Summary
Have you ever been ripped off by a financial advisor? Today’s podcast is all about identifying the tactics financial advisors use that put their interests ahead of yours. Joining me in this discussion is Phil Harvey. He’s an independent financial advisor and one of the founding members of PIFA which stands for the Profession of Independent Financial Advisers.
Some of the topics we cover are:
- Who is Phil Harvey? (05:41)
- Phil’s personal experience with financial advisors in 2010 before the royal commission (08:01)
- What motivated Phil to help start PIFA? (11:20)
- What is an independent financial adviser? (13:29)
- Fee structure differences between independent and non-independent advisors (15:25)
- What percentage of all financial advisors are independent? (22:09)
- Red flags when vetting financial advisors (36:15)
- Phil’s tips on avoiding being ripped off by a financial advisor (55:11)
I think of financial sales people the same as real estate agents, used car salesman, NOT MUCH !!!!
Great pod.
I just feel I’m getting ripped off with insurance costs.
Anything I get reccomended seems to be for the planners benefit.
Also, has anyone else’s planner tried and to get them into Investment Bonds
Hi Dave,
Yes it is a great podcast. My personal experience is a little similar to Phil’s. One thing Phil did not mention re insurance is that most Planners deal with multiple insurance companies, and this is where most planners actually do add value. The comment that submitting the insurance application is just the click of a button is misleading and I wish Phil had pushed back on that comment. There is often considerable effort involved in choosing the company and getting all the information required before “pushing the button”.
One of the biggest mistakes anyone can make is cancelling personal insurances in a fit of frustration. Most people with a young family are under insured and think that their default superannuation insurance is adequate. It’s not. If you’re complaining about cost then you are probably adequately insured. Alternatively, you could be in your 50’s and seeing the premium starting to skyrocket, in which case it is time to review just what the insurance is for.
When I first started working (as a cobol programmer!), a financial “adviser” organised insurance for me, then every few years he would contact me about “better deals” and roll me onto a different insurance company. I eventually got suspicious and talked to another adviser who looked at the commission percentages and went “wow, and he’s churning you as well!?”. Needless to say the new guy got my business. The insurance was still expensive, in fact the premiums went up due to coverage for a larger amount (I now had a wife, kids and mortgage) but he explained what it was for and we discussed how much was required and why. He got a very nice commission (which I knew about and agreed with) and I was a happy customer for many years. Then I hit 50 and the premium went up 25% in one year. That got my attention. The kids had finished HSC and the mortgage was gone, so what was the insurance for? We had reduced the coverage a few years earlier, and this time it was cancelled.
Regarding investment bonds, I wish I had known about them years ago. Fabulous things if your investment horizon is 10+ years and your marginal tax rate is over 30%. (And there are uses outside of these simple constraints.) Just make sure you understand the rules regarding the annual contribution limits. There is also a lot of very significant differences between the offerings from different investment bond companies, so key questions to ask are “what other bond companies did you consider and what why is the recommended bond better than the offerings from the other companies?” To me, a big red flag here would be if they answer off the cuff since it suggests they have not researched and are just pushing their company preference. Some also have commission structures like other insurances. If your feeling pressured into getting a bond then ask questions about commissions.
Hey Greg
Fair comment about me not pushing back on the insurance. Yes there is alot more to helping people take out insurance than pushing a button. Before we recommend particular products we have to know what the different insurers offer, know which ones are best for which people, and then match this up with trying to get the best price. If the client then wants to go ahead, we find it pretty time consuming helping people through the underwriting process. Even though most people think they are straightforward, it turns out often to not be the case.
Re investment bonds, unless it is for Estate Planning purposes, I don’t generally recommend them. Two reasons, the first is the higher fees charged by the Investment Bond companies eat into the tax benefits. The second reason is that the way investments like this are taxed means capital gains tax is paid each year rather than when you sell the investment. This reduces the benefit of compounding.
For most people, even those in the top tax bracket, after 10 years you would have been better investing in an ETF and then selling it and paying the CGT.
Hi!
Can a PIFA adviser charge a flat fee (initially for SOA works) but then charge a % base ongoing fee?
Quote from the PIFA website’s Consumer page: “the three criteria of the PIFA Gold Standard Independence™ – no links to products manufacturers, no commissions, and no asset based fees.”
So the answer to your question is No.
Thanks Greg. I think I might need to raise this with someone…
LJ, a pretty firm no on that one. They may have a sliding scale of fees that increase when your situation becomes more complicated, but there shouldn’t be any % based fees.
I have recently inherited a substantial sum, split among family members. My Dad’s financial adviser (part of a large stockbroking firm) wants to charge us approx 4% of the total asset value to provide advice. My Dad would never have paid this, and it was not charged to him. This will equate to more than 30k/annum. Dad loved his shares and did most of his own research, and would not always follow the advice of the broker.
I am really not sure what to do, as I feel the responsibility of the financial management of the inheritance quite heavily. My mum is in a nursing home, and cannot make decisions.
The portfolio gets quite good returns, better than index funds – but the portfolio is not diversified (mostly banks and mining), it is very tempting to leave them where they are, but I am concerned the world is changing and these returns wont be sustained.
Does anyone know of an adviser that will help for a fixed fee?
Hi Jenny.
$30k is too high on less than $1 million if all you are getting is investment advice.
Given shares give long -term annual returns of around 8%, the adviser would need to achieve returns of 50% better than the average just to be on par with index funds.
Happy for you to contact me, otherwise check out the PIFA website – https://pifa.org.au/
4%… wow, and he will probably charge brokerage and other fees as well. You can definitely do better. Listen to the podcast again, take some notes, and then use the link provided above to PIFA’s web site – pifa.org.au
The home page has a “Find an Adviser” link/button in the middle of the screen, use it and go from there.
Re your portfolio, don’t rush into making any changes, or get pressured to. Let it sit until you are comfortable. Yes diversification is important, it lowers risk and smooths returns. Less diversification means higher risk and potential for the greater returns, which you have noticed. You need to work out what risk level you want. Unless you want to start actively managing the portfolio like your dad did, which I doubt, you may be better off making a change, but what to change to is where you do need *independent* advice. It could be ETFs, or Investment Bonds, or Superannuation, or a mix of all this and something else.
I can relate to your feelings. Prior to my dad’s death 8 years ago, investing was something I knew I should do but never really got around to. Then I was hit with a similar inheritance to yours and suddenly money management was a big deal because the last thing you want to do is squander that final gift.
If you have not already, then read The Barefoot Investor. It is an excellent starting point for someone wanting to get financial control of their life and gets you thinking about all the aspects of a full SOA. For many people it is a life changing book, it was for me and I recommend it often. In your situation it is not a replacement for a good financial planner, and from some of your comments I think you will find a good financial planner well worth the cost.
Thanks Greg, I have read Barefoot. I will follow up with a financial advisor.
I have tried searching for bills, the internet that a Financial Planner’s company can still receive commission. Is there anywhere that states this?
thanks Phil