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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.
NEWS 
