Commission Biased Investment Advice Can Seriously Harm Your Financial Health

In this article I would like to focus on “commissioned based financial advice” and illustrate the negative effects of commissions on your wealth as well as look at alternative means of paying for advice. The Australian financial planning industry was labelled “structurally corrupt” back in 2002 by the head of the Australian Consumers Association and it appears that not much has changed in 2008.

Who owns your financial planner?

Nowadays over 70% of financial planning groups are owned by big financial institutions like fund managers, banks and insurance companies. As a result these planners are the “defacto salesforce” for their employers’ investment products and the independence of their advice is suspect.

This fact was made abundantly clear in ASIC’s 2006 Shadow Shopping Survey on Superannuation Advice. The survey assessed 306 examples of advice given to real customers. Unsurprisingly the results were damning of financial advisers, the survey finding that:

Unreasonable advice was three to six times more common where the adviser had an actual conflict of interest over remuneration (e.g. commissions) or recommending associated products. Where consumers were advised to switch funds, a third of this advice lacked credible reasons and risked leaving the consumer worse off. 16% of advice was not reasonable given the clients needs (as required by law) and a further 3% was probably not reasonable.
Avoid commission driven financial advice

The vast majority of financial advisers in Australia typically receive the 4% – 5% entry fee charged by most managed funds and superannuation funds that they recommend. On top of this entry fee, advisers often charge a percentage based “adviser service fee” as high as 1% – 2% of the account balance annually.

Investors should ask themselves whether the percentage based financial adviser service fees they are paying are justified by the ongoing level of service provided by their financial adviser. I have long been a vocal advocate of ‘ professional dollar based fee for service financial advice’ whereby clients are able to separate their advice from product sales and eliminate product bias.

Pay a professional dollar based fee for service for financial advice

Paying unnecessary percentage based adviser service fees can seriously reduce your portfolio value and your retirement nest egg. Over time the effect of these unnecessary fees is compounded and these fees can make a huge difference in your final result.

You don’t pay your accountant or lawyer an ongoing percentage of the value of your assets for their advice. The same should apply to financial planning advice. Fee for service financial advice is also the only way to ensure unbiased, non-commission driven advice. Potential conflicts of interest arise when a financial adviser is paid by or employed the fund he or she is recommending which can undermine the value and quality of the advice provided. By separating products from advice and paying your financial adviser an hourly or dollar based fee for service, there will be no incentive for your adviser to recommend any investment for any reason other than its investment merit and its suitability for you.

To ensure independent financial advice and to be confident that your financial adviser is working in “your best interest” you need to be the one paying his or her fees and not the providers of products he may recommend. Pay a separate professional fee for advice and execute your own transactions.

Unfortunately these true “fee for service” advisers are difficult to find as they are truly a minority. Why don’t you make it your New Years’ resolution to find out what fees you are paying to your adviser and take the necessary steps to pay a professional dollar based fee for your investment advice. You will be glad you did and richer as a result.

By: Michael Lannon

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