The Financial Planner Shake-up

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Right now there are lobbyists frantically running around Canberra trying to convince politicians to go easy on financial planners. What’s playing out behind the scenes is one of the biggest shakeups of one of the biggest industries in the country.

Ironically, it all stems from a broken business model, years in the making.

The first rule of business is to know who your customers are. That’s pretty simple: they’re the ones who pay you.

But for decades financial planners’ customers have been not you, the client, but the big financial institutions, who pay them (generously) for investing your money with them. Financial researcher Rainmaker says financial institutions pay more than a billion a year in kickbacks to planners.

That’s all about to change. The financial planning industry has reluctantly bowed to pressure, and from next year their paying customers will be the clients who hire them, not the financial institutions.

And the problem facing the industry is that many clients don’t want to pay the tens of thousands of dollars they’re being slugged now by way of commissions, or asset-based percentage fees.

The financial planner

Last month I spoke to a financial planner who was very, very concerned.

“In the old days, I’d gross about $10,000 per year in commissions from a client”, he said.

“But I realised that the old game was up, and I wanted to stay ahead of the pack, so I started a fee-for-service model in my business. I knew clients would baulk at a ten grand fee, so I gave them an option to provide annual advice for $2,000.”

“Now, I know that I was taking a huge haircut, but I really just wanted to ease the clients in, and then see if I could increase my fees over the years.”

Twelve months on, his business is looking shaky.

In the planner’s eyes, he was offering a bargain – he’d dropped his fees by a whopping 80 percent. But the majority of his clients didn’t see it this way.

“All my clients said basically the same thing: ‘I don’t want a holistic financial plan – and I definitely don’t want to spend thousands of dollars a year.’”

“They told me they wanted specific advice about one problem, like whether they should put money into super or pay it off the mortgage. And for that they’re only willing to pay about $400 in fees – tops.”

Despite the proposed changes, the political fight will continue, as the financial planning lobby pushes for concessions. After all, billions of dollars (of your money) is on the line. Don’t expect them to give it up quickly.

Government launches a new money website:
moneysmart.gov.au

All this highlights how hard it is for consumers to get good, unbiased financial information that’s in their best interests.

Right on cue, ASIC has launched a new financial literacy site, moneysmart.gov.au. The site has 26 nifty financial calculators you can use to work out whether you’re on the right track, but its real value is in its advice to consumers.

For example, here’s ASIC’s advice about choosing a financial advisor:

“In our opinion, the fee-for-service model is generally a better way to pay for advice. It reduces the chance that the adviser’s recommendation will be biased. A ‘flat dollar’ fee, rather than a ‘percentage of assets’ fee, will give you more certainty and reduce conflicts of interest. It is better if the adviser does not have an incentive to recommend that you invest larger amounts of money.”

Moneysmart.gov.au also has a downloadable 24-page booklet entitled Thinking of Trading CFDs? I’ll summarise it for you: don’t.

Read Scott’s interview with a man who blew $500,000 trading CFD’s

Tread Your Own Path!



Photo: http://www.flickr.com/photos/jule_berlin/853806749/

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