Written by Melissa Grimshaw
That old saying ‘you get what your pay for’.
Accessing a service from a third party generally comes with a fee. We ask the plumber to fix a leaky tap -we get a quote; we pay a call out fee and receive an invoice to pay for the repair. The repair fee charged usually consists of two components:
- A labour charge, and;
- Parts and other levies.
This is no different to going to the mechanic for a car service or replacement part for your car. You pay a portion of the total fee as labour and parts and other levies.
Obtaining Financial Advice from your adviser could be described as similar. There is a labour charge (adviser fee) and then there are other fees generally charged through products that you may obtain through your adviser that is part of your strategy.
These fees are not paid to your adviser, rather to the product provider and other third parties.
So what does this all mean when accessing Financial Advice?
Advice fees charged by a Financial Adviser– These fees are paid for labour and cover the expertise and experience of the skilled professional that is providing you with a solution or advice on a concern that you have. It covers the cost of the education and personal development hours required to maintain the skills and knowledge needed for that professional to give you “good advice” based on your circumstances, as well as support staff.
Advice fees are generally in two forms:
- Initial or upfront fees, and;
- Ongoing Fees.
Products and Investments recommended by your adviser are a solution to the issues being addressed. The product is the umbrella that investments such as managed funds sit underneath. The product itself carries fees and so do the individual investments that you can select within the product.
Components of these fees include labour and parts.
- Administration Fees
- Investment Management Fee – known as MER’s (Management Expense Ratio)/ICR’s – (Indirect Cost Ratios).
- Incidental/brokerage/transactional costs – Buy Sell Spreads.
The above fee structures relate to a superannuation product or a non-super (investment) product.
Did you know? According to Wikipedia, there are 500 superannuation products operating in Australia – June 2018. For investment, platforms are generally either master trust or wrap account.
Superannuation Funds, Master Trusts and wrap accounts all offer investments. These investment solutions can consist of direct assets or managed funds, Exchange Traded Funds (ETF’s) or Listed Investment Companies (LIC’s). A combination of these assets form your investment portfolio.
Understanding these fees
Administration Fees – The administration charge is a fee that is charged and paid to the product provider to:
- have a client /adviser call center available,
- provide you with your consolidating reporting,
- generate transaction confirmations and manage the overall portfolio on your behalf, ensure the correct reporting and record keeping and tracking of unrealised and realised capital gains, and ensure payment of appropriate taxes (super) etc are handled on your behalf.
- It also covers the costs of maintaining a menu (or shopping list of investments) that are on offer to construct a portfolio.
Investment Management Fees – These fees are paid to the professional manager of the investment that you select off the product menu. Fees payable to a professional manager include buying and selling assets within a managed fund, ETF or LIC that you are invested within. These fees cover.
- The skills and knowledge of portfolio managers and analysis on the ground reviewing the macro and microenvironment of the assets. They form opinions as to what assets and how much they will purchase at any given time.
- Individual Direct Share generally do not have this fee.
- A mix of investments form your portfolio.
Incidental/Brokerage/Transactional Fees – Buy Sell spreads- these are costs that are involved in buying and selling assets that make up the portfolio.
- They can be built into the pricing of the managed funds – gross vs net unit price.
- Brokerage is the charge for buying and selling direct stocks on the stock exchange.
Therefore, in simple terms, advice fees and product fees are broken down into labour charges + parts like any other services we access, including professional services like your accountant and lawyer.
Fun Fact – research conducted by Russell Investments – Value of an Adviser 2022 indicates that, ‘advised clients are 5.8% a year better off than a DIY investor’.
The value of your advice is based on a simple formula together with the skills, knowledge and expertise of your professional adviser. This could make a difference in achieving your goals and objectives. An adviser will help understand your goals and match your risk tolerances, investment preferences, and tax strategies to fit, and they will be your coach (sounding board).
The cost of having an adviser far outweighs the costs of not having one.