

Generally, you have to opt-in to an ongoing fee for advice arrangement every 2 years. Ask your adviser how often you have to opt-in and when they will remind you.

If you don't pay an ongoing fee for financial advice, ask your financial adviser for an annual statement. Ask about any commissions they have received from your products and portfolio.

Note: The above points are outlined on the Australian Securities and Investments Commission’s Moneysmart.gov.au website.

Note: The above points are outlined on the Australian Securities and Investments Commission’s Moneysmart.gov.au website. 

Never miss an insight

If you're not an existing Livewire subscriber you can sign up to get free access to investment ideas and strategies from Australia's leading investors.

And you can follow my profile to stay up to date with other wires as they're published – don't forget to give them a “like”.