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Is my financial planner overcharging me?

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Q I have a financial planner who charged $7700 for an initial investment of around $30000. This gave me a credit until $100000. Every time I do additional investing (capital +or margin loan) they charge 5.5% of that extra investment amount (after $50000 it becoms 3.5%). Also the index fund, MLC-Vanguard Aus share index charges its 0.54% with a 0.3% rebate + the margin loan interest of approx 10%. My question is, this seems extreme to me. is it? The value of the portfolio would have to increase by at least 4% + 4% dividends for this investment to even break even. Am I right?

Josie’s answer: ‘Watch out.  Everyone is after your money.   Learn how to outsmart them! (also applies to financial planners).

Thanks for your question and I am gobsmacked.     I don’t know how much work your financial planner did for the $7,700 he initially charged and even if it was a lot, did you really need that much service? ’ I am guessing, you went to a seminar, they told you that if you didn’t do something now, you will be living on the pension, which is a pittance, and have a miserable retirement (even though millions do now and manage to smile every day).

Hope they didn’t make the claim the pension won’t be around, which is a blatant lie! It is all very emotional and easy to feel there is some urgency to act.  You then sat down with a financial planner and completed a fact find.   A few weeks later, they presented you with a slick Statement of Advice (a financial plan) and here you are now questioning your decision.    Again guessing,  but I imagine that the majority of their clients would have a similar strategy in place.

Their financial planner has recommended a stock standard financial planning strategy.   Borrow money and invest in a managed fund which replicates a share index.   If this is the style of service you received, why do they need to charge so much?   It is a financial planning factory - one size fits all which theoretically means it should be much cheaper to run the business.

Furthermore, they have recommended an index fund which simply replicates a parcel of stocks on the stock exchange - the human element of trying to pick the right shares at the right time has been eliminated.   For more information on index investing, go to www.vanguard.com.au.         By the way, I have money invested in the Vanguard Australian Share Index Fund via my superannuation fund (not 100%).

It is widely known what my feelings are in relation to commissions being paid from investment products.   I DO NOT LIKE COMMISSIONS AND/OR FEES BEING CHARGED AS A PERCENTAGE OF THE AMOUNTS INVESTED.  Financial planners are humans after all, and there is too much temptation to choose investments that pay high commission (the Westpoint debacle is proof of this).

There is also an incentive for financial planners to encourage investors to borrow significant sums of money (the more you borrow, the more you invest, the more they earn).   Remember, they have the same financial burdens as you do - mortgage, car, kids, wife, lifestyle, retirement savings (plus business expenses, especially if they have fancy offices).

Some fly the flag and promote they are fee for service advisers because they rebate all commissions, but at the same time charge a percentage of the amount invested (I call it a commission by another name).   Are they  claiming that it takes 5 times longer to service a client with $500K to invest, than someone with $100K to invest?   Highly unlikely, as every client has different goals and objectives and the amount of money they have has nothing to do with the complexity of a client’s circumstances.

The only good thing about this practice is that you can cancel the fees being paid on an ongoing basis (you can’t cancel commissions until you redeem the investment).    Again, there is an underlying temptation to make recommendations which favour increased amounts to be invested e.g. borrowing using the equity in the family home, margin lending, recommend investment properties be sold.

They may also be less ethusiastic to explore whether you might be better off salary sacrificing income into your work super, or perhaps injecting more funds into the mortgage (as they sometimes don’t pay).    Fortunately, not all financial planners behave like this.  It is vital that people understand the financial planning industry before they accept recommendations.  Life savings are at stake here and it breaks my heart when I see people disillusioned.

Personally, I believe the consumer is better off with a financial planner who charges a flat hourly fee, or quoted flat fee, just  like accountants, lawyers, and like professionals.   The average hourly rate is around $250, but good luck finding one (probably range from $150 - $450).     Based on your fee of $7,700, and an hourly rate of $250, your financial planner could personally work on your particular situation for least 30 hours.   The highly regarded Institute of Chartered Accountants shares a similar philosophy which is outlined in the following document - Reinventing financial planning - Institute of Chartered Accountants.

I know I have gone a bit too much, but you have hit a nerve.  I have some further thoughts on this matter:-

• the 5.5% contribution charge seems excessive?   How much work is involved e.g. you contribute $20K, they receive $1,100.   Usually funds can be transferred online which only takes a few minutes.   If they charged an hourly rate, it equates to approximately four hours work.   Again, I have a bug bear about fees being charged as a percentage of amounts invested, because it doesn’t correlate with the amount of work involved.
• with regards to your calculation that you would need a return of 4% growth + 4% in dividends in order to break even.  The final figure would be dependant on your personal rate of tax and the amount of interest you are charged on the margin loan (which is usually 1-2% higher than home loans).   You have already lost at least 23% of the $30K originally invested, plus margin loan interest and costs - deposited in the financial planners account, plus any downturns in the sharemarket - a paper loss anyway.  To help with this task, the following ASIC calculator may help - managed-funds-calculator-fido
• are you aware that your financial planner  gets paid a commission on the margin loan?  For example,  if you borrow $100K, the lending institution usually pays approximately 0.3 - 0.5% per annum (or $300 - $500 and sometimes a set up fee).  Furthermore, if they recommended any personal insurances the standard commission is approximately 100%+ of the first years premium, plus 10-15% every year thereafter e.g. $2,000 premium = revenue of $2,000 (sometimes more) plus $200 per year (sometimes more).   I am not revealing industry secrets.   It is law that all commissions and fees be disclosed in the Statement of Advice.    Have a read of this document to work it out.  If you can’t send me another question.   Therefore, when working out how much money your financial planner has made, you need to include these amounts.
• check the Management Expense Ratio (MER), sometimes known as ‘indirect cost ratio’ applied to the MLC Vanguard Share Index Fund.  The amount of 0.54% with 0.3% rebate just seems a little low.  However, it all depends on the product they are using.   I am assuming that the 0.3% rebate is commission they may be rebating in lieu of the amount they are charging upfront (up to 5.5%).   The MLC Vanguard Australian Share Index Fund is the similar to the Vanguard Australian Share Index Fund, just a different badge, but MLC also needs to make a bit.

No doubt I have put a lot of people off financial planners.   This is not my intention as I actually believe that most people would benefit from the services of a financial planner.  Financial literacy is a huge issue in Australia and we spend thousands of hours imparting knowledge which no doubt helps people organise their financial lives and leads them onto the path to financial security.   The biggest mistake people make is thinking we somehow know where the best place to invest is.  Nothing could be further from the truth.   The best description for what we do is ‘financial coach’.    I just want people to ask lots of questions and be confident they understand the risk involved.    Attached is a document published by the Financial Planning Association and ASIC which assists with this process. Getting good advice booklet - ASIC and FPA

The fact that you have written to me questioning how much your financial planning is charging, obviously means that you don’t perceive you are getting value for money.   Firstly you need to sit down with your financial planner with a list of questions.   A professional financial planning practice will take the time to listen to your concerns.    You might want seek a second opinion (or third in this case).    Investing in this volatile market is very tricky at the moment, with plenty arguing you are buying bargains (which they also said months ago - see nobody really knows).    Could be true, but remember if you are using borrowed funds, and if the share market keeps going down you are magnifying your losses.    The success of your investment strategy all depends on your time frame (hope it at least 10 plus years), and your cash flow (if your income changes, you might struggle to pay the loan and forced to sell) and of course the return on your investment.

I wish you all the very best for the future and sincerely hope it all works out for you.   Thanks for posting for posting a question on www.askjosiekay.com.au

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YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. For your information, the average hourly rate for a Certified Financial Planner is approximately $250 per hour. Josie does not ask for money. She relies on word of mouth, and would be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached! Don’t forget to subscribe to our weekly newsletter in order to receive great money savng tips.

ps. Hope the above helps. I am continually trying to improve this service, your feedback would be greatly appreciated.

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