One of the problems with engaging a financial planner is not knowing what to expect.
Worse still, once you’ve signed up and are perhaps paying thousands of dollars in fees each year, are you actually getting value for money? Sadly, there’s no industry association, government body or other groups that set the standards. In that regard, financial advice and planning is pretty much a free-for-all.

Some advisers operate fantastic “hold-your-hand” financial advice services while others charge outrageous fees for doing little more than selling you a financial product or service like operating a self-managed-super-fund. Bear in mind that you’re probably also paying for the operation of these funds in addition to the advice.

Before leaping into what’s good ‘n bad, we need to understand who’s who in the zoo.
Why is that important? Because each participant clips the ticket in some way. Each clip of the ticket is less in your pocket to spend on your next holiday or to pass on to your kids.

An overview of the industry

The overarching regulator of finance in Australia is the Australian Securities and Investments Commission or ASIC. ASIC issue Australian Financial Services Licenses (AFSLs). To provide financial advice or products, you have-to-have an AFSL to operate.

In a sense, this allows them (ASIC) to delegate some of their regulatory responsibility to others. The AFSLs are responsible for the day-to-day operations of the firm and its financial advisers. ASIC charge each AFSL an annual levy for each adviser on the books, typically a couple of thousand dollars each, annual AFSL license fees of $3K - $4K and mandatory auditing requirements which can range from $5K and up, depending on the size of the firm (as measured by the number of advisers).

AFSLs must also take-out special “professional indemnity” insurance which protects you against dodgy financial advice and it is expensive. For a very small firm, the premium is at least $10k per year, easily getting up to $100K for a larger organisation.

The AFSL must ensure that their advisers are properly qualified and receive ongoing training to operate to the required standards. They do this through the initial appointment process, ongoing education and deciding what financial products and what type of advice can be provided. All up, it typically costs an AFSL about $6K per year to have an adviser “on the books”. The AFSL in many cases will charge their advisers extra for add-on costs such as software licenses and investment fund research.

Most financial advisers will pay a percentage of their revenue to the AFSL to cover costs and for the AFSL to make a profit. There are typically discounts for scale but usually, between 15 and 50 percent of any revenue generated is pocketed by the AFSL. 15 percent might apply when the adviser’s business turns over $1 Million or more per year.

Another model is where the adviser pays an AFSL a set fee per month. Often that might start at around $3k per month per adviser, but that can vary too.

Sounds innocuous enough right?

Except that 90 percent of the financial advisers operating in Australia work for an AFSL that is actually owned by a financial product manufacturer or an AFSL that has links to a product manufacturer that pays them!

And guess what? Surprise, surprise, most of the financial products and services recommended by those advisers typically have links to the manufacturer who pay them.

Independent financial advisers cannot work for an AFSL that has any links to a product manufacturer, nor receive payments from product manufacturers for recommending a financial product to you. They also cannot be restricted by their AFSL as to what products or strategies they can recommend to you.

Following the findings and recommendations from the Hayne Royal Commission into dodgy financial advice, non-independent advisers must now clearly state that they are “not independent” to new and existing clients.

The other reality is that even some independent financial advisers (i.e. not linked to an AFSL owned by a financial product manufacturer) may not be quite as independent as we might like them to be.
There’s a compelling argument that a Self-Managed-Super-Fund (SMSF) is a financial product by any other name (ASIC thinks so).

Often, an adviser will recommend an SMSF and while SMSFs do have a role, the fact the adviser’s fees and livelihood might be linked to the operation of an SMSF, becomes an issue. Some independent advisers can and often do recommend SMSFs.

More on the suitability of SMSFs later but let’s just say for now, Netplan thinks that many SMSFs are over-sold to people that really shouldn’t be using them. There are often easier and cheaper alternatives that you can use.

No, we’re not popular with some of our colleagues because we tell it how it is.

What Next?

In the next part of this series, we'll tell you how to find a financial planner, and what to look out for..

Why are we telling you this stuff?

Netplan isn’t trying to be a traditional financial advisor, we want to give you the tools you need to succeed financially. Financial advisors have their place in the industry, whoever you are, whatever your situation, Netplan will help you to get the most out of the decisions you make with your finances.