Radio Grabs: Costly Financial Advice

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25th February 2009, 06:04am - Views: 1050






25 February 2009

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Consumers pay up to 13 times too much for financial advice

– Rice Warner Actuaries


AUSTRALIANS who pay for their financial advice by commissions, could be paying as

much as 13 times too much, according to a new report by Rice Warner Actuaries. 


The report, commissioned by Industry Super Network (ISN), compared the net value of

advice provided by Industry Fund Financial Planning (IFFP) and advisers remunerated by

sales commissions.


The report reveals that consumers are substantially better off paying for their advice on a

‘fee for service’ basis rather than paying ongoing commissions.


In one example, the Rice Warner study modelled the net value of a typical plan advising on a

retirement strategy. Advice delivered by a fee for service financial adviser delivered around

$60,000 more in additional value, after fees, than advice provided by a commission-

remunerated financial adviser. 


Financial advisers remunerated by commissions can earn between 2 and 13 times more than

financial advisers remunerated on a fee for service basis. 


“There are many vocal critics of the conflicts of interest inherent in the antiquated

commission system. This research reveals for the first time that fee for service advice is more

cost-effective than commission based advice”, said Mr David Whiteley, Executive Manager,

Industry Super Network.  


Many advisers promote commissions as being an affordable means for paying for financial

advice. However, this report shows that over a few years, commissions end up costing

consumers considerably more than time-based fees.


Mr. Whiteley called for the immediate abolition of sales commissions and the introduction

of a ‘best interests’ test for financial advice. 


“It’s about time that financial advice was given in the best interests of the clients, and not

compromised by the commission system.” he added.


Mr. Whiteley pointed to the number of financial scandals in recent years in which financial

advisers have not acted in the best interest of their clients


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“The root cause of scandals such as Westpoint and now Storm, is the commission system,”

Mr Whiteley added.


For further information and interviews with David Whiteley:

Ted McDonnell, 0434 434 868


FACT SHEET – RICE WARNER VALUE OF DIFFERENT MODELS

OF FINANCIAL ADVICE


Fee for service (time based/hourly rate) financial advice, such as that provided by Industry

Fund  Financial Planning (IFFP) delivers up to 6 times better net value than commission-

based advice, according to a report from Rice Warner Actuaries.


The report also found that for the scenarios modelled commission based financial advice

costs up to 13 times more than financial advice delivered on a fee for service basis.


The Rice Warner report findings suggest that consumers are better off paying for financial

advice on a fee for service basis. Not only does financial advice cost less when clients pay fee

for service, but the products recommended also cost less, resulting in greater net value of

advice. 


Financial advisers remunerated by commissions earn between 2 and 13 times more than

financial advisers remunerated on a fee for service basis. 


The report finds that fee for service advice delivers greater value because: 


Consumers are likely to pay more for financial advice if they pay by commission rather

than on a fee for service, hourly basis ; and 

Retail super funds and other financial products that pay commissions have higher

average ongoing fees than products such as industry super funds which do not pay

commissions.  


Fee for service advice costs less, and delivers more value than commission based advice.

These findings do not include historic investment out-performance of the industry super

fund sector when compared to the retail fund sector. (According to Super Ratings, all ten of

the top ten performing balanced super funds for the fives years to 31 December 2008 are

industry super funds¹


Summary of case study results


1.

Insurance strategy – projected cost

of

commission based advice is 3.1 times the

cost of advice charged by IFFP fee for service financial planner


                                                

1

  SR Balanced 50 Index

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2.

Co-contribution strategy

– net value of advice delivered by fee for service IFFP

adviser was $10,522 versus $2,355 net value of advice delivered by a commission

remunerated adviser


Co Contribution - Net Value

$10,522

$2,355

-$3,876

-$660

-$5,000

-$2,500

$-

$2,500

$5,000

$7,500

$10,000

$12,500

IFFP

Retail

$

Value

Remuneration





3.

Salary sacrifice strategy net value of the advice delivered by fee for service IFFP

adviser was $56,679 versus $31,753  net value of advice delivered by a commission

remunerated adviser


4.

Transition to retirement strategy net value delivered by fee for service IFFP

adviser was $220,641 versus $118,728  net value of advice delivered by a commission

remunerated adviser


5.

Retirement plan –net value delivered by fee for service IFFP adviser was

$70,961versus $11,714 728  net value of advice delivered by a commission

remunerated adviser. 


Case Study 

Net value delivered

to client when

advice remuneration

is fee for service ($)

Net value delivered

to client when

advice remuneration

is commission ($)  

Ratio of net value

delivered by fee for

service to net value

delivered by

commission

Co-contribution 

$10,522

$2,355

4.5 

Salary sacrifice 

$56,679

$31,753

1.8

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Transition to

retirement 

$220,641

$118,728

1.8

Retirement plan 

$70,961

$11,714

6


Retirement Plan - Net Value

$70,961

$11,714

-$7,240

-$25,246

-$30,000

$-

$30,000

$60,000

$90,000

IFFP

Retail

$

Value

Remuneration



Financial advice must be in the ‘best interests’ of clients 


The findings of this report reinforce the need for urgent change to the regulation of financial

advice. 


In the 2007 report by the Parliamentary Joint Committee on Corporations and Financial

Services on the Structure and Operation of the Superannuation industry, it was noted that:


"…as long as disclosure requirements are met, it is legally permissible for an adviser to recommend a product

privately knowing it is not the best option for the client."


Appropriate reform includes:

The immediate abolition of sales commissions on superannuation; and

The extension of the fiduciary obligation required of super fund trustees to act in the

"best interests" of their clients to financial advisers.


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An obligation for a financial adviser to act in the 'best interests' of their client would require

the adviser to scrupulously avoid any actual or perceived self-interest. A best interests

obligation would require a financial adviser:


To give advice which is in the client's best interests;

To ensure that they do not allow their own interests or the interests of an associate

to conflict with the client's interest;

To receive fair time-based remuneration for the services provided to the client,

which are concisely and clearly disclosed to the client and paid for by the client.


The only remuneration model which is consistent with financial advice given in a client's

best interests is for a time based fee to be paid by the client to the adviser. Conflicted

remuneration practices such as shelf or platform fees, trail commissions, up front

commissions, ongoing adviser fees, adviser service fees and asset based adviser fees paid to

financial advisers by product issuers ensure that there is always an element of sales in

financial advice and are not consistent with a ‘best interests’ obligation.



About the report 


Industry Super Network (ISN) commissioned Rice Warner Actuaries, who had previously

completed a report looking at the value of advice for the Financial Planning Association

(FPA), to compare the value of commission remunerated advice against hourly rate fee for

service advice for superannuation members.  This comparison was undertaken by analysing

five real life Industry Fund Financial Planning (IFFP) case studies. 


Rice Warner used the Statement of Advice (SoA) output provided by IFFP to measure the

costs to the fund member of receiving the advice and the value that would be obtained if the

advice was followed.  Rice Warner then used the same advice recommendations and

modelled what value would have been obtained using the average retail super fund product

costs and average retail super fund product-based ongoing commission (as determined by

Rice Warner from industry analysis presented in the Superannuation Fees Report 2008

prepared for IFSA).


In assuming the same advice strategies from different advisers Rice Warner sought to

compare:


the IFFP advice costs with the average retail ongoing commission generated advice

costs; 

the costs of the products recommended by IFFP with the average retail product costs

and

the net value of advice delivered via each advice remuneration model. 











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