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Investor Education > Financial Advice > Fee for service financial advice

FEE FOR SERVICE FINANCIAL ADVICE

True fee for service financial advice refers to paying your adviser or planner an hourly rate for the advice provided. Financial advisers provide a professional service, just like an accountant or a lawyer, and just like an accountant or a lawyer they should charge an hourly rate for this service. This may mean paying for advice received upfront, but will save thousands of dollars in annual service fees over the life of the investment. Fee for service financial advice ensures that you are free to implement the advice you receive, rather than bound to the advice you receive. And like any other professional, a financial adviser will need to provide a professional service to keep you as a client. If you are happy with the adviser and choose to proceed with annual reviews and ongoing service, these are similarly paid for on a fee for service basis.

Why fee for service advice?
Fee for service financial advice is also the only way to ensure unbiased, non commission driven advice. Immediately apparent conflicts of interest arise when a financial adviser is paid by the fund he or she is recommending. In recent shadow shopping surveys carried out, ASIC has been damning of the financial advisers and advice that is tainted by commissions. These days more than 75% of financial planning groups are owned by banks and insurance companies. By paying your financial adviser an hourly fee for service, there will be no incentive to recommend a fund for any reason other than the merit of that fund. To ensure independent financial advice, you need to be the only one paying your adviser.

The cost of advice
Commission-based advisers can not only taint the quality of advice you are receiving but also significantly affect the cost. Paying an adviser annual percentage based adviser service fees will greatly influence your investment returns. Consider the example of Mary and John provided below. Mary pays entry fees and adviser service fees and John pays an upfront for fee for service advice only.
 

Case study: Mary vs John
  Mary: Commission-based advice with 1% pa adviser service fee  John: Fee for service advice with professional dollar based fee only.
Amount of invest  $250,000 $250,000
2% entry fee* $5,000 N/A
Professional fee-for-service advice fee N/A $2,500#
Net amount invested $245,000 $247,500
Value after 10 years^ $580,004 $641,951
Value after 20 years^ $1,373,081 $1,665,056
Difference in value after

10 years
20 years


$61,947
$291,976

*Assumes an entry fee of 2% and a 1.0% p.a. adviser service fee are charged by Mary’s financial adviser. Financial advisers can charge entry fees of up to 5%.
#Assumes John is charged $2,500 for advice provided on a professional Fee for Service basis
^Assumes 10% return pa before adviser service fees.

Even though Mary had the benefit of ongoing advice, this equated to paying over $290,000 for that advice over 20 years. Even if John paid $1,000 each year for portfolio reviews with a fee for service adviser, he is still more than $234,700 ahead of Mary.

 

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