As an investor, what might a successful professional relationship with a financial planner mean?

What are you prepared to pay for it?   What is “Advice” anyway ?

Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia makes many good points in the following piece.  The confusion though, as you will see later, is in what we actually mean by “advice”.

Here is Robin….

“Historically, investors may have said that the primary job of the financial planner was to pick winning investments. That remains a recipe for disappointment. The best and brightest brains in the investment world globally regularly fail to pick market movements so it is unrealistic to expect your local financial planner to do that.

The value of financial planning lies in the development of a long-term plan that will achieve your personal financial goals with a weather eye on the risks that you are comfortable taking. There are many ways a financial planner can add value – building a diversified portfolio, advising on super contribution and tax strategies and retirement income plans. And that is before you get into the area of estate planning and insurance.

 So let us move to the second question: what are you prepared to pay for professional financial planning services? If you are typical of investors researched in Australia, the answer will be somewhere between $300 and $500.

Yet industry data says that the cost of delivering face to face comprehensive advice is around $2500.

 Clearly that is a massive gap in terms of investor expectations and adviser’s business costs.

 The financial planning industry has had to deal with the challenges that global markets have thrown them along with the regulatory sands shifting under their business feet.

 But perhaps the biggest challenge still lies ahead: demonstrating to investors the real value of financial planning.”

Thanks Robin.   Here is my clarifying explanation about costs.  But first let me say that the survey was not of “investors” but of members of superannuation funds.  There is a difference.

There is also a difference between a Financial PLAN and simple limited advice on one topic.        Before we start, a reminder . Financial advising is now a highly regulated profession.   The more the rules and information keep changing and the more demanding the role, the more time has to be spent in background work before a word is spoken or typed.   I just paid $100 for a proper technician to drop in for 15 minutes and adjust a few things on the fridge.  The recommended rate for a solicitor is $530 an hour.  Like Solicitors, Financial planners and advisers work with information that is in constant change and need a back office too.   I usually say I “work” until Wednseday lunch to know what to advise, stay licensed and run a business.  I work the rest of the week for my expenses , my income and the tax man.

The Financial “advice”  at $2500 (and upward)  is more of  a “comprehensive plan” with written statements of advice covering a review of the whole situation, a lot of discussion and client education and assistance. It includes clarification of goals, calculations and expressions of the possibility of those goals and subsequent adjustment. Where investments are contemplated it must include assessments of your understanding and tolerance of investment risk (and more client education), a look ahead at major life expenditures and stages, then the development of a saving and investing plan to work towards that and to aim for a satisfactory retirement.  It takes an informed look at insurance needs to take care of interruption to the financial plan by death or disability or trauma and may look at the whole family situation for that. It also looks at whether people have suitable wills, powers of attorney and such important estate planning issues.  It looks at a suitable superannuation fund as a vehicle to meet the main savings goal, provide some of the insurance and integrate with the estate planning so that the will is not confused by provisions for beneficiaries in the superannuation member’s instructions.  There is no upper limit to what might be required for a comprehensive Plan. The whole thing must be written and presented in a very particular way prescribed in great detail by regulation. Our work is randomly audited by The Australian Securities and Investments Commission and we are in big trouble if it does not follow the rules (which keep changing ).

Such a Plan might cost a whole lot less when you are young and the first steps are obvious;  It is almost an “off the shelf plan” (it is in my book) , what we call the “Foundation Stage”.   Create a Reserve Fund of 3 months living expenses, Save 10% of all you earn, insure yourself properly, fine tune your Super and pay off your “bad” debts.

But “plans” may become more complex and critical and hence more expensive (but well worth it) as families, assets, incomes and ideas become more complicated and the choices more numerous.

Finally a well crafted retirement strategy with a decent sum of money and complexities of interaction with part aged pension and so on might justify a very thorough plan at that time.

Included in the real Planning process might be some help by the adviser in getting couples or the whole family “on the same page” about where they are going and what money management they have to co-operate on and do together.  I have written plans where one party has mostly worked it out themselves and my role has been to check, verify and fine tune or correct minor matters etc but most importantly to “umpire” a discussion whereby the other party comes to a clear understanding and genuine agreement with the more financially dominant partner and then both parties sign acceptance of “The Plan”.    I have also written up “plans”  where there was already a brilliant plan built up over many years. A plan involving many millions of dollars and a lot of thought about the children and grandchildren and client from who I learned much.  But the plan was in many parts and the actual logic of it was in his head and on notes and in various files and the client was 85 and smart enough to get my help to write it all down and turn it into one comprehensive document while he was still making sense.

Having a really well worked out plan provides the framework for all the particular “bits” of advice about the one issue moves, the “limited” or “scaled” advice.

The public in fact knows very little at all about real financial planning and the “advice” that starts at $2500 but sets up the game for long running certain  success.

Most people imagine advice in the form of specific issues.   “Help me get my super fund in order”. Or…. “Please help me to arrange insurance for my Life and Income in the best way “.    Or… “My mates at work are investing in this XYZ scheme. Is it OK?”

In the jargon of the advice regulators that is called “Limited Advice” and the public perception about what they would pay for it is not too far short of the mark.

In the past and still, far too many situations that only require limited or scaled down advice have been dressed up with a computer generated Plan of hundreds of pages to somehow justify unconscionable entry fees on large retirement superannuation rollovers or contributions.  No wonder the public seemed confused.   Regulatory change is now seeking to drive that practice out, mostly from the large institutions that make up 80 % of the public’s experience so far.

In our small world of ethical advising the change will make little difference because we never played in that game.