The Aussie Firebug (meaning Financial Independence Retire Early) website recently highlighted the cost of getting financial advice and owning managed investments. They quote from an Australian Government website case study on fees that on a $400,000 investment, including superannuation, the first-year costs are $14,000, and the ongoing fees will be $8,000 (assuming no insurance premiums).
They highlight in this example that the initial cost of advice is 3.5% on the sum to be invested, and 2% annually thereafter. One of the dangers of this type of case study is that it might anchor those percentages as ‘normal’ or ‘acceptable.’
We should focus on the money paid not the percent for a number of reasons:
- There is little or no extra work for a portfolio of $300,000 or $500,000 compared to one of $400,000.
- If you need income from the portfolio to live on e.g., if you are retired then the amount of fees can be substantial relevant to your income.
- Percentages can seem small. 1% of $100 is only $1 - but 1% of $400,000 is $4,000.
Competent financial planners are worth what we pay if they can:
- Reduce investment risk.
- Get average or better returns.
- Help getting any government benefits or income tax concessions to which we are entitled.
- Help us to sleep at night and not worry about money.
- Get us to live within our means.
- Invest in what is appropriate for our needs and tolerance for risk.
However, as we pay the price (or get the benefit!) for the advice we follow, getting an understanding of what financial planning is about is highly recommended. You don’t have to get a diploma – most of it is common sense.
But understanding the elements of it will help you know whether a financial planner is more interested in you than themselves.
The upfront fees should be regarded as an investment. If the plan is solid then reviews may not be needed every year, except you have doubts about events.
It is also worth exploring if your superannuation fund has advisers who can assist. The costs should be relative to what you need, not to the amount of money you have.
For those willing to try new things there are Robo Advice services that use AI (artificial intelligence) to provide investment advice.
Getting the right financial strategy at the beginning can help with boosting returns, living within our means, and ensuring that our money outlasts us.